What Students and Families Need to Know About How Student Loans Work
Loans help people afford college, buy cars, and purchase homes or property. They’re a necessary fact of life, but they’re also an easy path into extreme debt when poorly managed. Practicing financial wellness means understanding the differences between good debt and bad debt, acknowledging that debt isn’t always a bad thing, and learning to make debt manageable and helpful, not a burden. Unfortunately, one of the most burdensome forms of debt is student loans.
Student loans are the money a student (or a student’s family) borrows in order to pay for higher education, whether technical school, community college, or a four-year college or university. They are most often used for tuition, but also help pay for room and board, textbooks, and more expenses associated with attendance.
According to CollegeBoard's 2019 Trends in College Pricing report, the average total tuition, fee, room, and board charges for public, four-year colleges for the 2019-2020 academic year was $21,950; the average total charges for private, nonprofit four-year institutions was $49,870. With a four-year college education costing between $87,000 and nearly $200,000, depending on where you go, it's no surprise that the majority of people are unable to pay for college out of pocket.
According to the Federal Reserve, U.S. borrowers have a collective $1.6 trillion in student debt; it can take decades to pay back these loans thanks to interest accumulation. Student debt doesn’t have to be bad—it did make it possible to achieve a college education, after all, and in many cases a college degree increases lifetime earning power drastically—but it can feel unmanageable, especially when you consider that these tens or hundreds of thousands of dollars are borrowed by teenagers.
Because many student loan borrowers are 17 or 18 years old, preparing to head off to college, they don’t always know what they might qualify for, or what options they have, says Andrea Koryn Williams, CFP, CLU, ChFC, a wealth management advisor with Northwestern Mutual. The cost of repaying those loans can shape the course of their early (and even middle and late) adulthood. It’s not super helpful to those already struggling to repay their student loans, but for students or parents researching student loans, making smart choices now can make repaying those loans in the future much easier.
There’s more to making the most of student loans than just minimizing the loan amounts, though. Here are common pitfalls or details everyone should understand before they take out student loans.