Teenagers tend to have few financial obligations. They may need to work a part-time job to earn spending money, but generally, no one is expecting them to put food on the table or manage important assets. It’s usually understood that high schoolers don’t yet have the life experience or maturity for those kinds of responsibilities.
And yet, we allow them to take out tens and even hundreds of thousands in student loan debt before they turn 18. That’s a financial obligation on par with buying a home, entrusted to kids who can’t even rent a car. Unfortunately, it’s a reality for most young people looking to get a degree.
That’s why every student needs to be prepared for the harsh reality of borrowing so much money. The more prepared you are to pay back those loans as soon as possible, the less likely you’ll be struggling financially in your adult years. A strong repayment approach can mean the difference between a debt-free life in your 20s and a lingering debt burden in your 30s – and thousands in owed interest.
If you’re about to take out student loans or already have them, here’s what you need to know.
Know What Kind of Loans You Have
Student loans often get lumped into one group, but they can vary widely. The two main types are private loans and federal loans. Like their namesake, federal loans are offered by the federal government. A private loan is a loan offered by a private bank or credit union. Most students have federal loans or a mix of both federal and private.
Federal loans are considered a better option than private loans because they have more repayment and forgiveness options. They also tend to have lower interest rates.
Private loans often require a cosigner, someone who will take on the responsibility of paying off the loan if you default or can’t make payments. Most students have their parents act as the cosigner.
Write down what kind of loan you have, the account number, the interest rate and the amount you originally borrowed.
Know How Much You’re Borrowing
Many students sign up for student loans assuming they’ll be able to pay them off easily after graduation. Most don’t realize how much they’re borrowing until they’ve graduated and the loan comes due.
The best thing you can do for your future self is to look at how much you’ve borrowed so far, how much you’re taking out currently and how much you’ll need for the duration of your time in school.
In 2012, Indiana University started sending out letters to current students explaining how much they owed and how much they would have to pay each month after graduating. Those letters proved to be very effective, reducing how much students borrowed by more than 10%. Three years later, the Indiana General Assembly passed a bill mandating that all state schools release similar letters to their students.
Knowing how much you’ve borrowed will make you more aware of your financial reality, and motivate you to find alternate ways of paying for school. You may try to take more classes per semester and graduate early or apply for more scholarships and grants. Even working a few hours a week in the student library or behind the front desk at your dorm can make a significant difference.
Most students borrow the maximum amount they’re allowed, but that’s not always necessary. Do a projection of how much your expenses will be this semester, including rent, groceries, transportation, utilities, parking, books and other fees. If you end up needing less than you anticipated, tell your loan provider that you’d like to take out less. If you need the same, then stick with that amount.
Looking at your loans on a semester-by-semester basis can help you borrow more or less depending on your circumstances. Create a budget each semester and stick to it, so you can be confident in the amount you’ve chosen to borrow.
Know Your Interest Rate
Every loan has its own interest rate which depends on the kind of loan, when you borrowed and other factors. Interest rates for federal student loans are determined by the government, but private lenders are allowed to charge as much as they want. Currently, federal interest rates for undergraduate loans are 5.05% and graduate degree loans are 6.6%. In 2017, the average variable interest rate for a private student loan was 7.81% and the fixed-rate average was 9.66%.
Know You Can Pay Back Your Loans Early
If you have federal loans, you can start repaying them while still in college. If you borrow too much or find a lucrative part-time job, you can use some of your income to pay back your loans. Doing that now will mean lower payments after you graduate.
If you have private student loans that don’t allow early payments, you can still save money in a savings account and put that toward your loans once they become eligible for repayment.
Know If Your Parents Took Out Student Loans for You
It’s not uncommon for parents to take out loans either from the federal government or a private lender. Some parents do so without telling their kids, because they want to help fund their education. Even if your parents don’t expect repayment, it’s always good to have an idea of how much they’ve sacrificed to get you there.
Other parents take out student loans and expect their children to repay them, as well as any individual bonds they borrowed. As a student you won’t have access to your parents’ loan information, so you have to ask them for the specifics. If you know you’ll eventually be on the hook for any debt your parents took out, you need as much information about the loans as possible.
Ask Your Parents if Any of Their Financial Information Will Change
How much grant and scholarship money you’re eligible for is often dependent on your financial need. Your parents’ income is the single most important factor in determining that eligibility.
If your parents’ income doesn’t fluctuate, you’ll generally receive the same amount every year. If your parents get divorced or your single parent remarries, then your FAFSA could look quite different for the coming year. When my friend’s dad lost his job, she immediately qualified for more need-based grants the following semester.
Know When Your Loans are Due
Even if you’re a freshman in college, it’s important to know when your student loans will come due. Federal loans give you a six-month grace period after graduation, so you don’t have to start repayment until the fall if you graduate in the spring. Private loans have their own system determining when the first payment is due, which varies from lender to lender.
If you’re a senior in college and plan to graduate this year, it’s not a bad idea to look up when your first bill is due. You don’t want to graduate May 15 and find out you owe $500 on June 1. Knowing when that first payment will hit can save you months of worry, and help you create a repayment plan in anticipation.
Know That Student Loan Debt is Real Money
When you first take out student loans, it’s easy to feel like the amount you borrow is just a number. You won’t be forced to deal with it for years, so that $50,000 total doesn’t actually feel like $50,000 dollars. For a teen used to making minimum wage at a coffee shop, that amount is hard to wrap your head around.
But make no mistake, that money is very real – and you will have to pay it back eventually. Acknowledging the reality of your situation can help inform the decisions you make about applying for grants and scholarships, working a side job and managing expenses throughout the year.
Talk to a friend or family member who graduated college with student debt and ask them about their experience. They may be able to shed some light on the reality of living with debt after graduation.
Where to Find Help
The financial aid office at your university can help you suss out where your loans are coming from, how much you’ve borrowed and how to contact your lenders. Once you know who your lenders are, you can reach out to them for more specific information.
You can find a list of the loans you’ve taken out by checking your credit report, which you can do via AnnualCreditReport.com. There are three credit bureaus that publish credit histories, so you’ll want to check all three if it’s your first time looking at your report.
Some lenders may fail to report student loans on your credit, so don’t rely on that exclusively. However, if your credit report shows student loans or other loans that don’t look familiar, contact that lender. It’s possible for lenders to report student loans to the wrong person if you have a similar name or social security number.
If you know you’ve taken out student loans and don’t see them on your credit report, that doesn’t absolve you of the debt. Mistakes made by the lender will still affect you, so be vigilant.