2 Student Loan Questions Students and Parents Always Miss

When student loans become a necessity, parents and students should be well aware of what is owed. But during all the rush, key financial questions get easily brushed aside.

Asking the wrong questions about debt

Families looking to secure a quick college tuition solution tend to focus on two questions that fail to completely answer issues involving debt. They are “What’s the interest rate and what’s the payment?”

Indeed, the interest rate and minimum payment are important to know, but are only components of a student loan application. They fail to provide the “big picture” answer necessary considering how expensive college can be. If you are comparing loan options based on interest rate and minimum payments, it’s like comparing two cars based on the hood ornament only. Wouldn’t you rather compare cars considering something more important, like the engine? It’s time to take your debt obligations on a “test drive” by knowing the right questions to answer.

When comparing student loan options, ask  these two questions:

How much will this debt cost to repay?

Use a loan calculator to estimate how much total interest will accrue over the course of the repayment period. Make sure to include within the calculation any loan fees that may have been built into the loan at the time of origination.

Also consider fixed or variable rate projections. Fixed rates will be more predictable, but depending on the program they may actually be locked in at a somewhat higher rate. A variable rate may offer a lower rate today, but may be subject to change based on a rate index like LIBOR or Prime.

When will I be debt free?

Look into your future and set the date when you can be student loan debt free. How many total years will it take to pay the debt back? How old will you be when that time comes? If this date is too far into the future, consider the option of making payments while in school, or additional pre-payments after graduation.

Making student loan payments while in school may be more affordable than realized, so students should not shy away from the concept on face value. Even $25 a month is a good start. Making pre-payments towards student loan debt means paying more than the minimum monthly amount due each month, and can greatly reduce the time it takes to be debt free. Confirm with your loan provider that your program allows for pre-payments to secure your debt elimination strategy.

Does student loan refinancing or consolidation make sense for me?

Answering this advanced financial literacy question will become more clear as a student nears graduation. Gaining a student loan consolidation after graduation can help to best organize debts and manage repayment.

The Federal Direct Loans consolidation is available for borrowers of federal loans only, and simply uses a weighted average of all federal debts combined into one application. This is convenient, but does not actually provide an interest rate reduction by way of a traditional loan refinance.

Student loan refinancing is when you take out a brand new student loan, and use that new loan to pay off all of your existing loans. This method doesn’t combine anything, but rather creates a brand new loan for you.  As a student moves towards a career path by way of their degree and experience, the right consolidation choice will become more clear.