Gen Z: Consider 3 Financial Factors Before Taking on Student Loans
According to virtually every graduation speech, if you fail to plan, you plan to fail. That being said, before enrolling in your dream university, prospective college students will want to put together a plan that includes money management, particularly in regard to their student loans.
“The very first piece of advice I offer is this: Do not take on debt that you believe will be offset by the salary you want to make one day," said Cody Schuiteboer, president and CEO of Best Interest Financial. "Think of it the other way around. Carry debt based on the salary that you believe you will actually make. And if you have no clue what the starting salary is for your intended career, do the research before securing the debt, not after."
Below, we'll explore several financial factors to take into account before you accept student loans for college. While the amount you’ll need to take out is ultimately a decision that will vary on a case-by-case basis, keep in mind that cost of student loans doesn't end with the total debt. The real cost comes with years of payments that put your financial goals on hold. Student loans take money away from the down payment for your house, put retirement on hold, and drain your emergency fund.
Read More: 3 Student Loan Repayment Issues—and How To Avoid Them
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And that's just the tip of the iceberg...
Expected Family Contribution Minus Cost of Attendance
Your attendance costs breakdown can be assessed by taking the cost of attendance (COA) minus the expected family contribution (EFC) to equal financial need or need-based aid. For example, if the COA for a university is $50,000 and the EFC is $20,000, a student would need $30,000 of need-based aid.
In addition to tuition and fees, other costs that may be calculated include living expenses (room and board), books and supplies, transportation, equipment (usually in the form of a personal computer), costs related to a disability, an allowance for childcare or other dependent care and reasonable costs for eligible study-abroad programs.
Estimate Your Debt-To-Income Ratio
It’s not just about the size of the loan (plus interest) you need to get you through school; it’s all the future of your finances you need to consider. For example, according to Schuiteboer, you need to be able to borrow against a future you cannot see and factor in your debt-to-income ratio as one of the top priorities.
“When it comes time for a potential borrower to apply for a mortgage, the very first number I need to calculate is their debt-to-income ratio, and student loans always play a large role in that number," he said. "I've always operated under the rule that your total student loan payment should never exceed the total amount you project your monthly salary to be."
Melanie Musson, insurance and finance expert at Clearsurance.com, agreed. “The amount of money you have to pay toward your student loan debt will directly impact your debt-to-income ratio, and that will directly affect your ability to qualify for a mortgage. If you just graduated college, you’re probably looking at monthly bills in the $300 range. If you’re planning to get your master’s degree, those monthly payments could exceed $600 a month,” said Musson.
Research and Apply for Financial Aid Opportunities
Paying for a college education can be done with the help of scholarships, grants and more financial aid opportunities if a student is willing, organized and determined to get them.
James Lewis, president of the National Society of High School Scholars (NSHSS), recommended starting research early and applying often, making sure to identify all possible options. Ideally, students should focus their efforts on programs that are a good fit for their skills, background and interests. You can tap into funding opportunities through local community resources, religious organizations, employer programs, advocacy groups, institutional grants and national scholarship programs.
As you find relevant funding opportunities, track these sources along with their open and close dates for application deadlines.
"Open and close dates for scholarships vary greatly. Students should make applying for scholarships part of their year-round routine to maximize the potential for earning those dollars when they need them," said Lewis. "They should also look to earn scholarships during junior and senior year of high school that can be deferred for use freshman year."
Heather Taylor contributed to the reporting for this article.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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