6 Factors to Consider Before Taking Out a Student Loan

Deciding what to do with your life and whether to attend college has never been an easy decision. But it’s getting increasingly more difficult now as the average college tuition for a bachelor’s degree has more than tripled in the last 3 decades!

Annual budgets for 4-year institutions now range from $27,940 for public, in-state students, $45,240 for out-of-state students, and $57,570 for private universities. Not to mention some of the ivy league universities will set you back $100,000 a year!  Per year friends!!

The cost of attending college has skyrocketed while the income for people without a college degree has significantly gone up in the last decade, according to Pew Research Center. 

This adds another layer of complexity to committing to a college degree, especially if you need to take out a student loan. In this post, we will break down 6 key factors to consider before you sign the dotted lines on a student loan agreement. 

Factor #1: The return on a college degree 

An average borrower takes about 20 years to repay their student loan debt. Worse yet, millions of Americans aged 55 and older are still paying this deft. So, before committing to long-term installment payments that could last two decades or more, evaluate whether the investment in your college degree is truly worthwhile.

According to a new Pew Research Center survey, 29% of U.S. adults think a college degree is not worth the cost, 47% think it’s worth the cost only if you don't have to take out a loan, and 22% think a college degree is worth it even with a student loan. 

So, how do we know whether a college degree is worth it? One key factor to consider is the expected financial return. 

While in general college graduates earn a higher annual income, not all degrees are created equal. For instance, technical skills like petroleum engineering, biomedical engineering, and actuarial science are among the highest paying majors, while degrees in liberal arts, performing arts and theology may not have as much earning potential. 

So, before taking out a loan, explore the earning potential of the degree you are planning to pursue. Is the degree in demand by employers? What kinds of jobs does it offer? And, most importantly, will it provide a livable wage to support your lifestyle long-term? 

Don’t know? That’s why uThrive Academy exists, to help you figure out these life-altering decisions. After all, you must look at your college degree as a financial investment. 

Factor #2: The scholarships, grants, and financial aid available

Here’s a mind-blowing statistic:

Nearly $100 million in scholarships and $2 billion in student grants go unclaimed every year due to a lack of applicants.

The U.S. Department of Education awards an estimated $46 billion in scholarships every year. An average first-time undergraduate who receives government grants and scholarships at a 4-year college receives about $13,690 annually. 

Unlike school loans, you don't need to repay scholarships, grants, and financial aid. So, not claiming them simply equals not picking up free money lying on the floor. 

A key reason many students don't apply for scholarships or grants is that they simply don't know these funding options exist. Plus, self-rejection—thinking that academic excellence is the only criterion for awarding scholarships—also plays a crucial role. 

The bottom line: There are more scholarships, grants, and financial aid than many commonly believe. Exhaust all scholarships and grant opportunities on sites like Scholarships.com, Fastweb, and College Board. You owe it to yourself to explore these options - it could end up covering a significant portion of your college expenses!

Factor #3: The feasibility of alternative funding sources

Are you still in the red trying to cover all of your college expenses? Keep your chin up - there are many other alternative funding options other than student loans. 

For instance, a part-time job is a great option for students who don't mind juggling work and study to fund a part of their college expenses. Plus, it's good for you! 40% of full-time undergraduate students and 74% of part-time students are involved in part-time jobs, and most work at least 20 hours per week, according to the National Center for Education Statistics. 

In addition to paying for your college expenses, another advantage of part-time work is the value it adds to your resume and soft skill development. Having prior work experience - and (paid) internships - helps students land better paying jobs after graduation because employers want to see that you have workplace skills. 

Next in line is employer tuition assistance. Every year American companies spend more than $28 billion in educational assistance programs. However, similar to scholarships and financial aid, employer tuition assistance is underutilized. 

Only 2% of eligible employees tap into tuition assistance programs, and a whopping 60% of working professionals are not even aware that such benefits exist!

If you are currently employed, you may be eligible for an employee benefit where your employer covers a set amount of continuing education credits or college coursework toward a degree. Doesn't hurt to ask your boss!

Finally, consider opting for a community college to fulfill your general education courses in the first couple of years. Across the board, community colleges are much less expensive compared to 4-year and private institutions, with tuition as little as around $3,500 per year. 

Factor #4: The amount of loan required

Once you have exhausted the above 3 options, it’s time to take a pen and paper and calculate how much you need to borrow. 

Unfortunately the tuition fee is not the only thing you need to pay for. You are going to spend a substantial amount on room and board, transportation (if you live off campus), textbooks, computers, and other supplies. 

The maximum amount you can borrow is capped at the cost of attendance (COA), which is determined by a college or university and it’s generally available on an institution’s website. 

Deduct scholarships, grants, aid, income from part-time jobs, or employer tuition assistance from the COA to calculate the net amount of student loan you need. 

Factor #5: Is it a federal or private loan?

Once you have zeroed in on how much to borrow, the next piece of the puzzle is the type of loan. 

According to Jan Miller, president of Miller Student Loan Consulting, 

“It’s important to understand the type of loans you’re taking out. There are many varieties of student loans, and each has a different impact and problem they're going to create for you once you enter into repayment.”

There are primarily two types of student loans: federal and private loans. Federal loans are extended by the government whereas private student loans are offered by banks and other lenders. 

Federal loans typically have lower interest rates and better repayment options compared to private loans. For the 2024-25 school year, federal student loan interest rates range from 5.50% to 9.08%, whereas private lenders are offering rates from 3.74% to 17.99% (as of July 29, 2024). 

There are also subsidized federal loans for students demonstrating financial needs in their Free Application for Federal Student Aid (FAFSA) applications. In these loans, the U.S. Department of Education subsidizes the interest while you’re still in college. 

Note: federal and private loans have different eligibility criteria, so pay attention to those details and diligently shop for the best rates based on your eligibility. 

Factor #6: Loan terms 

Loan terms include a range of things you must have a close eye on, which include loan tenure, interest rates, type of interest (fixed or variable), grace period (when repayment starts), and any collateral requirements.  

The repayment period determines how long you’ll be making payments. A rule of thumb: shorter repayment periods come with higher monthly payments but much less interest and, therefore, cost overall. 

Whether an interest rate is fixed or variable affects the total interest cost. Fixed-rate loans offer stable interest rates and predictable payments, while variable-rate loans fluctuate with market conditions. 

Fixed rates are generally safer for most students, but understanding the pros and cons of each can help you decide which best fits your financial situation and budget. 

(Side note: loans can be complex and confusing, but we break it down in our master course, which you should check out here!)

Some private student loans require you to make payments while you're still in school, while others offer a grace period, allowing you to delay your first payment for a certain period. A grace period provides breathing room after graduation before payments begin, easing the transition into repayment.

Lastly, a collateral education loan, or secured loan, requires you to pledge property or other eligible financial assets as security. However, on the upside, a collateral loan comes with a lower interest rate and better repayment terms. 

Remember that as the cost of college escalates, taking out a student loan to fund your degree will have long-lasting repercussions on your finances. So, look carefully before you leap.

These tips give a sneak peek of our comprehensive online course that transforms career readiness, financial literacy, and practical life skills into actionable steps for today's world. Ready to succeed? Explore the course below!