By Nicole Shepard, News Editor @NicoleEShepard
So, you’re a brand new freshmen, with limited to no work history and maybe $300 to your name. Chances are that $300 will be gone in the first month of the semester. Gone to late night runs to Village Inn or Rancheritos. I get it; you need to make new friends. You were told to get the “full college experience” at orientation.
If you’re a newbie trying to decide if you want to take the plunge into the foreboding waters of student-loan debt, I’ve got some tips to keep you safe.
For those entering the realm of financial aid, remember that grants are your best friends because they are free money so take as many as you qualify for. Many federal grants are coupled with federal loans, but you aren’t required to accept the loans to get the grant.
For some, student loans are wholly unavoidable. But now that consistently declining interest rate for Federal Stafford Loans is a thing of the past, and you need to be more careful than ever in what you do with your loans.
First, you should know what kind of loans you would get, the interest rate, and the amount you’ll owe. As a UVU student, chances are you’ll get a Federal Stafford Loan. Find out if it’s subsidized, meaning the government covers the interest for the time you are in school, or unsubsidized, where your loan racks up interest from day one. Also note the interest rate goes up or down every July 1. Stafford Loans max out at 8.25 percent, so the government can’t go up much more from the daunting 6.8 percent it’s currently threatening.
Here are some dos and don’ts you may want to consider while you’re filling out your FAFSA.
DON’T get unsubsidized loans, unless of course you want to start paying them back the day you get them.
If you choose to get just one unsubsidized loan for the standard amount of $3,000 that covers exactly one semester, at the 2012 average of a 6.8 percent interest rate, by the end of your four to six years of undergraduate work you will owe upwards of $1,000 to $2,000 extra in interest. And that is just for one semester’s worth of a loan. And remember, loans come in pairs, two a year.
Let’s say you get a typical unsubsidized loan every year for the average five years it takes someone to graduate. That adds up to $30,000 in loans. Now let’s say you don’t make any payments on those loans while you’re in school, upon graduation you will have yourself a pretty pile of interest worth approximately $4,500 and growing. And that is on top of the $30,000 you already owe. Aren’t you glad you aren’t at some fancy East Coast school?
DO take out subsidized loans.
In the world of loans, subsidized federal student loans are the best option. They have a low interest rate, comparatively speaking, even if that rate doubles. They are a far better option than credit cards, bank loans, or private loans. Loans from a private lender may have a comparable interest rate, but they aren’t federally guaranteed or protected. They don’t have to maintain the interest rate that you signed with and can take up to seven weeks longer to process than federal loans.
DON’T take out loans to spend on anything besides rent and utilities.
The biggest danger when someone hands you $3,000 and says you don’t have to give it back for four years is that you’ll not be able to resist buying a flat screen TV.
But resist. If you must get a student loan, it must be because you can’t make rent otherwise. If you can make rent, pay your half of the utilities and are eligible for a grant or a scholarship and aren’t buried in credit card debt that you need to pay now, don’t under any other circumstances take out a student loan.
DO take the chance to invest your loans.
It is worth mentioning that some grant offers are lessened when you reject the loan, but if all you’re looking for is tuition payment and nothing else, it’s best to forsake the loan altogether.
If you want the extra on that grant, but don’t need the loan, and worry about the debt you’d acquire from spending the loan, one great investment plan is to accept both the grant and the loan, use the grant to pay for school then use the loan to obtain a certificate of deposit (CD).
CDs, like savings accounts, are insured so they are risk free, which makes them the ideal investment for your loan money. CDs are like savings accounts with time-restricted access and higher interest rates, so you can’t touch the money for the time allotted and you make more off having them there.
At graduation you can pull the money out in time to pay back the loans and then pocket the extra cash. Win win.