If you’re headed to college for the first time next fall or you’re the parent of a rising freshman, you no doubt have seen all the doom-and-gloom headlines about student debt, such as that 44 million Americans are saddled with more than $1.3 trillion in student loans and that the student loan delinquency rate far outpaces that of all other consumer debt.
Student loan horror stories also abound. But many of them could have been avoided had students been more informed during the college selection and financial aid acceptance process.
That’s why more than ever before, students and families need to really think about the long-term ramifications of their college choice before paying the deposit in early May.
This year, the entire financial aid process kicked off three months earlier than usual, thanks to a change in when students and families can file the Free Application for Federal Student Aid. This means some higher education institutions were able to get a jump-start on compiling and distributing financial aid packages.
[Learn the importance of filling out the FAFSA early.]
That’s good news for higher education consumers is that this gives them more time to compare aid offers and factor financial fit into their college decision. If you’re faced with picking a college this spring, use this time wisely to head off student loan problems before they begin by ensuring you don’t get in over your head. Here are three questions to consider.
How Much Will I Have to Repay for My Full Education?
Financial aid award letters typically only cover one academic year. Often, this leads to families adopting a similar approach in their college financing strategy: concentrating only on what they will have to borrow for the immediate upcoming year or semester.
What you really need to consider, however, is how much you’re likely to borrow every year until graduation, how much interest will be added to the loans’ principal and what your monthly payments will be.
Getting an estimate of how much you’ll borrow over your entire college career isn’t as easy as taking the amount of loans awarded in your freshman year and multiplying by four. First, the amounts you can borrow in federal loans increase as you progress through college, so your loan amounts as a junior and senior may be higher.
[Discover 10 steps to develop a student loan repayment plan.]
Second, some colleges may award more institutional scholarships and grants to freshmen as a way to entice them to enroll but then replace them with loans in subsequent years. Or conversely, some schools may reserve the bulk of their grant aid for juniors and seniors who are more likely to graduate. Talk to the college financial aid office at prospective schools to learn more about their policy.
Use any online calculator to estimate how much interest you need to account for on top of your student loan totals. While your federal student loan interest rate will be fixed for the life of your loan, those interest rates are assigned July 1 each year, with the exception of Perkins loans, which have a set 5 percent interest rate.
For example, your freshman year loan interest rate will be different from that of your sophomore year and so on. You could use the current undergraduate Stafford loan interest rate of 3.76 percent in your estimate, or you could use the cap of 8.25 percent to get a worst-case scenario.
Once you’ve determine the total you’ll owe in principal and interest, start to experiment with some different repayment options to get a sense of what monthly payments will be. You may find thw college decision process much easier to make if you think of your student debt in tangible terms of “I’ll be paying $X a month for Y years after I graduate,” rather than an intangible figure of total indebtedness.
Will I Have to Turn to Parent PLUS or Private Loans?
Federal student loans come with both annual limits and an aggregate limit on how much you can borrow. This helps ensure students don’t over borrow.
But sometimes students and families instead turn to parent PLUS loans or alternative loans from private lenders to fill the gap between their financial aid and the total cost of college.
Sticking to only federal loans doesn’t always mean you will successfully repay down the road. But based on years of working directly with borrowers, we can say that borrowers experience much more difficulty in repaying private loans because they don’t offer the same flexible repayment options as federal loans.
[Ask these 10 questions before borrowing a private student loan for college.]
Similarly, even federal loans made to parents don’t offer as generous repayment terms as the ones for students, so parents should think long and hard before taking on any education debt for their child, including co-signing a private loan, especially if it will affect retirement savings.
Taking out a parent PLUS or private loan isn’t always a bad choice, but if federal student loans won’t provide the financial support you need to attend your dream school, at least consider your other education options.
Did I Use All the Free Resources Available?
The financial aid process is overly complex, but free resources are available to help. College financial aid officers are a good place to start.
Or if you prefer a neutral resource, many states offer free tools and guides. Check out your state’s department of education website, or search the National Association for College Admissions Counseling directory of college access programs for resources in your local area.
Ultimately, your future student debt shouldn’t be the only factor you weigh when making choosing a college. But it is better to know your options and potential debt load before you owe and face possibly years of regret.
More from U.S. News
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3 Debt Questions to Ask While Choosing a College originally appeared on usnews.com
