What to Consider When Taking Out Student Loans

Pursuing a post-secondary degree is an incredible opportunity to further your education, but it can have an expensive price tag that might leave you in debt and impact other financial goals like buying a house or saving for retirement. While student loans can be the right choice when figuring out how to pay for school, it is important to understand the whole picture before borrowing.

Federal vs. private

There are two types of student loans: federal and private. Federal loans are given out by the government, whereas private loans come from non-federal entities such as a bank or credit union. Both types of loans accrue interest. Though, typically, federal loans will have lower interest rates and can come with other perks like income-based repayment, forbearance, and deferment. You typically do not need a cosigner for a federal loan, even if you don’t have much of a credit history. You may need a cosigner for private loans.

You can apply for federal loans using the Free Application for Federal Student Aid (FAFSA®). Federal loans can be either subsidized or unsubsidized. A subsidized federal loan does not begin collecting interest until after you graduate (so long as you are enrolled at least half time) whereas an unsubsidized federal loan begins collecting interest as soon as the loan is issued.

Interest rates

It is important to know the interest rate on the loans you borrow. Loans can have different interest rates depending on the lender and other factors, like your credit score. So, it can be beneficial to compare the different options. Knowing the loan’s interest rate can help you calculate exactly how much you will owe when it comes time to repay it.

How repayment will work

There are several repayment plan options that lenders will offer. Understanding loans’ repayment options may help you decide which to take out. Generally, there will be required minimum monthly payments; the longer the plan lasts the lower the monthly payment might be. However, a longer repayment plan might mean you are paying more in interest.

There are loan forgiveness programs for federal student loans. These can depend on the field you work in, the type of company you work for, and years of service. Federal loans are also eligible for income-driven repayment plans. There are several different income-driven repayment programs but, in general, they correlate your monthly payment to your income. For some federal loans, the remaining balance is forgiven after 20 or 25 years (depending on whether you used them for undergraduate or graduate education).

Alternative sources of funding

Student loans are often necessary, but there are other options that may enable you to take out less in loans. Scholarships and grants don’t need to be paid back and can reduce the amount you need to borrow. If you're pursuing a degree while still working, many employers provide tuition assistance to employees who are furthering their education. You might even decide it's time to use the cash value of your universal life insurance or whole life insurance to cover all or some of the costs.

The primary purpose of permanent life insurance is to provide a death benefit. Using permanent life insurance accumulated value will reduce the death benefit and may affect other aspects of the policy.