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5 Rules To Follow Before Accepting Student Loans

By Frugaling 10 Comments

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5 Rules To Follow Before Accepting Student Loans

The “Award”

Every year of graduate school, I’ve been “awarded” $16,000 in student loans. Without hesitation, I’ve accepted nearly the full amount (despite financial destruction and crisis). At the beginning of this year, I decided to seek support. Full of misconceptions, misguidance, and falsities, I decided to step into my financial aid office for help. When I left, I realized mistakes that had already cost me thousands of dollars. Why hadn’t I done this sooner?

Despite feeling financially literate, I was continually making poor financial choices. I hadn’t ever read or been educated about student loans. Despite the fact that you must sign an agreement to pay student loans off in a certain period of time, something about it just didn’t compute. I blindly accepted them as the reality of an education. No formal class in primary or secondary or post-secondary school explained these complicated financial instruments that could affect my life for decades. Absolutely, some of the responsibility falls on my shoulders for this self-imposed, willful ignorance.

Student Loans Are Not Your Friend

Student Loans Debt Money To Burn GIF

Applying for Federal student loans is easy. Federal aid is disbursed two times a year (once in the fall and once in the spring). Before receiving aid, students must fill out FAFSA (Free Application for Federal Student Aid). Fortunately, for graduate students like me, it’s easy enough. I have no contributions coming from parents and no extra income. The application takes about 15 to 20 minutes each March.

Understanding the consequences of student loans is obsequious at best – bordering on impossible. As I’ve stated, “I’m convinced that students (me included) are not able to accurately calculate and convert a bucket of student loan debt into a monthly payment – with compounding interest – on a salary that doesn’t exist yet.” Repayment plans are only the beginning, and the depressing reality is that you could be well into adulthood before you’re done.

photo
Photo: Nazareth College

After meeting with financial aid counselors, I came away with 5 rules that you must follow before accepting student loans:

1. Make a budget

This can be a daunting task. Detailed, informative budgets take time and honest critiquing – sometimes by close friends and family. My budget took me about three to four hours to complete. After diving through receipts, account statements, and credit card payments, I created a solid list of must-haves. These include: rent, utilities, food, car loan, car insurance, health insurance, dental insurance, gas, and leftover student fees and tuition. In total, my monthly budget sits around $1500 for everything necessary to keep my current standard of living. There’s a deficit each month, and that’s where student loans come into the picture. The key is to have this self-effacing, honest, frugal budget in hand when you talk with a financial aid counselor (see rule 2).

2. Talk to a financial aid counselor

This is a lesson I learned the hard way (having lost thousands of dollars to interest): Talk to your financial adviser at school to help strategize your student loans. Despite a lot of information being publicly available, they’re resources with years of experience. Trust their expertise and come with questions. How can I reduce my amount of aid? How can I better balance my budget? What do repayment plans look like for the amount of debt I might be taking out? You pay their salaries with your student fees – take advantage of it. It was in my conversation with a counselor that I discovered a trick to student loans that could’ve saved thousands.

3. Divide disbursements across the semester

Once you’ve created a solid budget and discussed your potential financial situation with your counselor, it’s time to come to a solid number. This next academic cycle, I’ll be taking about $12,000 less in loans. That leaves me with $4,050 for the 9-month year, which will disburse about $2,025 (less a 1% origination fee from the government) per semester. Here’s where I messed up in years prior: If you ever underbudget or overbudget you can “reactivate” a loan and adjust the value to a more appropriate level at no added cost. So, what does this mean for you? Well, if you disburse your semester funds ($2025 in August and January), the clock will be immediately running on your debt. For me, that’s a 6.8% interest rate slapping me across the face and keeping me awake at night. The key is purposively under-budgeting. Let’s say your budget needs to account for $4,000 in August disbursement and $2,000 will be needed around late November. Instead of taking out $6,000 all at once, request a reactivation and increase the student loan later on the semester. Otherwise, this large chunk of funds sits in my savings account (likely making an abysmal amount compared the government’s fees) going unused until later on in the semester.While the 1% origination fee will still apply, this will save you thousands of dollars in interest (because the 6.8% only applies to what is currently disbursed) over the course of your education because you won’t have money sitting, waiting to be spent on your monthly budget.

4. Ignore intriguing, teaser rates from private companies

In a brief period of desperation to try and reduce the strangely abhorrent Federal rates for aid, I looked to private companies that were teasing me with rates just above prime (~3.5%). Despite the initial appeal, these are deeply disturbing loans for people that don’t have guaranteed funding opportunities upon graduation. Unlike Federal loans, private companies do not offer deferment and forbearance options. If you aren’t making as much as you expected or don’t have a job, the government will work with you on repayment. If this occurs with private loans, you’ll be swimming with bankruptcy notices and calls from debt collectors. Stick with the government.

5. Apply for departmental and/or institution-based scholarships

While I wrote about applying for $50,500 worth of scholarships in 70 minutes, these online opportunities are inundated with applicants. The likelihood of winning one could easily be compared to the lottery. The reality is that you’d be better off looking for scholarships at your local institution. Applying for these scholarships is a more straightforward, open process. Usually, they require a personal statement of interest, transcripts, and FAFSA information (to consider financial need). Larger universities tend to have a variety of merit and need-based scholarships and they’re worth applying for as soon as possible. If you are awarded a scholarship, you can immediately contact financial services and reduce your loan award!

Some of these rules and tricks can be complicated. Before changing your budget, student loans, and/or disbursement schedules, go to your financial aid counselor. Their help could save you thousands of dollars; heck, it only took me 15 minutes to realize everything I was doing wrong.

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Comments

  1. Michael @ The Student Loan Sherpa says

    May 22, 2013 at 9:40 pm

    This is great advice. The sad part is that way too many people don’t learn the pitfalls of student loans until its too late. I never thought it was a problem when I was in grad school, but getting student loans is way too easy. Its too bad schools don’t do a better job educating their students on this subject.

    Reply
    • Broke Grad says

      May 22, 2013 at 10:14 pm

      Hey Michael,

      Thanks for your comment. You’re right! Students do need to get a better education in loans. It’s a tragic irony.

      -Sam

      Reply
  2. Syed @ The Broke Professional says

    November 11, 2013 at 12:07 pm

    Yeah I remember these student loan “award letters”. They make it sound like something to be proud of. In any case I am thankful I did budget and just took what I needed. The majority of my classmates just signed the award without even looking at it. They now have well over $200,000 in debt. I still came out with 6 digits of debt, but almost half of what I could have had.

    Great cautionary tale that all students, especially grad students, need to hear.

    Reply
    • Sam Lustgarten says

      November 11, 2013 at 6:17 pm

      Syed,

      Exactly! Aren’t those “award” letters confusing!? Haha.

      It’s like when you bid on an eBay auction and it says you “won” the item. Haha. Have money, and you’ll always win. 😉

      Sam

      Reply
  3. Kali @ CommonSenseMillennial says

    November 11, 2013 at 3:18 pm

    This is great advice! Especially #2. Smart folks know what they DON’T know, and knowing when to ask for help is crucial. Definitely take advantage of other people’s experience and knowledge when they’re offering.

    Reply
    • Sam Lustgarten says

      November 11, 2013 at 6:16 pm

      Kali,

      That’s a great point haha. Knowing when to ask is a critical part of the equation. And what a good way of looking at it. 🙂

      Thanks for the comment,

      Sam

      Reply
  4. Jen @ Frugal Rules says

    November 12, 2013 at 1:20 am

    I felt some kind of panic reading the line that said bad financial decisions were still made despite financial literacy. I don’t have so much financial savvy hence like a sponge, I try to absorb as much from blogs like this. You have no idea how much I appreciate how you share your thoughts!

    Reply
  5. Ben @ The Wealth Gospel says

    November 12, 2013 at 6:15 am

    May I add “get a job” to that list? 🙂 I’m not really sure why some college students think they can’t work while studying. I worked full-time while doing school full-time, and although I wasn’t as social as I wanted to be, I was still social enough to meet and date my wife, and I was able to avoid a LOT more in student loans that way.

    Reply
  6. Joe Saul-Sehy says

    November 13, 2013 at 10:36 am

    Great line about avoiding the private company come ones. While they might look great according to the large font, the small print often hides some ugly details.

    Reply
    • Sam Lustgarten says

      November 13, 2013 at 2:09 pm

      Joe,

      Thanks for the comment. You’re right, they’re a dangerous piece of the puzzle. Students need to watch out, because they operate on a different legal classification for debt repayment.

      All the best,
      Sam

      Reply

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