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

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.

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.