Staff Writer

Staff Writer

MN Office of Higher Education

In order to experience the full benefits of student loans, it’s important to understand how they’re designed, the risks involved, and the steps you’ll need to take for success. 

Student using calculator next to piggy bank

One of the first things to keep in mind is that the funds you borrow will eventually need to be paid back in full. Student loans are a form of debt, and if you’re not able to pay them back, it can cost you extra money and harm your credit score. Because it’s a commitment that requires careful planning and tracking, taking the time to learn about responsible borrowing is an important piece of setting yourself up for financial success. Student loans are a powerful tool that have the ability to provide you with access to education, teach you financial planning, and build your credit score so you’ll be in a position to borrow money in the future. 

Fortunately, the wide variety of federally operated and subsidized loans are generally simple and straight-forward to manage. In some cases, you may have the option to choose deferred loans, meaning you don’t have to pay it back immediately. This can be a good choice if you’re currently working to save money gradually, but perhaps not able to do so right now.

Here are five tips that will help you pay for college in the way that’s best for you:

1. Understand whether it’s an ideal scenario for you to take out a loan, or if it would make better sense to explore other options.
Loans can be helpful when you don’t qualify for scholarships, or if you’ve received some scholarship or grant money but need additional funds to fully cover your expenses. You might also take out a loan if you attend a college that’s in a different state, which may cost more for a non-resident to attend as opposed to a resident. 

2. Keep a long-term mindset
Carefully consider your budget and what type of school aligns with your goals and your financial situation. In order to make a good decision, be sure to consider what your expected salary will be in your chosen career in both the short and mid-term. Remember, choosing the right college is, in itself, a key financial decision.

3. Build financial security by only borrowing an amount you can afford to pay back. 
A good rule of thumb: if your potential student loan equals more than eight percent of your overall income before taxes, the best thing to do is not take that loan. Be sure to find out how long the loan terms are, and how much you would owe each month and make it part of your monthly budget for all your college expenses. Directly comparing each loan will help you get a clear idea of how each loan type works. Visit our student loans webpage to compare federal loan programs, and consider Minnesota’s SELF Loan as a good option as well.

4. Take time to learn the terminology used with loans.
If this is your first time pursuing a loan, the language used to talk about the process may seem confusing at first. However, the concepts themselves are pretty easy to understand. The two most important terms you’ll need to know are principal and interest. The principal is the amount of money you borrow initially. Your lender will also charge interest, which is calculated by taking a certain percentage of the principal (known as an interest rate) and then adding it to the amount of money that still needs to be paid off. Banks can charge fixed interest rates or variable interest rates, but both types will require interest to be paid. Think of interest as the fee that is charged for the convenience of being able to access the money you’re borrowing. You can learn more about the vocabulary, and about student loans in general, in our 2023 Student Loans publication

To borrow money for a student loan, you’ll also be asked to sign a promissory note. This is a contract between you and the lender that explains the terms of the loan and is important to read and understand because it will affect your finances for an extended period of time. If you know someone with finance experience, it’s a good idea to ask them to read the promissory note, too. 

5. Get help from a trusted adult.
As you prepare for the future and consider all of your options, it’s a good idea to seek out the help of your guardians, guidance counselors, and financial aid officers at the college you want to attend. Many loans require cosigners, so it’s appropriate to have an open discussion with your parents or guardians. They can provide honest advice about the responsibility of acquiring a loan, how to build and manage your monthly budget, and how to create a plan for completing your education. 

With these tips and resources, you have the tools you’ll need to make student loans work for you and support your long-term goals for the future.

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