things to know before signing student loans

Four Questions To Ask BEFORE Getting Another Student Loan

Michael Lux Blog, Student Loans 0 Comments

Attending college and getting a degree is a key factor in future financial success.  However, borrowing student loans can have devastating financial consequences.  Students who do not have parents or scholarships covering their education need to be extremely careful when it comes to using student loans.

Before borrowing, any student should ask themselves the following:

1) Do I absolutely need this loan?

If you are getting any student debt for an expense that is not essential, you are making a mistake.  Borrowers commonly end up paying back twice the amount they borrowed.  That means using student loans to buy a $800 TV could end up costing $1600 in the long run.

One way that student loans can quickly get out of hand is to spend too much on living expenses.  Having a fancy apartment is nice, but it is a horrible financial decision and one that could mean a lousy apartment for many years after graduation.

Living the stereotypical lifestyle of a poor college student has major advantages.  If you are getting extra debt to inflate your lifestyle, it should be a huge red flag.

2) Is this the best available student loan for me?

The first loan offered, or the easiest loan to get, is rarely the best loan option.

We typically suggest that students first max out federal student loans before even considering a private loan.  This is because federal student loans come with borrower protections such as income-driven repayment plans and loan forgiveness options like Public Service Loan Forgiveness.

Due to limitations on federal borrowing, many students also opt for private student loans.  These loans have much more rigid repayment plans and many can have outrageous interest rates.  Borrowers who do not shop around to find the best interest rates will end up spending far more in repayment.  Some lenders have rates at near credit card levels while others are more reasonable.  Because each lender evaluates applications differently, checking rates with multiple lenders is the best way to ensure you are getting the best actual rate possible.

3) Do I understand all of the obligations that come with this loan?

A student loan is a contract between a lender and a borrower.  The danger in this situation is that this contract is drafted by lawyers working for the lenders and rarely ever read by the borrower.

All borrowers should understand that student loans start generating interest from day one.  In repayment, loan contracts often call for fees for missed or late payments.  The terms of these agreements are usually quite rigid.  Some agreements even call for loans to automatically go into default if a co-signer dies or declares bankruptcy.

Co-signers also have serious obligations that they need to understand before signing for the loan.  Student loan issues can put stress on the existing relationship between a borrower and their co-signer.

Someone considering a student loan should ask about what happens if they lose their job.  They should know what repayment plans are available under the contract.  They should also know if the interest rate can go up on the student loan.

Many people sign lots of contracts without ever reading them.  Student loan agreements should be an exception to this practice.  An understanding of the agreement is essential to responsible borrowing.

4) Will I be able to repay this loan in full?

Student loans are unlike mortgage debt, business loans, or credit card purchases.  With most consumer debt, borrowers have the protection of bankruptcy in case they get in over their heads.  Nobody plans on bankruptcy, but it provides a light at the end of a difficult tunnel.

Student loans offer no such protection.  Any debt borrowed must be repaid in full according to the terms of the loan.  Students who hope for the best when they borrow could be setting themselves up for decades of hardship.

A simple rule of thumb for borrowers to consider is that their total student loan borrowing should be less than their expected starting salary after school.  If the expected starting salary is low, the only sensible option is to keep borrowing low as well.

Final Thoughts

Getting student loans is usually easy for most students.  Paying back student loans is incredibly difficult for most borrowers.  Keep this in mind before you sign for another student loan.