5 things I wish someone had told me before I took out student loans
- Student loan applications are complex and can impact your finances for years to come.
- Your credit score (or your parent's score) will have a huge impact on your loan terms.
- It is crucial to know your credit score, time the applications right, and do your best to cut costs.
- Use entrance and exit counseling to learn about your loans - that way you can avoid making mistakes that will hurt your finances in the long run.
I thought I did everything right: I submitted my Free Application for Federal Student Aid (FAFSA) as early as possible, I completed the required documents, and I compared financial aid packages from different colleges to find the perfect balance of affordability, quality, and potential for career advancement.
I'm a first-generation college student, so I felt less prepared than my peers who were from families that had been through the application process before. So, I spent a lot of my time during junior and senior years of high school researching the process and trying to find "secret" ways to get the most financial aid possible - all the strategies I assumed my peers were already taking advantage of.
Despite all my research, I still made a few mistakes when it came to student loans. I knew the basics - federal loans are usually a cheaper and safer option than private ones since they tend to have lower interest rates and better borrower protections. And as a rule of thumb, try not to borrow more than you expect to earn in your first year after graduation."
I figured that would be enough.
In the end I chose to study at Boston University, a private college that promised a ton of scholarship money to help me pay for school. But I ended up graduating with almost $70,000 in student debt.
Here's what I wish I knew before taking out student loans to pay for college:
1. Financial aid packages can change over time
My initial financial aid package was great - more scholarships and grants than I could have ever imagined, and I would only need to take out federal loans to cover the full cost of attendance.
So I multiplied my freshman-year loan amounts by four and assumed that was how much debt I would graduate with.
Subsequently, my tuition went up and my parents began to earn more money. That translated to me having to borrow an average of $10,000 more in student loans to pay for each year of college.
To avoid unexpected changes in financial aid, look into tuition trends and find out whether your family's finances are expected to change in the future.
2. Credit scores matter
I was a teenager, and loan applications were not exactly my forte. So when I asked my dad to cosign loans for me, I didn't realize that his credit would impact my interest rate. I didn't even know what a credit score was.
To make a long story short, if you're a recent high school senior, and you have to take out private loans to pay for school, your parent's credit score will have an enormous sway over your future finances.
If you cosigner has a great credit score, you could land a great, low interest rate on your loans. But if your cosigner has a low or middling credit score, you may get stuck with a higher interest rate on your loans.
3. Time your loan applications carefully
Multiple hard credit inquiries - which happen when a lender formally looks into your credit profile - will lower your score. That usually results in higher interest rates, which are more expensive in the long run.
If I could go back, I would have set aside a weekend to focus on loan applications and send them out all at once to avoid getting dinged by multiple inquiries. That way, the credit bureaus would have recognized that I was rate shopping rather than taking out multiple private loans.
4. Paying off accrued interest is worth it in the long run
Unsubsidized federal and private student loans usually accrue interest while you're still in school. If you don't pay off the interest before graduating, it will be added to your original loan amounts. As a result, you will have to pay interest on the original interest.
5. Entrance and exit counseling is only as helpful as you make it
All students who take out federal loans are required to complete entrance and exit counseling. However, when you complete the counseling online, it is easy to breeze through it without letting the information properly sink in.
I'll be honest: I was in denial about my debt. I thought that by refusing to acknowledge the debt, the debt wouldn't exist. But that's not how it works, of course.
Use the mandatory counseling to get acquainted with loan terms. That way, you'll be more prepared to take on your debt.