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Is Taking Out a Student Loan the Best Way to Pay for College?

This post is from a student, parent, or professional contributor. The opinions expressed by the author are their own and do not necessarily reflect the positions, viewpoints, or policies of Niche.

Hemming and hawing on whether to take out student loans?

If that’s the case, that might mean you’re in a position to decline them altogether—and that’s great.

But if you do need to take out student loans, they can offer lasting benefits. 

Why Should I Get a Student Loan (Even if I Don’t Need It)? 

Like other types of loans, a student loan can help you build credit. For students who have never had a loan or credit card before, it may even be the first account that establishes their credit report and makes them eligible for a credit score. Here’s how student loans can affect your credit.

1. Student loans can help build your credit.

Student loans function as a type of installment loan, which means you make monthly payments over a predetermined period of time. 

Student loans can help you build credit because they add to your credit reports and, over time, increase the length of your credit history.

Let’s say you also have a car loan or other type of loan—a student loan adds to your credit mix and further boosts your credit (as long as you pay your bills on time). 

2. Paying off student loans can positively impact your credit over a number of years. 

Think ahead to when you pay off your loan. You’ll certainly breathe a major sigh of relief, but you might also experience a drop in your credit score (don’t freak!). It may drop when you pay off your loan, but your scores will recover and improve. 

Your student loan can remain on your credit reports for 10 years after you pay it off and impact the length of your credit history, payment history and the amount of—which all contribute to better credit.

3. You get a degree out of the deal.

Obviously the best benefit of all, if you stick with it, you get a degree.

During the time you earn your degree, you can pay for books, supplies, housing and tuition with that loan. Student loans also allow you to more easily focus on schoolwork and your overall college experience.

They help you to avoid short-term financial anxiety, especially if you feel you’d need to work to pay your tuition bill. That can feel impossible to do when you’re in school full time.  

On the flip side, it’s easy to see how student loans can negatively affect you.  

What are the Downsides of Getting a Student Loan? 

1. Student loans can take a long time to pay off.

Student loans can take 10 years or longer to pay off. Depending on the type of loan repayment plan you have, it could take up to 25 years or more!

2. You could hurt your credit if you don’t make your payments on time.

All loans carry some amount of risk. If you default on your student loan (read: don’t pay them properly), you can ruin your credit score. This can make it difficult to take out other loans in the future, such as when you want to buy a house or car.

3. Student loan interest builds over time.

The longer you take to pay off your loans (especially if you have an extended repayment plan) the more interest you’ll build during that time. It just costs you more!

Take Out Federal or Private Loans? Learn More

How to Decide Whether You Need Student Loans

Sometimes, just by necessity, you know you’ll need to take out loans to pay for college. However, take these steps to assess exactly whether you need a student loan.

Step 1: First, lay out all the costs. 

What costs will you actually owe? What is your full financial aid award? What scholarships can you receive?

Make sure you have a full financial aid award letter in front of you, not just the website’s overview of tuition, room, board and fees. You need to know your specific dollars-and-cents costs and how much you’ll pay out of pocket. 

How can you peel back the out-of-pocket cost even more, instead of assuming you need to take the rest of the out-of-pocket out in loans? 

Step 2: Determine how scholarships and grants can help with the out-of-pocket amount.

Peeling back the onion layers of out-of-pocket costs amounts to a giant subtraction problem, including when you get outside scholarships and grants.

Your college or university may already have applied institutional scholarships and grants to your financial aid award, so it’s important to factor in the scholarships from your community to that gap. 

Step 3: Figure out how you can fill in the gaps with your own earnings.

How much can you earn on your own during summers, over holidays and after classes?

You might surprise yourself with how much you can earn. Even $5,000 can knock off a substantial amount! 

Step 4: Find out whether family members can help. 

Will family members help you fill in the gaps? Whether family members want to pick up all the extra out-of-pocket costs or can only contribute about $100 to your full balance, don’t forget to figure out how much family members can contribute to the outstanding balance. You might find yourself in awe of what Auntie Em might contribute.

Step 5: Learn the long-term ramifications. 

Take a look at the amount of student loans you think you might need to take out and figure out the ballpark figure you’ll pay over five, 10 or 20 years—or more. You can use a student loan interest calculator to help you figure this out.

It’s best to know what you’re facing so that you can work a little harder to fill in the gaps with scholarships or work.

Step 6: Remember that scholarship opportunities can come later, too.

You can always get scholarships, even while you’re in college. Never assume it’s the “end of the road” for financial aid and scholarships.

More Tips About Taking Out Student Loans

Do you know a lot about student loans? Do you know how student loans work? One of the best ways you can create clarity about almost anything: Arm yourself with education. 

1. Know the ins and outs of student loans. 

It’s a good idea to understand the difference between federal loans and private student loans

  • Direct Subsidized loans provide assistance to undergraduate students who demonstrate financial need. Your loans will start accruing interest right away.
  • Direct Unsubsidized loans (for undergads and grads) provide assistance whether or not you have financial need. The government pays the interest on the loan while you take classes full time.
  • Graduate and professional degree students and the parents of dependent undergraduate students can tap into Direct PLUS loans. These loans require you to pay interest during all periods. 
  • Private student loans usually come from banks or other private companies and may end up costing you more in the long run.

Consider the costs no matter which type of loan you look into. Ask a lot of questions about interest rates, interest rate accrual, whether you get a variable or fixed rate, repayment terms and more. It’s a good idea to shop around with different private lenders to ensure you get the best deal on your interest rate. 

2. Know how you can pay student loans back. 

Understand how you can pay back student loans. You may want to research a few types of federal student loan repayment options:

  • Income-based repayment
  • Standard repayment
  • Graduated repayment
  • Extended repayment
  • Pay-as-you-earn repayment plans
  • Income-contingent repayment plans

You can usually tap into a six-month grace period with federal loans before you must start making payments. 

How to Decline Student Loans 

What if you think you don’t need student loans? You’ve got enough scholarship money, grant money or more?

First of all, good for you.

Now, how do you decline them? Great question.

Step 1: Review your financial aid award for your federal loan offerings.

Does your financial aid award offer federal loans? Most do.

You’ll often see Direct Subsidized loans and Direct Unsubsidized loans displayed prominently on your award. 

Step 2: Select the option that lets you decline your award.

You may click on “decline” if you’re viewing an electronic version of your aid award.

If you take a look at a paper version (yes, some schools still send those!) you can check “decline” and scan your information in and send it as an email attachment.

You may also want to snail mail the information back with the “decline” section marked on your award.

Making the Right Decision About Student Loans

Loans can follow you for a while, so make sure you total up how much you actually need. You don’t want to go overboard!

Take only what’s necessary to get you through each semester and evaluate every semester what you can chip in toward your out-of-pocket costs.

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Author: Melissa Brock

Melissa Brock is the founder of College Money Tips and Money editor at Benzinga. She loves helping families navigate their finances and the college search process. Check out her essential timeline and checklist for the college search!