5 Essential Questions to Ask Before Taking Out Student Loans
**Disclosure: the following post, while important, is probably only pertinent to those taking out student loans for grad school.**
Congrats! You made it through undergrad, worked your tail off studying for whatever entry exam your grad school requires (LSAT, GRE, PCAT, MCAT...really, the list is endless), and you're finally on your way to your dream profession. You did it!
But if you're anything like the majority of graduate students in the US, you'll rely on student loans for tuition and fees, and probably even living expenses, medical costs, or even travel/wedding/car expenses. Life happens, know what I mean?
So first things first: how do you even take out a student loan? There are, broadly speaking, two separate student loan servicers: public (i.e. US government-originated) and private (think regular banks, like Bank of America). Each offers their own set of advantages and disadvantages, which we'll talk about below, and the way you obtain them is a little different. [This is the part of the story where I tell you I'm a visual learner, so we'll use some "graphics" to better understand everything <-- airquotes because they're very much homemade. No judgment.]
Basically, government-sponsored loans are nearly always going to be required (as in, a private company likely will only lend student loans to "fill in the gaps"). And as much as people fear having to pay back the government, there are several advantages to Direct Subsidized/Unsubsidized and PLUS loans. First, the interest rate you lock in when you apply for the loans is the guaranteed rate you will pay if you choose fixed payments after graduation. To contrast, private loans may offer a lower rate when you take out the loans, but once repayment begins, the rate will adjust according to the LIBOR index.
Another reason federal loans are great? You will never have a cosignor, so should anything happen in your life to cause you to default on your loans, you won't be jeopardizing anyone else's financial well-being. Yes, the government likes to make money, but private institutions require profits to operate. The government (for better or for worse...) can always approve a new budget, withstand debt default, and in general is less interested in turning a profit on student loans. [Sidenote: Direct PLUS federal loans might require a credit check before approval.]
With that said, I have an obvious bias towards federal loans. They're secure, have overall lower interest rates, and can usually cover the costs for grad school.
However, what about when you need extra funds for living expenses or life events during graduate or professional school? This might be the time to look at private loans with the caveat that any expenses that can be deferred until after graduation absolutely, 100% should be. Guys, the interest rate of private loans can exceed 10%. TEN PERCENT. That's absurd! So while it's tempting to apply for just a little bit extra for that "cheap" trip to Europe with friends (because YOLO!), it is. not. worth. it. Depending on when in your grad school journey you take out private loans, you could have accumulated thousands of dollars of debt just in interest.
My greatest piece of advice is to take out as few loans as you possibly can. Things might feel tight, or it might require you to work a bit during the year for additional living money, but it will make sense when you begin repayment. Too many of us fall victim to the "just in case" mentality (I'll take out a little more than I need for tuition just in case I need it!) and end up spending it; if the money was never there as an option, this likely wouldn't even happen.
So with these things in mind, we'll talk next time about how to actually apply for and obtain these loans. It's pretty easy, but there are a few steps you don't want to miss. Until then!