Paying for college can be very expensive. Many potential students either work part-time or consider starting a small business to supplement their income. If you’re running a business, should you take out a student loan to help finance college?
A student loan can propel pupils through college and help them kickstart their dream careers. According to 2019 data, over six in ten graduates had student debt and owed an average of $28,950 – which they are expected to be able to repay in no less than 20 years!
With college graduates earning more than twice as much as workers with a high school diploma, getting a student loan is certainly a long-term investment for future employees.
But, choosing a loan mindfully is vital to avoiding a decades-long financial burden. Here are four important things to think about before submitting a student loan application.
1. Choosing Between Private and Federal Loans
Whether it is to step up within their current workplace or take their dream career off the ground, getting a college degree can make all the difference in a professional’s future prospects. After all, the average ROI of a bachelor’s degree is around $306,000.
Student loans are the tool needed to access such a whopping return – for current employees and pupils alike. But there is more than one choice to consider.
Both federal and private student loans serve their purpose. Understanding the differences between the two can get applicants a step closer to finding the right loan:
- Federal loans – FAFSA (Free Application for Federal Student Aid) is a need-based financial help program designed to fund part of a student’s tuition fees. The amount that can be borrowed through FAFSA is capped at $5,500-$12,500, depending on personal circumstances.
- Private student loans – offered by independent lenders, these loans can cover up to 100% of a student’s financial needs and offer ad hoc benefits and interest rates.
Private student loans are useful to cover the entire amount you need, or they can be used in combination with federal student loans to bridge any financial gaps left.
2. Only Borrowing What is Needed
The amount borrowed through a student loan can impact the ROI perceived by graduates during their careers. That’s why it is essential to only borrow what is needed – not the maximum amount the lender is offering.
For example, exploring other financial help available – including need-based aids, grants, savings, and scholarships – can reduce monthly payments and interest.
It is also worth considering that, as the benefits of earning a degree kick in, borrowers might access a promotion within their current workplace (especially if leveraging an employer-sponsored program) or a high-salary position.
This means that the borrower’s financial situation will change over time. And, there is a lot that can be done do to reduce the principal and shorten the student loan’s lifespan:
- Refinancing – Refinancing a student loan allows borrowers to shorten the terms of the loan agreement and reduce the interests tied to it.
- Making prepayments – unlike other loans, there are no penalties for prepayments made against your student debt. So, borrowers can repay part of the loan earlier and without running into extra costs.
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3. Understanding the Impact of Interest Rates
Interest rates are the greatest variable to account for when taking out any loan. That small percentage might not seem like much at first, but even a 0.25-0.50% can make a difference in how much a borrower will need to repay.
For federal student loans, once the 0% interest rate period ends in May 2022, borrowers will face a 3.73% interest rate for bachelor’s degrees, and 5.28% for master’s degrees.
Oppositely, private student loans’ interest rates will entirely depend on the borrower’s financial situation, credit score, and co-signer’s financial history. However, if the borrower’s finances are pristine, they’ll be able to secure rates below 3.22%.
- Extra tip – according to the contract, repayments don’t start while the student is still at school or during the grace period. However, interest will continue to accrue during this time, and, if unpaid, it is capitalized and added to the loan balance. Avoid seeing the loan swell over time by keeping up with interest repayments from day one.
4. Taking Advantage of Rewards and Discounts
Student loans are financial products created specifically for borrowers to financially support their education. That’s why some private student loans come with a range of benefits, discounts, and rewards.
For example, setting up AutoPay might make a student eligible for a 0.25-0.50% interest rate reduction. Additionally, a student credit card can offer discounts and cash-back rewards for education-related expenses, such as tech gadgets and books.
5. “Earn While You Learn”: Employer-Sponsored Degrees
For those who have already joined the workforce and have found the right employer for their career goals instead of starting their own business, it is worth exploring employee-sponsored education assistance options.
While only an estimated 1-10% of eligible employees take advantage of these programs, they can help team members study at their own pace while keeping their current job and advancing within the same company.
And, for employers, this can benefit the entire organization by boosting its talent pool, promoting upskilling and employee development, and making tax-free repayment contributions.
Ultimately, while applying for a student loan is straightforward, terms like interest rates, capitalization, repayment period, and refinancing can confuse even an experienced borrower.
If in doubt, partnering with a mortgage broker or financial advisor can help borrowers make the right choice.