As a financial advisor, I have always cautioned clients and their families to avoid borrowing money unless they absolutely have to. Like it or not, but higher education is often one of those situations.
After all, the average cost of tuition and fees at public, four-year colleges and universities worked out to $10,740 per year for the 2021-22 academic year. Not only do students pay this much every year for four years or longer to earn a bachelor’s degree, but it doesn’t even take into account any costs related to room and board, transportation and regular living expenses.
I’ve actually found that, under the right circumstances, borrowing for college can make a whole lot of sense despite these high costs. This is especially true for students who try to keep college costs down, as well as those who are pursuing degrees in a profitable field.
Recent reporting from the Bureau of Labor Statistics lays out the value of various college degrees plain as day. Based on the most recent data, weekly earnings based on degree type work out to the following:
- Less than a high school diploma: $619 per week
- High school diploma: $781 per week
- Some college, no degree: $877 per week
- Associates degree: $938 per week
- Bachelor’s degree: $1,305 per week
- Master’s degree: $1,545 per week
- Professional degree: $1,893 per week
- Doctoral degree: $1,885 per week
4 Student Loan Factors to Consider
That said, how and where you borrow money is truly important. And when it comes to student loans, your first best choice is typically going to be federal student loans. This is partly because federal student loans come with fixed interest rates and fixed monthly payments, but it’s also because federal loans come with federal protections like deferment and forbearance.
But, whether you opt for federal student loans or private loans, you should consider the same set of factors. Here’s everything you should consider as you compare loan options through the government or private lenders.
Competitive Rates
First off, you’ll want to make sure you’re comparing interest rates across various loan options. You can find the information on fixed interest rates for federal student loans here.
When you take the time to look, you can see that rates on federal student loans are currently paused through May 1, 2022. After that, fixed rates on Direct Subsidized Loans and Direct Unsubsidized Loans will be set at 3.73%, rates on Direct Unsubsidized Loans for grads will be set at 5.28% and Direct Plus Loans will charge 6.28%.
You can also look at private student loan companies like College Ave Student Loans, which offer both fixed or variable rates.
Either way, securing a lower interest rate can help you land a lower monthly payment on your student debt. Not only that, but you can pay less interest over the life of your loans. If you’re curious how your interest rate will affect your monthly loan payment and total interest charges, a student loan calculator can help.
Flexible Loan Terms
Next up, you’ll want to make sure you find student loans with a variety of repayment options. Federal student loans come with a standard ten-year repayment plan, you could also be eligible for some of the other repayment options offered such as graduated repayment or income-based repayment.
Private student loans typically let you repay your loans over anywhere from 5 to 15 years. They also let you choose whether to start making payments right away or to defer repayment until you graduate from school. Ultimately, it’s important to make sure you select loans with a repayment timeline and monthly payment you can live with. This student loan calculator can help you estimate different monthly payments based on your loan terms.
Fees
In the meantime, you’ll want to make sure you know and understand any loan fees you have to pay. Also never assume there aren’t any fees associated with student loans, even federal student loans.
For example, federal student loans come with an origination fee that you have to pay for your loan to be funded. These fees are usually a little bit over 1% for Federal Direct Subsidized and Unsubsidized Loans and a bit over 4% for Direct PLUS loans, but they add to the amount of money you have to pay back. By contrast, private student loans typically do not have an origination fee, but you should still take time to check.
You should also make sure your loans don’t have any prepayment penalties, which they shouldn’t. Ultimately, you should do your research on any student loans you’re considering so you know what you’re getting into.
Positive Company Reviews
Finally, you should make sure you only apply for private student loans with a company that is reputable and honest. You can typically find this out by checking the Better Business Bureau (BBB) for accreditation. You can also read student loan company reviews to learn about user experiences and see each company’s star ratings.
The Bottom Line
Borrowing for college may be a necessity, but that doesn’t mean you should go with the first student loan you come across. You should take the time to compare all your options based on their interest rates, repayment terms, and fees, and you should make sure the company you go with will offer the customer experience you expect.
By doing some research upfront and being choosy when it comes to who you borrow from, you should be able to save money on interest, get out of student debt faster, or both.
