Seven Things to Consider Before Borrowing Money for College

Have you decided on a college? Are planning to take out loans to pay for it? You will want to take some time and do your research. 

 

A Few Tips To Keep in Mind 

1. Think about how many years you will be in college 

If you need loans this year, you’ll probably need loans next year. Whatever you’re borrowing this year should be multiplied by the number of years you will be in college. Can you afford that much debt? 

2. It’s important to do the math 

You will be paying back more than you borrowed because that’s how lenders make money. How much you pay back will depend on the interest rate, how long you take to pay off the loan, and the amount you borrow.  

A typical example: Need a loan of $5,500? If you pay it back over 10 years at a fixed 4.99 percent interest rate, you’ll need to pay a total of $6,997. That’s the original $5,500 plus $1,497 in interest costs. Watch our video to learn more about how student loans work. 

3. Not a math wiz? No problem! Use a loan calculator. 

Loan calculators do the work for you and there are plenty available online. Try out Federal Student Aid’s Loan Simulator. We love Student Debt Smarter, a calculator that allows you to see how much debt you may be able to afford once you are in the workforce. And many financial publications offer loan calculators, including this popular one from Bankrate. 

4. Are you a parent, thinking of taking out a Parent PLUS loan? Be careful. 

Add up your total debt, including mortgage payments, car payments, credit card payments, and other student loans, including yours. Ideally, this number should be less than one-third of your income. If the number is higher, you may have trouble making the payments and find that you don’t have good enough credit for future needs. 

5. Getting cold feet after you crunch the numbers? It’s OK to change your mind. 

You may have sent in a tuition deposit, but you are not required to enroll. Sacrificing the deposit may be smarter than borrowing more than you can afford. (And you can always try to get your deposit back, though there are no guarantees.)

6. If you decide to take out a loan, do your research

Federal Student Aid offers a wealth of information on the different types of loans available. Whenever possible, you will want to use government-backed loans and keep the numbers as low as you can. And be sure to heed our advice if you are considering Parent PLUS loans:

For Parents: PLUS Loans Are an Option but Proceed With Caution

Parent PLUS Loans Part 2: Putting Off Payments and More Help

7. Last but not least, read the fine print 

Some types of loans offer much better deals than others. And interest rates can vary from year to year depending on the type of loan you get. If you’ve already taken out a loan for college, don’t assume the same terms will be in place for future loans. Look at the terms of your current loans and be sure to find the best possible deal for any future loans you take out. 

Example: If you borrow $5,500 and pay it back in 10 years, see how much you’ll have to pay back based on current lending rates:

Source of the LoanRateTotal Amount You Will Pay BackDifference
Federal Government Student Loan4.99%$6,997$1,497  🙂
Parent PLUS Loan8.04%$8,022$2,522  🙁
Private Loans: best case (great credit) 4.55%$6,856$1,356   🙂
Private Loans: worst case (poor credit)14.9%$10,608$5,108   🤬