Student management

Quick tips for new grads to consider before taking out traditional student loans

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For many young Americans, graduating from high school brings new beginnings, new opportunities, new challenges — and new debt in the form of student loans to help pay for their college education.

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Before applying for a loan, you must follow a number of steps to ensure that you find the right financial solution. It starts with having a clear understanding of your payment options and responsibilities, according to Rick Castellano, vice president of corporate communications at Sallie Mae. He suggests scheduling a time to sit down with your family to discuss your options and expectations.

“We see time and time again that families who sit down and make a plan are better equipped to pay for their education,” Castellano said in an interview with Fortune. “You want to go into it with your eyes wide open and manage expectations of how much debt you’ll be carrying after.”

Topics you should discuss include how much you’ve saved for tuition, how much debt you’re willing to take on, and your plans after college.

Once you’ve sorted that out, your first step is to fill out a Free Application for Federal Student Aid (FAFSA) form, Castellano said. The FAFSA provides billions of dollars in financial aid in the form of scholarships, grants, work-study programs, and federal loans.

What types of federal student loans are there?

In terms of federal loans, there are two basic types: subsidized and unsubsidized. Subsidized loans are need-based, and the US Department of Education pays the interest while you’re in school. Unsubsidized loans require you to repay all interest for the life of the loan.

The FAFSA application period opens on October 1 each year, with aid awarded on a rolling basis. The application period for the 2022-2023 school year is still open.

Before taking out a loan, you should look into scholarships and other non-loan options. A good resource is Sallie Mae, which lets you search millions of different scholarships. You should also contact your college’s financial aid office to find out more about the scholarships they offer. Another option is to check with your state’s education agency to find out if they offer any assistance programs.

Federal Student Loans vs Private Student Loans

If you can’t find options other than loans, you’re probably better off getting a federal loan than a private loan, experts say.

“Federal loan interest rates are generally lower and they have more flexible repayment options,” Liz Frazier, certified financial planner and executive director of financial literacy at Copper Banking, told Fortune.

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Another benefit of federal loans is that you don’t need a credit history to qualify. This is not the case with private loans, which means you may need to get a co-signer. Additionally, some borrowers with federal loans may qualify for forgiveness programs such as the Public Service Loan Forgiveness Program (PSLF). Federal loans also offer income-based repayment programs in which monthly payments are determined by income and family size.

Just make sure you don’t depend on loan forgiveness when you take out a loan. Assume that you will have to repay the entire loan on the agreed terms and develop a plan to do so.

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About the Author

Vance Cariaga is a London-based writer, editor and journalist who previously held positions at Investor’s Business Daily, The Charlotte Business Journal and The Charlotte Observer. His work has also appeared in Charlotte Magazine, Street & Smith’s Sports Business Journal, and Business North Carolina magazine. He holds a BA in English from Appalachian State University and studied journalism at the University of South Carolina. His reporting has won awards from the North Carolina Press Association, the Green Eyeshade Awards and AlterNet. In addition to journalism, he has worked in banking, accounting and restaurant management. A North Carolina native who also writes fiction, Vance’s short story “Saint Christopher” placed second in the 2019 Writer’s Digest short story competition. Two of her short stories appear in With One Eye on the Cows, an anthology published by Ad Hoc Fiction in 2019. Her first novel, Voodoo Hideaway, is published in 2021 by Atmosphere Press.