Taking on student loan debt can be intimidating for first-time borrowers.
Those in their teens may experience an especially daunting process, preparing to take on thousands of dollars in debt before they’ve ever paid a utility bill or earned a paycheck.
“You can make a lot of really poor financial decisions in a really short period of time as an 18-year-old,” says Brad Barnett, senior associate director of the office of financial aid and scholarships at James Madison University.
Fortunately, the process of borrowing debt, especially federal debt, has some educational components in place to help students understand what they’re borrowing and how much they’ll owe.
Here’s a guide to the steps that first-time student loan borrowers must go through to take on federal — and sometimes private — debt.
1. Apply for aid: Students should complete this task long before school starts. For those filing the Free Application for Federal Student Aid, which unlocks access to federal, state and sometimes institutional aid, many priority deadlines expire in spring.
If students are stepping foot on campus this fall and realizing that they neglected to file the FAFSA, it’s not too late. Although some aid is awarded on a first-come, first-served basis, other aid doesn’t get used up. “You’re pretty much never out of luck in terms of federal money, including Pell Grants,” says Melissa Shepherd, director of financial aid at Virginia’s Longwood University.
For students considering private student loans, filling out the FAFSA is still a good move. It’s typically best to max out federal debt before taking on private loans.
In addition, private borrowers will need to apply through the bank or credit union they’ve selected. And they’ll often need a cosigner who can pass a credit check and agree to take on the private debt if the student fails to repay.
[Ask these 10 questions before borrowing a private student loan.]
2. Get your financial aid award: Students will learn how much they’re eligible to borrow in federal loans from each school’s award letter, which is typically sent in spring for a fall start date.
One surprise for first-time borrowers may be how little they are permitted to take in federal debt.
The maximum amount dependent students can borrow in federal direct loans is just $5,500 their first year. While there are some situations where students may borrow more — for example, if their parents fail to qualify for Parent PLUS loans — it may not be enough to cover what they need.
Students who can’t borrow enough to close that gap will need to start looking at other options. Those backups may be parent loans, college savings, a part-time job, private debt or simply a more affordable school, say experts.
3. Complete entrance counseling: Before students can take out federal loans, they need to complete entrance counseling. To get started, new student loan borrowers need their Federal Student Aid ID and 20 to 30 minutes.
While it may seem like an unnecessary chore or annoying hurdle, don’t underestimate the value of this step, say experts. “This is definitely the main, if not only, form of loan education that the student is getting before they borrow the money,” says Shepherd.
[Know which questions to ask during student loan counseling.]
Experts also warn against letting Mom and Dad take the counseling session in their child’s place. “With the entrance counseling, it’s best for students to be involved in the process,” says Blaine Blontz, financial aid consultant at Financial Aid Coach, where he helps families navigate the financial aid process.
4. Sign the promissory note: By signing this document, the student promises to repay their loans and any interest or fees.
For federal loans, the Master Promissory Note doesn’t require as much work. Students should prepare to input some personal information and several references. Compared with entrance counseling, “the Master Promissory Note should be a lot more straightforward,” says Blontz.
5. Understand disbursements: After signing the required paperwork and enrolling in class, students will begin to receive their student loans disbursements.
Often schools remove any money owed for tuition, fees and other school expenses before making the remainder, called a refund, available to the student.
New borrowers be aware, say experts, that early school expenses — books, a safety deposit on an apartment and travel costs — may come due before their first refund checks are issued.
[Understand why not to waste your student loan refunds.]
In some cases, schools may have short-term loans or advances, which students can use, to meet those early costs, says Shepherd, of Longwood. Landlords who work with students frequently may accept a letter from the financial aid office verifying that the refund check is sufficient, but not every landlord may do that.
If students have questions about the borrowing process, they shouldn’t hesitate to reach out, says Shepherd. “Keep in touch with your school,” she says. “If you are unsure, call, email and ask.”
Trying to fund your education? Get tips and more in the U.S. News Paying for College center.
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Know What to Expect the First Time You Borrow College Student Loans originally appeared on usnews.com
