Even though to me it seems like summer is just getting started, some colleges are starting up again in only a month. This is the season when thousands of families are signing up for student loans. Personally, I don’t think loans are necessary to earn a college degree, but they definitely are the norm.
If you or your child are planning on attending college this fall and using loans to do so, you need to know what you’re getting into. Here are three very important things for you to understand before taking out student loans:
1. Not All Student Loans Are Created Equal
When it comes to student loans, there is a clear winner: Direct Subsidized Loans. These loans are awarded based on financial need, only available to undergraduate students, and have low borrowing limits. The great thing about these loans is that the government pays the interest while you are in school.
It is sometimes a good idea to take out the maximum Direct Subsidized Loan allowed each year even if you have enough money for that specific school year. Doing so can allow students to build credit and also save some of their college funds for subsequent years so that they don’t end up taking out less advantageous loans at the end of their college career.
Other types of loans include Direct Unsubsidized Loans, Direct Grad PLUS Loans, Direct Parent PLUS Loans, and private loans. The PLUS loans tend to have the highest interest rates while the private loans are not eligible for government forgiveness and forbearance programs. Which loan is right for you will depend on your own unique situation.
2. Student Loans Cannot Be Discharged In Bankruptcy
Bankruptcy is the legal process where all of your debts are erased and you get to start over with a clean slate. Unless you have student loans. Those can’t just be wiped out the way medical bills and credit card debt can.
The only way to have student loans discharged in bankruptcy is by proving “undue hardship.” If you go as a missionary to Cambodia or can’t get a job that pays more than minimum wage, that won’t cut it. “Undue hardship” is something more along the lines of being left paralyzed from the neck down in a car accident. In most cases, paying the debt is preferable to the “undue hardship.”
3. You May Be Offered More Than You Need
Just like with mortgages, you can be approved for much more in student loans than you really need. Your kid doesn’t need the newest laptop and spring breaks in Cabo. Sure, the lenders may be willing to finance it, but you will all end up better off if he gets a part-time job instead.
Just because a lender offers you something, doesn’t mean you need it. When your beloved 18-year-old explains why she needs to go to the coolest out-of-state school with her best friend, look deep into those big puppy-dog eyes and see her as a 22-year-old, forced to take a job she hates (or delay starting a family) because she is strapped with a huge student loan. A good rule of thumb is to not borrow more than the first year’s expected salary for the student’s major.
Protect your and your child’s future. Don’t take out student loans haphazardly. Know what you’re getting yourselves into before you sign the dotted line.
