Video (1 minutes, 30 seconds)
For most students, taking out a loan to help pay for college is the first time they've had to borrow a large sum of money. If that's your situation, it's good for you to have at least a basic understanding of how loans work, and what you need to think about when looking at them.
The video above gives you a quick, 90-second overview of what to keep in mind when considering a student loan. The list below outlines the main things people don’t realize about loans, but are really important to know.
7 things most people don’t realize about student loans
- Any student can get a Federal Student loan, no matter what their family income might be. But to qualify, you have to first fill out and submit the FAFSA.
- Student loans are not paid to the student. They are paid to the college.
- If you're applying for a student loan, you have to do it each school year. The amounts are paid to the college each semester. (Example: If your loan for your sophomore year is $6,500, your college will be paid $3,250 in the Fall and $3,250 in the Spring.)
- The interest rates on student loans change every year.
- There is a limit on how much you can borrow in Federal Student Loans each year, but those amounts don’t accumulate. So if, for example, you skip taking a loan in your sophomore year, but take one in your junior year, you can’t add the two amounts together for your junior year.
- 60% of college students take more than 4 years to graduate. On average, that means two extra years of loans.
- Student loan debt affects people of all ages, as this chart from Federal Student Aid shows:
Important: Before you take out a student loan, make sure you do a reality test and calculate: what the overall cost will be (including interest), what your monthly payment will be, and how many years you’ll be paying it off. Then multiply by 4 – for 4 years of college. Not a math whiz? Use the calculators on our Helpful Sites page. (links to Helpful Sites at end of section)
Should you get a student loan?
Ask most students why they’re going to college, and though they may have all kinds of good reasons, most will probably say, "It’s to get a good job." In short, they’re making an investment in their future. But that investment can cost a lot of money – which is why roughly every other student who goes to college takes out student loans. Getting that needed extra money might sound good at first. But it gets complicated.
Student loans charge interest, which means you pay back more than you borrowed.
When you get a student loan, you also get charged interest – which means you’ll have to pay back more than what you borrowed. Plus, the more you borrow, and the longer it takes you to pay it back, the more your loans will cost you. Now some people might think – “Why worry? That won’t happen until way into the future.”
The more you owe in student loans, the less you’ll have left for other things.
Think about it. Your future is why you’re going to college. So, even if your education helps you land a good-paying job, you still have to ask yourself, “How much of your income will go towards paying off your student loan?” And how much could instead be going toward helping you buy a car, live in a nicer place, or do more of what you want to do? It’s really simple math. The more you owe in student loans, the less you’ll have left for other things. But there are ways to manage all this. And what you’re going to learn here are ways to work out a balance. It’s not easy. But it’s not all that difficult, either. And if you can start learning some good ways to invest in your dream right now, maybe you’ll be able to live more of that dream, later on.
Want to learn more? Watch our "Understanding How Loans Work" video.
RELATED TOPICS:
How do student loans work
Borrowing money with student loans
Helpful sites for paying for college