June is often seen as the unofficial kickoff to summer: A season full of longer days, poolside afternoons, and, let’s be real, bigger expenses. Between summer camps, childcare costs, family travel, and spontaneous ice cream runs, this time of year can hit hard financially.
But June is also home to something a little more empowering: Financial Freedom Day on June 29! Financial freedom isn’t just about being debt-free or making millions. It’s about making smart decisions today that give you more breathing room tomorrow. And to name one of them: Few financial decisions are as impactful or as long-lasting as taking out student loans.
Whether you’re heading to college yourself or helping your child get there, student loans can be an important tool for funding education. But they’re also a serious commitment that can follow you or your child well beyond graduation. And that’s exactly why we want to help you be prepared, informed, and confident before you take out any student loans. How? By giving you five essential things you should know before taking out student loans.
Please remember, this guide isn’t here to tell you whether student loans are good or bad. It’s here to help you make a good decision for your or your child’s future. Let’s dive straight into the tips!
1. Only borrow what you truly need
To kick things off, it’s often smart to only borrow what you truly need. Although everyone knows this deep down, it’s often tempting to accept the full amount offered when student loans are approved. After all, who wouldn’t want a financial cushion while navigating campus life? But here’s the catch: Every extra dollar you borrow comes with interest, and that adds up quickly.
Before you accept a loan, take the time to figure out exactly how much you need to cover essential costs like tuition, housing, books, and basic living expenses. Skip the “nice-to-haves” and focus only on the “must-haves.” Then, subtract any grants, scholarships, or family contributions to see how much you truly need to borrow.
A helpful tool for this can be the Net Price Calculator, which most schools offer on their websites. It can give you a realistic idea of your out-of-pocket costs after financial aid is applied.
Remember, your loan offer is not a mandatory amount; it’s just a maximum. Try to borrow only what you need, not what you can.
2. Federal loans often offer more flexibility than private ones
Next up, when comparing your loan options, it’s important to understand the key difference between federal and private student loans. Federal loans, which come from the U.S. Department of Education, typically offer lower fixed interest rates and much more flexible repayment options.
Also, federal loans allow for income-driven repayment plans, deferment or forbearance if you’re facing financial hardship, and in some cases, even loan forgiveness. They also don’t require a credit check or a co-signer, which makes them more accessible for many students.
On the other hand, private loans are offered through banks, credit unions, or online lenders. These loans often require good credit or a creditworthy co-signer and tend to come with higher, variable interest rates. They also lack the safety nets that federal loans provide.
Why do people still use private student loans? Federal loans are capped, while private loans are not. Simple as that.
If you still need more funding after accepting federal aid, you can compare private lenders to fill in the gap, but as a rule of thumb, only do so after exhausting your federal loan options.
3. Interest starts adding up sooner than you think
Third, it’s often better to start thinking about paying off your loans sooner rather than later. Many students assume they don’t need to worry about their loans until after graduation, and that could be a big mistake. The truth is, interest often begins accruing right away, even while you’re still in school. Specifically, unsubsidized federal loans and most private loans start accumulating interest from the day they hit your bank account.
That’s why even small payments while still in school can make a big difference. If you can afford to pay off just the monthly interest, or even $25 per month toward your loan balance, you’ll reduce the total amount you owe over the life of the loan.
And, to avoid surprises, ask your loan servicer when your interest begins and what your monthly payment would be if you started repayment today. That way, you will never be surprised by the interest you need to pay on your student loan.
4. Create a repayment strategy before you graduate
One of the biggest financial shocks new graduates face is realizing how soon repayment begins after graduation. Most student loans have a six-month grace period after graduation, and before you know it, your first bill arrives.
It’s smart not to wait until then to create a repayment plan. You’re probably better off doing it way before graduation, so you don’t run into financial surprises as soon as you start working. To help you do so, you can use the Loan Simulator on StudentAid.gov to estimate your monthly payments under different repayment options. This tool allows you to plug in your expected salary, degree, and total loan amount to see how affordable your loan will be across different plans.
It could also be smart to look into options like income-driven repayment plans, which cap your monthly payment based on your income and family size. These plans are only available for federal loans, though (which is another reason to prioritize those!). That way, you can lower the chances of having to dip into even more debt, just to pay off your student loans.
Knowing what to expect before your repayment period begins allows you to build a post-grad budget that actually works for you, and that gives you a much greater sense of financial control and peace of mind.
5. Choose a degree and school that align with your budget
And now on to the last tip. This may be one of the hardest conversations to have around taking out student loans, but it’s a crucial one: not every degree is worth taking out massive debt for. While education is invaluable, the financial return on investment (ROI) of your degree depends heavily on your chosen career path, your school’s cost, and your post-graduation earning potential.
If your total loan debt ends up being higher than your expected starting salary, you may find yourself struggling to make payments, even with income-driven plans. So, before you commit to a school or program, take the time to research average salaries in your field and area using resources like the Bureau of Labor Statistics, or other (often paid) databases.
Also, you can explore lower-cost pathways that lead to the same degree. Starting at a community college, attending an in-state public school, or taking online classes for certain credits can dramatically reduce your overall student debt without sacrificing your education quality!
Essentially, the best thing to keep in mind is this: Choose a school and a program that supports your future, both professionally and financially.
Set yourself up for long-term financial confidence
Student loans can be a smart way to invest in your education and future, but only if you understand the full picture before borrowing. June’s focus on Financial Freedom Day serves as a great reminder that achieving financial wellness starts with the choices we make early on in our financial journeys.
When it comes to student loans: Borrow intentionally, do the math, and don’t be scared to ask questions. Your future literally depends on it. Don’t take out more than you need, and always have a plan for how you’ll repay it. By approaching student loans with clarity, strategy, and care, you’re setting yourself up not just for a degree, but for long-term financial confidence and freedom!
