How to Handle Student Loans in 4 Easy Steps

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Updated on Wednesday, November 19, 2014

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When I was 18, I was so excited to start college. I carefully packed my clothes into a few different suitcases. I bought a mini fridge. I made sure I had a couple sets of extra long sheets. I contacted my roommate ahead of time. We found out we were in a really unique loft room in an all-girls dorm. It looked so cool, and I was really, really excited.

I was a complete and utter nerd in high school, and it paid off. I received a full-tuition scholarship to Tulane, in New Orleans. All my parents had to do was write a check for $5,000 or so, which covered room and board for the semester. Comparatively, a student who lives in the dorm at Tulane without a tuition scholarship will pay almost $50,000 a year for the privilege today. My parents were thrilled, and they wrote the check right when we arrived on campus and did orientation. 

Of course, a few hours later, my life changed forever.

Move in day at Tulane in 2005 was also the same day the city began evacuating for Hurricane Katrina. I was buying my first semester books in the bookstore with my dad when an announcement came over the loudspeaker. It was time for everyone to get out – really out. As in, leave the city.

Because I am from just outside of New Orleans, having my college plans messed up was actually the least of my family’s worries. A few days later, I found myself in a hotel room just outside of Baton Rouge. My childhood home had 8 feet of water. Tulane closed for the semester. But, most importantly, my parents’ business was completely disrupted, and they had major income losses in addition to the losses in our home.

My First Student Loan

I went to L.S.U. because Tulane closed, and I had to take out my first set of student loans. Everything so was incredibly uncertain at the time that my mom encouraged me to go take out loans.

My parents were busy dealing with the aftermath of the storm, and I had to figure the whole college/loans/new campus logistics out on my own. I don’t remember completing entrance counseling for my loans, although I know I did because they were subsidized federal loans.

I transferred schools again two years later to William and Mary. I never went back to Tulane, and I was still craving that small school atmosphere after two years at a large university that I never meant to go to in the first place.

In order to go to William and Mary as an out-of-state student, though, I had to come up with the cash. I received a generous grant due to our financial circumstances from the storm, my parents helped a little, and I took out the rest in federal loans. Again, I don’t remember doing entrance counseling.

Cat graduationIt wasn’t until I graduated that I learned how to check my credit score and find out how much I had taken out in loans in total. Luckily all my loans were federal loans and the majority was subsidized, which meant that I did not have to pay interest while I was in school.

You would think, though, that as someone who graduated early from one of the best colleges in the country (after transferring twice and experiencing a huge natural disaster) I would know how much money I took out. But I didn’t. Unfortunately, many other students and recent graduates are like me and unaware exactly how their student loans are structured and how repayment works.

Ultimately, I’m not upset that I took out student loans.

They were necessary in order to make my dreams come true. They were necessary to help me escape what had become a very sad situation in my home state. They were there for me when I needed to take one really expensive summer school class so that I could graduate a semester early. And, when I got a grant to do a fully paid for study abroad program, a student loan helped me buy plane tickets so I could see more of Europe while I was there. I don’t regret these decisions or experiences, but what I do regret is not understanding interest rates or the impact of student loans in general.

Learn From My Mistakes

If I had any advice to students going to college today and their parents, it would be as follows:

Step 1: Shop Around For Your Loan

Do not take the first loan that you’re offered. Please shop around. Just like any big investment, going to college deserves your full attention. If you have to fund it with loans, make sure you’re getting the best rates.

Private loans are historically worse for students because may of them require immediate payments, higher interest rates, more fees, and less flexible repayment terms.

Federal loans are the route most students take since those are the most widely accessible through colleges and universities. Although it seems like federal loans are the answer, don’t discount your local banks. If your parents have a good reputation with their local bank, they might be able to secure a lower interest rate than the federal government, but those instances are rare. It’s important to remember, though, that local banks will likely not be able to offer you deferred interest, so you will need to compare interest rates between these private loans and federal loans and weigh the pros and cons to find out the best plan of action for you.

In sum, shop around and know the difference between private and federal loans like the back of your hand. 

Step 2: Pay Attention to the Entrance Counseling

Entrance counseling is there for a reason. It’s typically automated with a quiz that you need to take online and pass to get your loans. The quiz asks questions to make sure you understand terms like deferment, repayment, interest accrual, and forbearance. Could it be better? Yes. Could it be more effective in helping students understand the risks? Yes. However, at a minimum it will explain the benefits and consequences of loans and what’s expected of you during your repayment. Remember, don’t complete entrance counseling until you fully understand everything about your loans. If you get to a section of entrance counseling that does not make sense, put in a call to your school’s financial aid office and ask them to explain the concept. If you don’t understand your interest rate, know your repayment period, or know what to do if you cannot make your payment in the future, ask your student loan counselor these questions.

Step 3: Take Out As Little As Possible

You might think that you’re going to college for engineering but most college students change their majors. In fact, the New York Times reported in 2012 that 80 percent of freshmen at Penn State were unsure about their major.

Maybe you’ll fall in love with acting even though you thought you wanted to go to medical school. Or, perhaps you’ll enjoy psychology and want to pursue being a social worker instead of becoming a business owner.

Either way, it’s important you only take out as much money as you need and work to subsidize other living costs of college, because you won’t know your ability to repay the loans until you start your career.

Just to give you an example, if you take out $26,000 in student loans, (which is about the national average for a four-year public university) at 6.8%, you would pay around $300.00 a month for 10 years to pay it off. You would also pay nearly $10,000 in interest! That $300 a month could be an incredible investment opportunity or a car payment. That $10,000 in interest could go towards a down payment on a house or a great emergency fund. So, before you take out anything extra, put your information in a loan calculator and find out how much money you’ll actually pay in the long run in interest charges. That should inspire you to take out as little as possible.

If all of this sounds daunting, don’t forget to regularly look for scholarships and find unique ones that apply to you. There are scholarships for just about everything whether you were a preemie as a baby or have German ancestry. To find unusual scholarships, click here.

Also, remember it’s okay to feel a little uncomfortable. College students are notorious for living on ramen noodles. Essentially, do whatever you can to take out the least amount of money possible. Your older self will thank you.

Step 4: Research Repayment Options

There are many careers that will offer you loan repayment assistance including teaching in underserved areas and joining the military. Make sure to take the time during your senior year to find places to work that will help you pay back you loans and know if they apply to private loans as well as federal. Sometimes you only have to sign a two or five-year contract to receive that benefit, and trust me, that seems like a long time but it will fly by.

Take Responsibility

Really, the most important takeaway is that you and only you can become educated about your student loans. The financial education system that is currently in place with respect to disseminating information to college students about the loan process is not as effective as it could be. Thus, it is up to you, the college student, to become an adult and start making adult decisions about your money.

Good luck. Remember, student loans can definitely help you follow your dreams like they did for me, but be wise about how much you take out.

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