If you're shopping for student loans, hopefully it's only after exhausting more cost-effective options — like scholarships, fellowships, and grants — since that's money you don't have to pay back (and after you have filled out a FAFSA first)!
Each year, roughly 34% of students borrow money to pay for college, according to the Education Data Initiative, a website that publishes U.S. education statistics. So even after taking advantage of free money, you may still need student loans to close the funding gap.
Here are six things you need to know before taking out student loans.
1. Opt for federal loans before private ones
There are two main loan types: federal and private. Federal loans — received by submitting the Free Application for Federal Student Aid, or FAFSA — are often the best choice because you don’t need a credit history to qualify, and they come with programs, like income-driven repayment plans and loan forgiveness, that private loans don’t offer.
Federal loans can be unsubsidized and subsidized. You may qualify for subsidized loans if you demonstrate financial need. These loans don’t accrue interest while you're in school — unsubsidized loans do.
Because of the additional repayment options and relief programs, consider maxing out federal loans before taking out private loans.
2. Borrow only what you need — and can reasonably repay
Independent undergraduate students can borrow up to $57,500 total in federal student loans, while dependent undergraduate students are limited to $31,000. Private loan borrowers can borrow up to the cost of attendance — tuition, fees, room, board, books, transportation, and personal expenses — minus financial aid that you don’t have to repay.
But you don't have to borrow the maximum. One rule of thumb is to borrow the amount that will keep your student loan payments around 10% of your projected after-tax monthly income.
Use the U.S. Department of Labor’s Occupation Outlook Handbook to calculate your projected earnings. Then, plug those earnings into a student loan affordability calculator to estimate your monthly payments.
For example, if you expect to earn $50,000 per year, aim for a student loan payment that is no more than $279 a month.
Your financial aid award letter should give instructions on accepting and rejecting financial aid. If you’re not sure how to do it, make sure you contact your financial aid office.
3. You’ll pay interest (and maybe fees) on the loan
Whether you borrow federal or private loans, you’re going to owe more than the amount you borrowed due to interest.
Interest accrues daily on your loan and will be added to the total amount you owe when repayment begins. The fixed federal undergraduate loan interest rate is 4.99%, but it changes each year. Private lenders will use your or your co-signer’s credit history to determine your rate.
In addition to interest, federal loans also require that you pay a loan fee — a percentage of the total loan amount. The current loan fee for federal direct student loans for undergraduates is 1.057%.
4. After you agree to the loan, your school will handle the rest
Your loan will be paid out to the school after you sign a master promissory note agreeing to repay.
Typically, your school will apply your loan money to tuition, fees, and room and board — if you live on campus — before giving you the remainder.
You can expect to receive your reward money each term or at least twice within an academic year.
5. You can use loan money only for certain things
Even if you receive your loan money directly, it can only be used for education-related expenses.
You can’t use your loan for entertainment, takeout, or vacations, but you can use it for transportation, groceries, study abroad costs, personal supplies, or off-campus housing.
6. Find out who your servicer is and when payments begin
If you take out federal loans, your debt will be turned over to a student loan servicer contracted by the federal government to manage loan payments. For private loans, your lender may be your servicer or it may similarly transfer you to another company.
When you graduate or are no longer enrolled in school at least half-time, you generally have a six-month grace period before the first student loan payment is due.
If you are a parent looking for ways to save for future school costs – whether it’s elementary or high school expenses, or your child’s future college education – opening a Coverdell Education Savings Account with Nusenda is a worthwhile investment. Your education savings account is tax- and penalty-free, and anyone can make contributions. You can start earning dividends with as little as $5, and you can contribute up to $2,000 per year, per dependent.
At Nusenda Credit Union, we’re dedicated to improving our members’ financial well-being and supporting them through affordable products, friendly service, community involvement, and financial education. We'd love to find other ways to help you reach your financial goals. Stop by a branch or make an appointment to meet with us today.
This article originally appeared on NerdWallet.