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It's cheaper than ever to borrow money for college, but is a student loan in your best interest?

October 05, 2020
female student holding books

Rates on all types of loans are at an all-time low, including student loans. That means it has never been more economical to borrow money for a college education. 

According to studentaid.gov, the amount of money you can borrow in federal student loans depends on your student status (undergrad vs. graduate). If you're an undergraduate, the maximum amount of direct subsidized and direct unsubsidized loans you can borrow each academic year is between $5,500 and $12,500, depending on your year in school and your dependency status.

Graduate and professional students can borrow up to a maximum of $20,500 per year. In addition, graduate students or parents of undergraduate students can apply for a DirectPLUS loan, assuming they pass a credit check. 

The first step in the loan process is to complete a Free Application for Federal Student Aid (FAFSA). This will determine your eligibility for federal student loans which are further divided into direct subsidized loans and direct unsubsidized loans. Subsidized loans are for undergraduate students who demonstrate a financial need. A key benefit is that the U.S. Department of Education pays the interest on these loans while the student is in school at least half-time and for the first six months after graduation. The amount of money that can be borrowed ranges from $3,500 during the first year in college up to $5,500 in the third and subsequent years of school. 

Unsubsidized loans, in contrast, are for undergraduate, graduate and professional students. There is no requirement to demonstrate a financial need, but these students must pay interest on the loans while they are still in school. The total amount that can be borrowed depends on whether a student is still a dependent or independent for income tax purposes, but the amount is typically higher than what is available under subsidized loan programs.

How do you know how much to borrow? Start by calculating your total education costs, including tuition, books and fees, and room and board, if appropriate. Compare to what you have available in personal savings and contributions from family members. From here you can calculate your funding gap.

Ideally, however, you won't need to borrow that full amount to fill the void. Be certain to first look for money in the form of scholarships before resorting to student loans. There are a wide variety of scholarships available from a combination of schools, businesses, service organizations, and non-government agencies.

There are also other ways to limit the amount of money you need to borrow. These include:

  • Choose an affordable school
  • Go to community college for the first year or two
  • Explore trade school options
  • Work while in school
  • Delay starting school in order to build your savings
  • Live off campus (preferably at home), since room and board represent a significant percentage of total costs
  • Consider other funding options, such as home equity loans, which often feature lower interest rates

Despite all the best efforts, however, many students still find themselves in debt. According to the nonprofit Institute for College Access and Success, 65% of students in the class of 2018 graduated with student debt. A study by Sallie Mae entitled "How America pays for college in 2020" additionally indicates that only about half of families - 52% - have a plan to pay for all four years of college, even though nine of 10 families expect their children will go to college.

That partially explains why the amount of student debt has skyrocketed in recent years. The Federal Reserve estimates that Americans today owe more than $1.6 trillion in student loan debt. There are currently in excess of 44 million student borrowers in America with the average debt per graduate estimated at $35,000. The Federal Reserve additionally has documented that it can take anywhere from 10 to 30 years to pay off student loans. 

It's important to research your earning potential in the field of study you select. You need to make sure you can afford the loan payments after your graduate with the income you'll be earning. Studies from the New York Federal Reserve and Georgetown's Center on Education and the Workforce show that those with college degrees tend to earn more per year over their lifetimes than high school graduates, strengthening the argument for a college education.

The key is to be realistic and know what to expect. In the Sallie Mae study previously mentioned, it was further documented that most students have no idea how their debt will translate into monthly payments after graduation. And few have given serious thought to how well the income from their desired major will cover their financial responsibilities.

The good news for those who may struggle to pay off their student loan debt is that there are options for repayment. These include income-based payments, deferment and forbearance, and refinancing. Income-based payments, as the name implies, are payments that have been recalculated based on graduate's ability to pay. 

Under a deferment arrangement, graduates can pause/postpone making payments without being considered in default, assuming they meet the minimum qualifications. Common reasons for deferment include entering the military or continuing schooling at least on a half-time basis. Forbearance is like deferment but typically has fewer requirements to qualify. However, the postponement period is often shorter under this type of arrangement. Common reasons for forbearance include temporary unemployment or a temporary medical disability. 

It's important to note, however, that if you take longer to pay, the amount you pay over the long-term will be higher due to added interest payments.

Graduates with good credit ratings may also qualify to refinance or consolidate their loans at lower interest rates.

If you can afford to do so, it's in your best interests to start makin payments on your student loans while you're still in school (even though you are not required to do so under the terms of a student loan). This will minimize your overall debt and interest expense.

A college education represents one of the largest financial investments many of us will ever make. So be sure to carefully consider your options when determining the best way to finance it.

The information and recommendations contained herein is compiled from sources deemed reliable but is not represented to be accurate or complete. In providing this information, neither Cortland Bank or its affiliates are acting as your agent or is offering you any tax, accounting or legal advice. 

By selecting any external link on www.cortlandbank.com, you will leave the Cortland Bank website and be directed to an unaffiliated third-party website that may offer a different privacy policy or level of security. The third-party is responsible for website content and system availability. Cortland Bank does not offer, endorse, recommend or guarantee any product or service available on that entity's website.
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