Many students find it necessary to borrow money to finance their higher education. Federal loans are mostly borrowed but private loans are also borrowed, depending on specific financial situations. While taking out loans help students to meet their academic goals, problems may arise if they are not aware of their financial responsibilities and debt management strategies. We advise students to understand the advantages and disadvantages before making the decision to borrow money.

How to

Pros of borrowing money

Taking out loans makes your education attainable, which prepares you for your future career.
Taking out loans helps you focus on school and get the most out of it.
Taking out federal loans helps you cover essential college expenses at relatively low-interest rates.
If managed carefully, paying off loans is a good way to build credit.
Particularly, having a credit card allows you to cushion unexpected emergencies

Cons of borrowing money

Loans can be expensive because the interest on the loans adds up over time.
Having loans means you begin your life after graduation with debt.
Having loans may require you to put off other financial and lifestyle goals.
Failing to pay back loans will significantly hurt your credit score, which often affects you throughout your life. This means you may face difficulties in getting a mortgage, a car loan, or any other large life-essential purchase.

As a student, a student loan is often a major loan type students use. We encourage you to look for available scholarships and grants before signing for a student loan and also consider participating in the Federal Work-Study program under the condition that you can make the time commitment balance so that you can focus on your studies. If these options are insufficient for you to cover educational expenses, then take out student loans. Please visit Federal Student Aid and also our module on Student Loans to understand the differences between the student loan types and details.

In addition to student loans, you may have credit card debts, car loans, personal debt, and mortgage depending on your own situation. All loans have vastly different repayment options and requirements as well as APR (interest) ranges.

So what should you do? Using the template, identify your loans and keep track of them. It is important for you to have this information gathered in one place and keep it accessible to understand your overall financial situation and plan for the future.

One thing we would like to emphasize is NOT to postpone paying back your loans. While in school, identify ways to lower your costs. Take the time to figure out your first payment timeline and expected amount. You can save some money starting from today and, if available, work a few hours during the semester or summers. This way, you can stay more in control when you graduate.

Practice

Now that you know the pros and cons of borrowing money, think of paying it forward and discuss useful tips to choose and manage loans with your social circle.

Congratulations! You can move on to Chapter 4. How do you assess your spending habits?

To review the full module on 10 Principles of Personal Financial Literacy, click here.