Disclaimer: I am not a banker nor loan provider nor financial adviser. I strongly encourage you to meet with one before you take out a student loan. This is insight of a woman who knows a ton about financing your way through college.
If you make a habit of following me on Instagram or Facebook then you know I do not like student loans or debt. I am all about scholarships, however, student loans are a foreboding reality for many students pursuing a higher education.
With that being said, there is a smart way of taking out student loans that will bring you out ahead. The last thing you need to do is to go in wild and reckless without a game plan. If you are going to take a student loan, be strategic. Here’s how!
Don’t do it.
Honestly, the best way to take out a student loan is to not take one out in the first place. I’m being perfectly serious. Exhaust all your other options first before you turn to student loans. That means scholarships and financial aid.
You need to have an in-depth conversation with your financial aid adviser about what you can do to reduce the cost of attendance. I have made a flurry of different scholarship resources. Please check them out before you consider student loans.
Map out your expenses to the penny
This is when you embrace every OCD bone in your body. You need to know exactly what your higher education will cost.
You need to know EXACTLY what you need to get by.
The trick is to think lean. Use a student loan to cover major expenses like tuition, room and board, meal plans, books and MAYBE transportation. Anything outside of what you MUST HAVE to survive and excel academically is extraneous.
Think about it this way, what are the expenses you must cover in order to enroll in classes next semester? If you have a balance left over, you won’t be able to progress. Some non-negotiables would be tuition and student fees. You must cover those expenses. Other items become negotiable.
For example, do you have to live on campus? Is living off campus more affordable? Is the commute realistic? Do you have to have a meal plan? Is it cheaper to go grocery shopping? Is it realistic to go grocery shopping? Is there a student discount for transportation?
These are the type of things you need to consider.
Do I have to buy a book for this class? Is it completely necessary? Can I borrow a book or check it out from the library? Is the ebook more affordable?
Ask these type of questions as well. Again, be stingy with every cent.
Let the interest rate guide you.
As I explained in my video about FAFSA student loans, the interest rate offered through FAFSA is the lowest interest rate you will find in the market. According to Federal Student Aid, FAFSA offers a 4.45% interest rate for undergraduates and a 6-7% rate for graduate students.
You will be hard-pressed to find a student loan that offers a lower rate than that. FAFSA offers the lowest rates because it is funded by the government and the government is not necessarily interested in making a profit
. Banks and private lenders, on the other hand, are trying to generate a profit. Banks are going to offer higher rates because they need to be profitable.
Bonus: Take a close look at credit unions. Credit unions are more community-centric and are going to offer a more tailored experience when it comes to student loans. For example, some credit unions in Houston include TDECU, Members Choice, and Alliant Credit Union. They offer 6-8%, 5.99%, and 4.33% respectively.
Quick Review: Interest is the cost of borrowing money. It’s like when you buy a t-shirt at a thrift store you may pay 10 bucks. The same principle applies to student loans. When you buy a $1000 student loan (for example) the cost might be $10. In the case of loans, the “cost” is a percentage so instead of $10 it would be 10%. This would translate to $100 because 10% of $1000 is $100. That’s basically how interest rates work. Watch my video on FAFSA loans to get the full breakdown.
Borrow in Bulk
Warning: This advice is only to responsible, self-disciplined adults. If you are not responsible and disciplined, skip over this section. It won’t help you.
If you know down to the penny exactly what you need in order to fund your higher education, then I would recommend borrowing in bulk IF YOU ARE RESPONSIBLE AND DISCIPLINED WITH YOUR FINANCES.
It’s easier to keep track of one big loan at one interest rate than various loans at multiple interest rates. It saves you the time and stress from having to reapply for various student loans as well.
For example, if you know you need about $30,000 in student loans to get you from now until graduation, then I would encourage you to borrow one $30,000 loan than to borrow 3-5 smaller loans that add up to $30,000.
Remember, this only works if you are responsible and disciplined. If you cannot be trusted to spend that money strictly on higher education expenses alone then do not take this approach. It is not worth it and you it will do more harm than good.
Store student loans in a separate account
If you end up taking a loan out from FAFSA, a bank, credit union or third party then make sure you keep that money in a secondary account you do not check often. The goal is to reduce the temptation of using the account for non-authorized transactions (like a Spring Break trip to the Bahamas). This will also make it much easier to keep track of exactly where that money is going because all the expenses related to higher education come out of that account specifically.
Make sure the account you open is free for students. Most credit unions and major banks do not charge students for a checking or savings account. If they do, then do not open that account. It’s counterproductive and a waste of resources.
Start paying that loan immediately
DO NOT WAIT UNTIL YOU GRADUATE TO START PAYING OFF THAT LOAN.
You need to take a proactive approach to student loans and start paying it off immediately. Most student loans do not start accruing interest until 6 months after graduation. Use that opportunity as a godsend to start paying off that loan. Your interest payments will be much cheaper if you start chipping off that principal bright and early.
For example, if you borrowed $1000 in student loan at 10% you owe about $100 a month in interest. (It’s more complicated than this because interest accrues off the principal aka the original amount you borrowed. This is the gist of how interest works.) That means your monthly payments are only going to go up.
However, if you borrowed that same $1000 and were able to pay off $200 before the interest started to accrue now you’re paying 10% of 800 which is $80. As simple logic would tell you, it’s much better to pay $80 of interest than $100.
If you need help balancing school and work, I have the perfect little article to help you achieve the perfect balance.
Get creative: Tuition reimbursement, student loan forgiveness, tuition assistance
There are various tuition assistance programs out there. It’s all a matter of investigating your options. Some employers offer tuition reimbursement programs. Start looking for those employers and vying for their attention. Government organizations like the PeaceCorps and AmeriCorps offer various tuition reimbursement as well.
Never stop applying for scholarships
Seriously, if you still have tuition to pay or student loans to slay then never stop applying for scholarships. I created a video, article, infographic and presentation all centred around scholarships. If you need an extra boost then set up a 30-minute consultation with me and we’ll get you started in the right direction ASAP. Never stop applying for scholarships no matter what!
Bonus: you can use scholarship money to pay off student loans. Seriously, you can. If you used student loans to clear out your balance, then earn some scholarship money afterwards you can redirect that scholarship money to pay back your student loans.
I know taking out a student loan can be scary and in this case, I would say a healthy dose of fear can do you some good. Let that fear motivate you to pay off those loans aggressively. Student loans can be a huge financial burden that can weigh you down for decades if you’re not careful.
What was your approach to student loans? Please share in the comments section below. If you’re ready to take your scholarship search seriously, set up a 30-minute session with me and we’ll get you started. As always, if you have any questions for me, you can reach me here.