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Blog » Money Tips » Student Loans: To Borrow or Not to Borrow? The Ultimate Guide

Student Loans: To Borrow or Not to Borrow? The Ultimate Guide

Do you know that 45 million Americans are currently in student loan debt? Considering the high cost of education, running into debt is easy. Standing at the crossroads of your high school and college, you might wonder whether to go for loans.

While earning a college degree largely streamlines your career, the price tag of education looks staggering. For most students, there’s no alternative to taking a student loan. So, if you want to know whether going for a student loan would be a viable choice, this guide will bail you out.

Education loan statistics you should know

  • Among independent undergraduate students, 54.1% receive federal student loans.
  • Among students living on college campuses, 63.6% receive these loans.
  • At 58.4%, middle-income students constitute the highest segment of federal loan borrowers.
  • Among college students who still live with their parents, 39.7% accept federal loans.

Given that more than half the college students in the US need to borrow to fund their higher education, you might be planning to get one. Education loans come at fixed interest, and the rate is lower compared to most other types of loans. Apparently, you might not feel financially stressed, but liabilities can accumulate fast.

How much student loan can you borrow?

College students can borrow the entire amount they need to fund their higher education through loans. The loan amount is capped at the COA (cost of attendance). This includes tuition fees, campus and board room expenses, and other direct costs. Besides, you can also finance indirect costs like off-campus living, textbooks, and transportation through student loans.

The type of loan determines the exact amount you receive. Federal loans are capped at $31,000 and $57,500 for dependent and independent undergraduate college students, respectively. However, private lenders have set lifetime limits for borrowers.

Regardless of the amount you qualify for, it’s wise to settle for only what you need. Now, how do you determine the exact amount of loan you would require to fund your college education? Additionally, you need to arrange adequate funds to manage your living expenses, tuition fees, books, housing costs, dining expenses, and supplies.

Don’t worry. We will help you do the math! After all, a college education is an investment. Every investment requires meticulous financial planning. With the right approach to education loan handling, you inch toward a debt-free future.

How much to borrow: Here’s the calculation

The best tactic to approach student loans is to borrow only the amount you need after streaming in other sources of cash flow.

For instance, you may have your 529 plan, parental support, scholarships, grants, and income from a part-time job or side hustle. Rather than borrowing a random amount of the maximum loan you qualify for, check out exactly how much you need.

A calculated approach to obtaining student loans ensures timely repayment. Besides, it would lower your obligations after graduation and help you attain financial freedom faster.

1. Create a list of expenses

Start budgeting for your college life and counting your fixed and variable expenses. Consider your living expenses, tuition fees, room rent, books, utilities, laundry, and medicines, among your fixed expenses.

Don’t overlook expenses for leisure and fun. Maybe you would be visiting movies twice a month or eating out once in a while—factor in expenses like traveling, gaming, and other incidental costs. Calculate your expenses over the four-year period and determine your monthly monetary outflow.

Now that you know your expenses, calculate how much you can manage without counting on loans.

2. Consider parental income

Talk to your parents and find out how much they can pay for your college fees each month. Discuss your financial plans with your family to get a realistic picture of their potential contribution.

Investments from parents typically include 529 college savings plans. These are the accounts that parents earmark to fund their children’s education.

3. Count in your own savings and income

Your own investments may include mutual funds, crypto investments, or savings in bank accounts. Besides, try to save money from part-time jobs, holidays, gifts, and birthdays. You can easily curtail expenses or save around $500 a year. This would be equivalent to the cost of your textbooks for a semester.

 Here are a few other ways to stack up additional dollars in your bank.

  • Share your room with your friends or batchmates rather than renting one for yourself. This will split the housing cost, which happens to be a major overhead.
  • Learn to cook so that you can prepare your own meals. This way, you can easily save $15 a day, if not more. Do the math to find out how much you save over the month.
  • Save on your car insurance, gas, and repairs by ditching the idea of owning a car altogether. Go for ride-sharing or use public transportation.

Add up all the savings you can make throughout the year. Lastly, consider your average monthly cash inflow through part-time jobs and side hustles. Make the most of your summer holidays and work full-time to boost your savings.

4. Count in bonuses and credits

Take advantage of the American Opportunity Credit, so your family can earn a maximum annual tax return of $2,500. Before you apply for the loan, consider this credit as saving and add up the amount on your ‘savings’ list.

This credit is applied to the initial $2,000 you spend on college fees, tuition, textbooks, and equipment. Next, the authorities calculate the credit at 25% of educational expenses. Therefore, if you spend another $2,000 on the mentioned heads, you can qualify for an additional credit of $500.

5.  Consider your scholarships and grants

Have you applied for scholarships and grants?

Remember, these financial aids can help you manage up to 26% of your college expenses. At $6,335, the average institutional scholarship amount looks impressive.

Besides, 37% of the recipients receiving financial aid from non-profit organizations, businesses, and other private sources get around $2,189 yearly. Students received a massive grant aid of $140.6 billion in 2021-2022.

So, why not apply for these educational assistance programs? Unlike loans, these resources offer free money you need not pay back. 

Now, subtract your aggregate monthly cash inflow, including parental support, your own savings, earnings from part-time jobs, scholarships, and tax credits from your expenses.

What should students know before taking loans?

Here are certain guidelines to streamline your academic journey through college and help you manage your loans better.

1. Go for federal loans first

If you do decide to take a loan, opt for a federal loan before counting on private lenders. Fill up the FAFSA to know your eligibility for federal loans at the outset. Qualifying for this type of student loan is easy because they won’t ask for your credit score. Besides, you can choose an income-driven repayment plan to reduce financial stress.

Most importantly, it’s easy to consolidate these loans and ask for student loan forgiveness. Private lenders don’t offer such privileges.

Federal loans can be subsidized or unsubsidized. If you are undergoing a financial crunch, go for subsidized federal student loans since they don’t accumulate interest while you are still studying. Otherwise, you may decide to settle with an unsubsidized loan.

It’s wise to take a private loan for education once you have maxed out your Federal aid.

2. Pay your interest and fees

Many students are unaware of the additional charges involved while obtaining a student loan. You would be paying more than the borrowed amount. Your repayment would include the interest and loan fees. As for federal loans, you need to pay a small percentage of the loan amount as the fee. Currently, federal direct student loans require undergraduate students to shell out a 1.057% fee.

Also, your loan interest would accumulate over time, which you’ll need to pay when you start repaying your debt. If you choose a private lender, they will check your co-signers credit history. Accordingly, the lender would determine your interest rate.

3. Use the loan for a specific purpose

The lenders specify that college students can use the loan only for education-related purposes. Therefore, you need to arrange for other sources of funds to enjoy your vacations, entertainment, and fun activities. This explains why most college students engage in side hustles, online jobs, or part-time jobs while studying.

Use your loan intelligibly to make the most of it. Consider essential costs like tuition fees, groceries, transportation costs, off-campus housing, and personal supplies. After managing these expenses using the loan, address other needs through your parental support or own income.

4. Find out when your repayment period begins

The Federal government assigns a student loan servicer to collect your repayments when the tenure starts. However, if you take a private loan for education, the lender itself may be the servicer. Sometimes, they may entrust this task to another company.

Don’t wait for the grace period to start and find who your servicer is. Before you receive your first bill, you may have certain questions. For instance, many students save money while in college through their part-time jobs and start repaying early. If you have any questions regarding early repayment, contact the loan servicer and set your schedule.

Should you opt for a student loan?

As you near the end of your high school days, it’s time to calculate how much you borrow as a student loan. The secret to striding toward your financial freedom lies in remaining debt-free. So, try to maximize ‘free money’ by being the early bird while applying for scholarships and grants. Next, try to manage a sizable chunk of your living and entertainment expenses through parental support, your own income, and student discounts.

Getting an education loan is easy, but that should be your last resort! Remember, your college life is the ideal time to inculcate financial resilience.


What are the different types of federal student loans?

College students will come across four key types of federal student loans. These are direct subsidized loans, direct unsubsidized loans, direct PLUS loans, and direct consolidation loans.

Which type of federal student loan do I need?

It’s essential to understand how you stand financially before choosing the right type of student loan.

Direct subsidized loans are designed to provide financial assistance to undergraduate students who need support. The Department of Education bears the interest cost. The student attends college and starts repaying the debt after the grace period.

Both graduate and undergraduate students can apply for direct unsubsidized loans. In this case, the borrower is liable to pay the interest costs. 

Regardless of the financial need, direct PLUS loans are available to both graduate students and their parents. So, you may need these funds handy while managing your lifestyle requirements.

In case you have several federal loans, you can take a direct consolidation loan to combine them. This way, you would be making a single repayment every month throughout the rest of the tenure.

Do federal student loans have any drawbacks?

Although federal student loans assist college students in managing their educational expenses, it pays to know their downsides.

  • Firstly, the government has imposed an upper cap on the availability of these loans. This explains why so many students count on private lenders for education loans.
  • Secondly, you need to pay a loan fee on federal student loans. Although it’s a small percentage, the amount seems to be large enough when you consider the overall loan amount.
  • You may not be able to use a federal loan to pay your tuition fees if it is not an accredited postsecondary institution.

How can I apply for a federal student loan?

You can apply for a federal student loan by submitting your details at FAFSA. Every year, this application opens on 1st October. The submission deadline varies depending on your state and college, 

What is the current interest rate for federal student loans?

The rate of interest depends on the type of federal student loan you choose to apply for. Undergraduate students must pay a 4.99% annual interest for direct subsidized and unsubsidized loans. For graduates, the rate is a little higher, at 6.54%. On the other hand, direct PLUS loans are more expensive, carrying an interest rate of 7.54%.

Featured Image Credit: Andrew Piacaquadio; Pexels: Thank You!

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