5 Questions To Ask When Considering A Student Loan
Student loans. That is by far the most common answer I hear when I ask college graduates what they regret about their past choices. To be clear, they do not regret taking out loans. They regret not researching their options. Most of the college grads I talk to claim they had no idea what they were signing up for.
Most graduates apply for and accept student loans without understanding how they work. The result is that most grads are surprised about how much they have to pay back every month after college. An unexpected large monthly payment can have a serious impact on your future plans. Before applying to any student loan, be sure to ask these 5 questions.
What Is The Total Amount Of Money I Am Borrowing?
First, it is crucial to understand how a loan works. A loan is an agreement between you and a bank. They will give the money you need but it will cost you. This cost is called an interest rate. Simply put, they will grant you $1,000 at 10% interest to spend on college but they are going to expect you to pay back $1,100 after your graduate.
If you know the amount you think you will need to borrow, be sure to review all the documents and understand how much money you will be expected to pay back. If you borrow $10,000 you will end up paying back closer to $13,000 when it is all said and done. That is how a loan works and it is important to know that when you are determining how much you want to owe after graduation.
What Is The Interest Rate Of This Loan?
We have established what an interest rate is and how it works. You should always know what the interest rate of your student loan is going to be. You should also be actively researching loans from various sources and comparing your options. Do not assume that the option you are looking at is giving you the best offer.
It is important to research your options when it comes to your interest rate because of the impact it has on your life as an adult. The longer it takes to pay back your loans, the more you have to pay back because of your interest rate. The lower the interest rate means the less you will have to pay back over time. That is why it is worth it to take your time and compare all of your options to ensure you are getting the best deal.
When Do I Have To Start Paying This Loan Back?
Not all loans have the same terms and conditions. Do not assume that every loan is the same and that you do not have options. Pay close attention to these terms when you are considering applying for a loan. Make the choice that makes the most sense for your situation and future.
You should know exactly when you will have to start paying back the money you are borrowing. Some loans require you to begin your monthly payments the month after you graduate college. This could become a serious issue if you cannot guarantee you will already be in your first post-college full-time job immediately after graduation. The last thing you want to do is miss a payment and hurt your credit score as a result.
Look for loan options that give you some breathing room after graduation. Loans that do not require first payment until 3-6 months after graduation will give you time to secure and settle into your first full-time job and begin saving some money. Regardless of what you choose, you should know what your payment schedule is going to be like and how you plan to make those payments on time every month.
What is the Minimum Amount I Have To Pay Back Each Month?
The biggest shock to college graduates is the amount of money they have to pay back each month. It is a shock because they did not bother to research this before signing their loan applications. Graduates have personally told me their stories where they graduated from college, bought a car, got ready to move out and then were blindsided by their first loan payment bill.
In addition, to shock, most graduates feel serious regret once they realize how much of their paycheck is going towards paying off their loans. If they had known this was going to happen, they would have researched more options and perhaps even chose a more cost-effective college to attend.
Figure out the exact amount you will be required to pay back every month. If your minimum payment is going to be over $500, what does that mean for your future? Will you be able to buy a new car and move out of your parent’s house? How much does an entry-level job in your field of interest pay after taxes? These are the numbers you need to be looking at while making this important decision.
Would The Minimum Amount Be Less If I Went To Another School?
Let me be clear, you should not choose a college strictly based on cost. There are several factors to weigh in making this choice. I cover them all in my online course ‘How To Select The Right College For You’ where we talk about what makes college worth the money. If you are going to spend all that time and money in a college, you want to make sure it is worth it.
Once you determine how much your minimum payment is for College A, run the numbers again against the other colleges on your list. If your minimum payment drops by $100 a more per month, that is something worth taking note of. If those colleges are offering the same courses and opportunities, it would benefit you in the long run to borrow less. You do not have to choose the most expensive college to get the best education.
Student loans are not necessarily a bad thing. They can be a useful tool that allows you to attend the college of your choice and build the career and future you want. However, they are not be entered into lightly. They deserve a significant amount of time and research. You should completely understand what you are signing up for and what will be expected of you after graduation.
We cover this topic in even more detail, as well as the other parts of the college selection process in my on-line, on-demand course entitled “How To Select The Right College For You”. I invite you to check out all of the topics we cover and watch the first lesson for free.
Kyle Grappone is an educational coach helping students prepare for the next steps in life.