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The Smart Guide to Student Loans: How to Assess & Avoid Risk as a Borrower

Student loans are a great way to fund your degree when used responsibly. This guide reveals practical tips for navigating student loans, including expert advice on avoiding more debt than you can reasonably repay. Keep reading to make the financial aid choices that work best for you.

Author: Blake Huggins
Editor: STEPS Staff
Reviewer: Fred Amrein

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If the thought of graduating college with debt sounds scary, you’re not alone. In 2021, nearly 64% of graduates carried student loan debt averaging around $30k. A few years prior 36% of college graduates reported that their student loans weren’t worth it. That feeling is understandable. Launching your professional career when you’re saddled with debt can be overwhelming. It’s no wonder so many remain confused and hesitant.

However, many students need this option to earn their degree because student loans can be a great way to pay for expenses not covered by financial aid when used responsibly. The key to smart borrowing is knowledge and understanding.

This guide offers clarity by breaking down different student loan types and assessing their pros and cons. It looks at repayment options, strategies for budgeting and debt management, and contains expert insight from an experienced financial professional. Keep reading to learn how to use student loans to your advantage.

Student Loan Risk Assessment from Low to High

There are several different types of student loans available to borrowers. Each offers its own set of benefits and limitations, ranging from low to high risk. All the technical language and verbiage can be confusing and difficult to sort out, especially if you’re juggling work, life, and academics. In this section we look at each type in particular so you can determine which student loans might work best for your situation. Explore the advantages, interest rates, eligibility criteria, and repayment terms associated with each type.

Federal Loan Risks

Federal student loans are those granted by the federal government, and they often involve lower potential risk than some of the others discussed here. In most cases, that includes lower interest rates and greater flexibility in repayment options. They’re also automatically eligible for any current or future debt forgiveness programs offered by the government. Your FAFSA will determine your eligibility for these loans and you can navigate to our guide for more information on that process.

Direct Subsidized Loans – Low Risk

Subsidized student loans include some government provisions that help lessen your financial burden in the long-term. They come with low interest rates, in addition, they include a federal subsidy that covers interest during key periods – when you’re in school, loan deferment, or during a grace period. This means that the total amount you need to repay will not increase during that time.

There are few cons associated with subsidized loans, but they do have some limitations. Eligibility is based on income and your FAFSA, but crucially, the maximum initial amount is only $3,500 annually, which means borrowers will likely need to secure additional funding.

Direct Unsubsidized – Low Risk

The federal government offers this option for those unable to establish clear financial need for a subsidized loan. Unsubsidized loans include benefits like low, fixed-interest rates, higher overall borrowing limits, and fewer income-based parameters. Like other federal loans, borrowers also enjoy modest flexibility in repayment.

There are potential drawbacks for these loans center on interest and the borrowing ceiling. Because these are unsubsidized, borrowers are responsible for paying all interest on these loans, including any interest accrued when you’re still in school. The total limit for these loans is also $5,500 annually when combined with subsidized loans, so they may not cover everything.

Direct PLUS Parent Loans – Low to Mid Risk

Federal PLUS loans offer parents or guardians a way to pay for their dependents’ education. These loans are not based on financial need and there is no real limit to the amount borrowed. Parents can take out whatever amount is needed to cover education-related expenses. PLUS Parent loans also benefit from low, fixed interest rates, especially in comparison to private loans.

Because of the reduced limits, these loans require a credit check. Full debt responsibility is assigned to the parent(s) or guardian(s). In addition, the government charges a 4-5% processing fee. This fee is taken directly out of the disbursement award.

Direct Consolidation Loans – Low Risk

Consolidation is essentially a refinancing measure. It allows you to take any of your federal loans – subsidized, unsubsidized, PLUS, etc. – and combine them into a single, fixed-interest loan. If you have multiple federal loans this could make things much more manageable. It simplified repayment and could result in lower monthly payments overall.

Federal direct consolidation excludes any private student loans you may hold. It could also result in a loss of individual, loan-specific benefits depending on your circumstances. There is no grace period for consolidation and it could lead to more accumulated interest over the life of the loan.

Private Loan Risks

Private student loans could make sense under certain circumstances, but they do present higher risk potential than government options. Be sure to carefully read the fine print associated with the private loans you consider. Pay close attention to the terms and conditions, including the interest rates, and determine your level of comfort. . Interest rates for private loans tend to be higher which could make repayment more challenging in some instances. Here’s some more key information.

Private Loans – High Risk

Sallie Mae remains the largest and most prominent private student loan provider in the U.S. It extends options for graduate and undergraduate students as well as pathways for those interested in specialized training in fields like business, law, and healthcare. Other large institutions like Ascent and College Ave offer similar opportunities.

Borrowers can also secure private loan funding through credit unions and smaller, more regionally-based banks. In some cases, the benefits of pursuing these opportunities might be more advantageous in the long-term, especially if you are already using a local credit union, for example.

Pros of Private Loans

Private student loans are a great way to obtain supplemental funding once you’ve exhausted federal options. In fact, most private loans are less restrictive than government alternatives. They are not income-based and do not require a recent FAFSA submission. Many do not involve borrowing limits or origination fees, which could put you in a position to receive your funds more quickly.

Depending on the institution and your own circumstances, you could even achieve lower overall interest rates but this will vary widely. Some banks and providers may offer special incentives or programs as well. Sometimes these are not advertised, so it cannot hurt to ask and inquire.

Cons of Private Loans

The drawbacks of private student loans could outweigh the benefits. Historically, these loans have been associated with predatory lending practices that make repayment and debt management especially challenging. Moreover, private loans use credit-worthiness to determine eligibility rather than income. Some borrowers may need a viable co-signer as a result. Interest rates are also credit-dependent, so it is crucial to understand the differences between fixed and variable interest rates.

Private loans are also not eligible for consolidation in most cases and offer fewer repayment options. Many also provide less flexibility for deferment and forbearance and do not qualify for federal forgiveness initiatives.

Lower Your Risk: Using Student Loans Responsibly

Any form of debt can be risky and for that reason, student loans should ideally be a last resort. Consider them a supplementary resource rather than your primary source of funding. This will help you minimize risk and make the amount of debt you incur more manageable. Consider your future salary potential and strive to exhaust all other options – scholarships, grants, etc. – before you turn to student loans. Here are some guidelines to keep in mind as you do that.

Apply for Scholarships

Taking on debt should always be a last resort. Prioritize “free” financial aid that does not require repayment before turning to student loans. This includes federal aid like Pell Grants, scholarship and private grants, work-study placements, and other opportunities. Treat these resources as your primary stream of funding and use student loans to help close the gap. See our public service scholarship guide for more information on opportunities available to you.

Apply for Work-Study Options

Work-study placement gives you the opportunity to discharge part of your tuition in exchange for part-time work for your college or university. These placements are typically campus-based and eligibility is determined by financial need demonstrated through the FAFSA. The upshot here is that you gain relevant hands-on work experience in addition to paying down your expenses. Hours could be limited but the opportunity could give you a leg up as a job candidate after graduation.

Get a Job

Work-study placement isn’t the only way to use your labor power to help pay down expenses. You can also seek out – or, depending on your situation, continue to maintain – a relevant and manageable professional role. You could work part-time during your studies and then pivot to full-time after graduation to help pay things off. Or, you could take advantage of online or part-time study, enabling you to keep a full-time job and pay as you go.

Use the Lowest Risk Loans Possible

High-interest loans with few deferment/forbearance options and inflexible repayment terms can make things difficult to manage. Instead, prioritize the subsidized, low-interest options mentioned above. These will give you the lowest levels of risk overall and greater freedom when you begin to repay. This means you will need to complete the FAFSA to demonstrate your financial standing and then focus on federal loans rather than private alternatives.

Cut Living Expenses

Audit your living expenses and strive to reduce them as much as possible. The money you’ll save can be applied to your debts or education expenses, ultimately allowing you to pay things off more quickly. Compare the cost of living on campus or off campus and act accordingly. If you study online (or plan to), consider where you could live that would help cut costs. You could also save money by living with family or roommates.

Consider Your Future Salary Potential

This is big. Understanding how much debt you can take on ultimately depends on your earning potential after you graduate. The relationship between debt and salary is well documented and the best place to start is by researching entry-level salaries for your degree path in the area you want to live. Weigh those realities alongside your own budget and decide what might be manageable for your situation. Available tools like debt-salary calculators can help you make that determination.

Attend an Affordable College or University

Ultimately, the school you attend will dictate the severity of your education-related expenses. Assess your options carefully, especially if you’re still in the admissions phase. It might be tempting to attend an expensive top-tier school several states away, but it could make more sense to enroll in a local college near home depending on your field and background. Online study could also be a viable path. See our rankings page, which takes affordability into consideration, for more information.

Take Out the Minimum Amount of Loans You Need

It may be tempting to borrow as much as possible, but this will likely work to your disadvantage in the future. Experts agree: only take out what you need. Doing so will put you in a better position to comfortably make payments in the future. Less debt also means a smaller principal balance and less accumulated interest over time. Avoid extravagance and only rely on student loans to help close gaps after you’ve secured other financial aid.

Estimate Your Future Loan Payments in Advance

We already covered future salary potential above. It’s a key factor here, but so are the monthly payments you’ll make after you finish school. If you have (or plan to have) multiple loans you will want to consider those payments together, or look into how consolidation might help reduce the burden. The federal government provides a useful payment simulator to help you calculate estimates. Private lenders like Sallie Mae offer similar tools.

Risk Awareness During Repayment

In most cases, you will be expected to begin timely repayment of your loans shortly after graduation. Depending on the loan, there may be a grace period that allows you to get settled and find employment. But interest will likely begin to accrue immediately. Here are some tips to help you navigate the repayment process.

Learn How to Budget

Devising a workable budget and sticking to it bolsters financial health. Be sure to include your loans in your planning and work to prioritize payments on amounts with higher interest. If you’re new to budgeting the Dept. of Education offers several useful resources that can help. Make a list of both your income and your expenses. Separate your expenses into variable and fixed categories, and be sure to allow for emergency savings. From there, allocate your resources as needed.

Determine if Loan Consolidation is Right for You

Consolidation might not be right for everyone, but it can streamline your repayment efforts. Consolidating federal loans, for example, may result in a lower monthly payment. It also allows you to lock in a new, fixed interest rate. If you have multiple loans this could be a great option because it eliminates multiple payments. However, you could lose some benefits associated with individual loans under consolidation so you should always seek advice from a financial expert before you decide.

Look Into Student Loan Forgiveness Options

Debt cancellation and loan forgiveness options can help make things more manageable, especially for those with a public service degree. There are a number of programs and initiatives available, depending on your field and line of work. Here are a few to consider.

  • Public Service Loan Forgiveness Program (PSLF) – The PSLF program grants forgiveness to borrowers working full-time for a qualified employer in public service. Eligible participants must complete 120 qualifying monthly payments on federal direct loans at which point the remaining balance is forgiven. Employers must certify employment each year in order for the forgiveness to take effect.
  • Teacher Loan Forgiveness Program (TLF)This initiative allows teachers to obtain up to $17,500 in federal loan forgiveness. Qualified borrowers must be employed as full-time teachers for at least 5 consecutive academic years at an eligible school. At least one of those academic years must be after 1997-98. Federal Perkins loans and PLUS loans do not qualify.
  • Perkins Loan Teacher Cancellation – For teachers holding Perkins loans, this program provides an additional forgiveness pathway. Eligible borrowers can receive up to 100% cancellation if they work full-time in a public or nonprofit elementary or secondary school. Qualifying roles include special education, teachers in math, science, or language, and those serving low-income families.

Explore Federal Service Program Options

Forgiveness programs aren’t the whole way to discharge some of your federal student loan debt. The government also recognizes several different service programs that can help expedite the repayment process. The options listed below show educational awards you can apply to your loan balance.

  • Peace Corps – Since the 1960s, members of the Peace Corps have provided international development services throughout the globe. Eligible volunteers can receive between 15-70% forgiveness for Perkins loans and potentially even greater benefits for federal direct loans under PSLF. Depending on the provider, private loan assistance may be available as well.
  • AmeriCorps – This agency provides services similar to the Peace Corps but with a domestic focus. After completing their service, volunteers may be eligible for the Segal AmeriCorps Education Award which provides funds equal to the maximum Pell Grant amount during their years of service (over $7000 in 2023).
  • Teach for America – This nonprofit organization recruits graduates from colleges across the country to serve as teachers in underrepresented communities. Participants are eligible for programs like Public Service Loan Forgiveness and Teacher Loan Forgiveness. Depending on the community your work in, additional incentives may also be available.
  • City Year – This Boston-based nonprofit is a member of the AmeriCorps service network. Participants work in high-need areas by providing teaching services and academic support. They qualify for additional forbearance during service and are eligible for federal loan forgiveness programs upon completion.

Know How to Navigate Financial Issues

You may run into financial issues despite your best efforts to mitigate risk and capitalize on available benefits. You’ll be better equipped to navigate those challenges if you know what your options are and how you can avail yourself of them. Learn more about both below.

  • Student Loan Deferment or ForbearanceThese options allow you to temporarily lower or even pause your monthly payments until your situation improves. In forbearance, loan payments are postponed and interest does not accrue during the interim. Deferment works similarly but is less all encompassing. Payments are postponed, but interest continues to accrue.
  • Apply for an Income-driven Repayment Plan – Income-driven repayment plans help make student loan debt more manageable and affordable. Available plans set a monthly payment more reflective of your resources, allowing you to pay down your debts in ways that do not negatively impact your finances or overwhelm your budget.

Student Loan Resources

There are a number of tools and resources available to help you manage your student loan debt and minimize overall risk. These include government agencies, nonprofits, grassroots advocacy efforts, user-maintained discussion forums, and research outlets. Consult the list below as you work to pay down your debt and reduce risk.

  • Consumer Action: This organization’s student loan page contains a lengthy list of valuable guides and resources for borrowers. It also provides information on financial management and job training.
  • Consumer Financial Protection Bureau: A government entity, this agency enforces consumer finance law. It also ensures that markets and student loan providers remain fair and competitive to prospective borrowers.
  • Debt.org: This nonprofit focuses on debt reduction and financial management. It maintains an active student loan portal with updated information on interest rates, budgeting best practices, and repayment options.
  • Education Data Initiative: Student borrowers can access research, statistics, and other data related to student loans using this site. It also includes a variety of resources related to loan refinancing.
  • Federal Student Aid: This is the federal government’s main student loan and financial aid portal. It includes information on the FAFSA, student loans and grants, repayment, and forgiveness programs.
  • FinAid: This site offers a wealth of information, guides, calculators, and other student loan resources. It also includes an update list of private loan providers.
  • Higher Education Loan Coalition: Staffed by experienced financial aid professionals, this organization works to improve student loan programs in ways that benefit borrowers and reduce their liability.
  • Institutional or Departmental Financial Aid Offices: These offices could be one of the most useful resources for student borrowers. Examples include those at Boston University and the University of Pittsburgh.
  • MyMoney.gov: Established by Congress to advance financial literacy and education, this site offers a range of tools, checklists, and budgeting worksheets to help with debt management.
  • Personal Finance Subreddit: This discussion forum contains a number of wide-ranging, user-generated guides, tips, and conversation on personal finances, including advice on student loan repayment.
  • Public Service Loan Forgiveness: This site contains more specific information on the PSLF program, including a help tool to assist borrowers interested in exploring their options or determining their eligibility.
  • Student Borrower Protection Center: This nonprofit organization works to protect student borrowers from predatory lending practices. You can access debt cancellation resources and information on repayment agreements.
  • Student Debt Crisis Center: A grassroots movement, the SDCC works directly with students to help navigate repayment. It also engages in advocacy efforts to spark meaningful change surrounding student loan issues.
  • Student Loan Borrower Assistance: Part of the National Consumer Law Center, this entity aggregates a range of resources designed to help assist students. It includes information on collections and delinquency, loan cancellation, and repayment options.
  • Student Loan Justice: This Ohio-based nonprofit maintains state chapters across the U.S. It focuses on legal measures that ensure fairness and equity, and distributes research materials and policy papers.
  • Student Loan Planner Podcast: This podcast focus on debt reduction and how to manage all the stress and anxiety that comes with student loans. The main website also includes an active blog.
  • Student Loan Subreddit: Unlike the other subreddit mentioned, this forum focuses solely on student loans and includes recent news, FAQs, and threaded discussion posts for crowdsourced advice.
  • Student Loan Sherpa: Parents, students, and graduates can use this site to access a variety of DIY guides related to consolidation, loan forgiveness, repayment, interest, and tax liability.
  • The Institute for College Access and Success | Project on Student Debt: This hub contains an interactive map to help stakeholders visualize available student loan data. It also additional information on private loans and income-driven repayment.
  • The Institute of Student Loan Advisors Corporation: This organization focus on dispute resolution related to student loans and offers legal advice and assistance to borrowers and their families.

Ask A Student Loan Expert: Smart Borrowing & Understanding Risks

Fred Amrein

Fred Amrein is a nationally recognized expert on college funding and student loan repayment.He has the most approved CFP courses covering these topics.Fred is the founder and CEO of PayForED.com, which provides software and training programs to solve the student debt crisis.

What strategies can students employ to minimize their reliance on student loans and secure alternative funding?

The only way to minimize debt is through better college list planning and maximizing both need-based and merit-based financial aid. Another alternative is the return to commuting to a local college and working during college. Employers may have a tuition reimbursement plan, which may increase funding. Unfortunately, parents and students are taking on significant debt to help the student have this experience and become independent. The average room & board is approaching $15K per year, which is $60K of debt that could be avoided.

How can students determine the potential return on investment for their chosen field, and how might that ROI impact their ability to repay their student loans?

Students must use the career centers to plan for career and income projections. The schools promote your need to follow your dreams but overlook the reality of the environment. Families need to change this decision to a purchase rather than an investment. An ongoing discussion on job demand, employment possibilities, and salary should start in the first year. After that, a combination of those employment discussions and course selection must happen every semester until graduation.

What are the potential consequences of defaulting on student loans, and what steps can at-risk students take to prevent that?

The consequences are severe. If the borrower has federal loans, there is more flexibility in repayment options than private loans. We expect some borrowers to consider the default path with the upcoming restart. This could result in wage garnishment, tax refund garnishment, social security garnishment, bad credit rating, and many other penalties. On the federal side, borrowers can use the income-driven repayment methods since it is based on income.In addition, both federal and private have a forbearance option which allows for a temporary pause, but interest is being charged to the loans during that time. Contact the lender or loan servicer to understand your options if this is an issue.

How can borrowers minimize the overall interest paid over the life of their student loans?

Selecting a manageable repayment option based on their debt is the first step for borrowers not qualifying for loan forgiveness. Some borrowers want to get out of debt ASAP. I typically recommend the lower payment for cash flow reasons and use the Pre-payment strategy. There is no pre-payment penalty for federal loans and most private student loans. Private refinancing may also be a great option depending on the debt structure.

Under what circumstances would it be beneficial for a potential borrower to consider a private student loan over those offered by the federal government?

There are a few reasons for this decision. First, using a private loan allows the co-signer to be released from the loan at a future date. If a Parent PLUS loan is used, that option does not exist. Parent and Grad PLUS loans have high fees, which can be avoided by using Private student loans. You need to evaluate the actual cost of money but also consider the repayment and forgiveness flexibility.

Are there any tax considerations that student loan borrowers should consider? What is the best way to navigate this aspect?

With the increased use of income-driven repayment, the entire repayment process depends on tax planning if the borrower is going to use that method. How they manage their pretax deductions and tax filing is directly related to their monthly repayment and forgiveness amount.

One of the problems is the upcoming IRS/DOE data integration. As a result, the tax preparer will become a more critical part of the solution. The problem is this contradicts their primary goal of lowering your taxes. Income-driven repayment planning may require tax increases to benefit the lower loan repayment.

Another significant issue is that the college financial aid offices and the loan servicers cannot legally provide tax or personal financial advice. Borrowers expect to go to the loan servicer to get the correct answer, but in many cases, they will need professional financial help.