Student Loans: Consider How You'll Repay Before Borrowing

Recent concerns over student loans and the inability of college graduates to repay their loans has called attention to the need for students to research whether or not financing college with students loans is worth the cost later. The Institute for College Access and Success reports that the average debt carried by graduates with four-year degrees was $28,400 in 2013. That's a lot of debt, especially if you're not sure how you'll repay it.

Student Loans: Even Playing Field for Borrowing, Not So Much for Repaying

Colleges encourage students to borrow to pay for tuition, books and living expenses, and while this can provide a feeling of relief for a student who has few resources, there is a potential risk involved for students who finance studies in majors that typically don't qualify graduates for the earning power needed to pay off college loans quickly. Here's an example. Let's say that student A borrows $25,000 to pay for a bachelor's degree in petroleum engineering, and student B borrows $25,000 for a four-year degree in elementary education.

According to the Bureau of Labor Statistics, the median salary for a petroleum engineer with a bachelor's degree was $130,280. The BLS also reported that petroleum engineers enjoyed much faster than average job growth at a rate of approximately 26 percent annually, which is much faster than the average. By comparison, the BLS reports that kindergarten and elementary school teachers with bachelors degrees earned a median salary of $53,090 in 2012. The pace of job growth was estimated at 12 percent annually or about as fast as the average. This example suggests that a petroleum engineer likely has stronger prospects for finding a job and paying off college loans faster than an elementary or kindergarten teacher. While both college graduates borrowed the same amount of money, the outcomes based on their careers are not the same at all.

This suggests that shopping careers and college majors before shopping for college loans could save you major headaches when it's time to start repaying your student loan debt. In general, federal college loans enter repayment status six months after you graduate or drop out of school. Education loans granted by private financial institutions and not backed by the federal government might have different repayment terms, so it's important to check with prospective lenders before signing your life away for the next several years.

How to Avoid Repayment Shock on Your College Loans

Common sense is not always associated with academia, but it's important if you want to avoid financial stress when your student loans come due and payable. Here are a few tips to help you plan your college education and prospective career:

  • Use the BLS Occupational Outlook Handbook to research careers and compare estimated salaries.
  • Consider related career choices. If your initial career choice doesn't mesh with the cost of your college degree, consider a similar major or career that meets your earnings expectations.
  • Understand long-term consequences of carrying student loan debt. Repaying education loans not only takes a bite out of your budget, it can impact your ability to qualify for home and business loans. Defaulting on federal college loans can limit your eligibility for other federal loan programs, such as VA and FHA home loans and small business loans. Depending on the amount of your education debt, it can affect your budget for 10 years or more.
  • Don't be blindsided by student loan debt. Comparing career options, college majors, and financing options for your college education before choosing a major and borrowing student loans can help you manage loan amounts along with your ability to repay your student loan debt.

Before taking out student loans, consider your major and make a plan on how you will pay the loans back. Apply for grants and scholarhips, live on a tight budget, work a part-time job, and borrow responsibly. Your future self will thank you.

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