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A guide for taking out student loans

Date posted:  8/18/15 08:45:00 AM Student loans provide individuals with the ability to finance higher education.

As the back-to-school season rolls around once again, many individuals are getting ready to hit the books. For those heading to college, the worry of covering the cost of tuition may weigh heavily on their minds. 

With the substantial cost of higher education, many individuals don't have the funds to cover other expenses, according to a Forbes article from contributor Laura Shin. 

Fortunately, there are loans available which students can use to finance their education. However, before applying for financial assistance, students should research and further their understanding of student loans. This is especially crucial considering the amount of debt many individuals endure after graduation. 

According to Forbes, Mark Kantrowitz, senior vice president and publisher of, indicated the money used toward paying off student loans represents funds that would otherwise feed into the economy. Young adults are putting off buying cars, houses and starting new families. 

"Federal Stafford loans for undergraduate students is forecast to fall to 4.29 percent."

Now is a good time for loans 
According to MarketWatch, it's a great time for students to take out loans for education. Interest rates for federal student loans are expected to drop. This can save borrowers a substantial amount of money in the long term. 

In fact, federal Stafford loans for undergraduate students is forecast to fall to 4.29 percent from 4.66 percent when compared on a year-over-year basis. Graduate Stafford loans are predicted to drop from the 6.21 percent interest rate seen last year to 5.84 percent. These decreases have the potential to save students an impressive amount over the life of the loan. 

Kantrowitz noted to MarketWatch the Federal Reserve has delayed raising interest rates. This has impacted his previous prediction that rates would go up this year. 

What's better is these rates might drop even more in the future, which is especially welcome news for students currently heading to school and looking to finance a degree. Lawmakers recently voted to tie rates to the final 10-year Treasury auction, which may help alleviate some of the financial burden many young students and recent graduates carry. 

"It's totally possible that rates could reset a little bit lower next year, but before people get excited about that possibility you have to remember that they're very linked to the strength of the economy," Jason Delisle, the director of the federal education budget project at the New America Foundation said, according to MarketWatch. "In a lot of ways we should all hope that interest rates aren't lower next year."

Federal before private 
When taking out loans, first apply for federal loans before seeking private alternatives. There are more advantages to a federal loan and it can wind up being more affordable in the long run, according to Forbes.

"Federal loans are cheaper, they have fixed [interest] rates as opposed to variable rates and they're more easily available," said Kantrowitz.  

The biggest difference between the two types of loan is the interest affixed to each. A private loan's rate varies with the market while a federal loan is a fixed-rate. This dependability is something that is especially appealing to individuals trying to pay off debt. 

Understanding which student loan is the right fit will help in the long run.Understanding which student loan is the right fit will help in the long run.

Establish a budget 
Attending an educational institution that fits well with what an individual wants out of his or her experience is important, but a budget is a critical first step. According to Forbes, students should not take out more student loans than what they expect to make with their first year's salary. Individuals should aim toward paying off student loans within 10 years. 

"If you devote more than 15 percent of your monthly gross income for those student loans, you're going to be struggling to make those loan payments or you're going to be adopting a very austere lifestyle or you're going to be working two jobs to help you pay back the debt," said Kantrowitz. "You could do a deeper analysis with a budget of all four years for where you are getting your money from - how much from savings, how much from education tax benefits, how much from parent help - but often times, that will likely not be more accurate [than the ballpark estimate] because circumstances change."

Start planning now 
The sooner hopeful students start looking for loans and financing options for higher education the better.

"Too often students wait until the spring of their senior year to start figuring out how to pay for college, and by then they've missed half the deadlines that year alone," noted Kantrowitz.

Apply for scholarships 
While student loans offer a great financing option, free money is even better, noted Bankrate. 

"Absolutely take advantage of the free money that's out there in terms of scholarships, grants and financial aid," said Mike Weber, spokesman for Credit Union Student Choice, a credit union service organization, according to Bankrate.

Communities, high schools and local organizations often offer scholarships for individuals looking to attend college and grants and financial aid options are also readily available. Individuals should put in extra time looking for these opportunities and apply for them as much as possible.