Now that we are in peak borrowing season for private student loans, our customer service inbox is overflowing with your questions. One question in particular keeps popping up so we’re going to address it quickly here and try to save some postage.
A recent email asked, “My daughter needs to borrow $10,000 this year to finance her costs. Does she request $10,000 for just this year or $40,000 for all 4 years she will be in school?”
It might seem convenient or even cost-effective due to current low interest rates to finance an entire education up front. However, the student would still be accruing or paying interest on the full amount borrowed while in school. As you can imagine, the interest charges on $40,000 are much higher than on $10,000. Let’s take a quick look at how eligibility is determined to see how the borrowing process works.
First things first–let’s get the answer to the question out of the way. A student may only borrow up to the cost of attendance determined by the school minus financial aid including other student loans. The amount a student is eligible to borrow is the remainder of that equation and it can only be determined one academic year at a time. Therefore, borrowing a student loan for multiple years is not possible because eligibility can’t be calculated in advance. Things like the school’s cost of attendance will change from year to year as will the financial aid your student is offered. Plus, the amount a student may borrow under the Direct Student Loan program increases from $5,500 for freshmen, to $6,500 for sophomores, to $7,500 for juniors and seniors.
The school will not only determine your student’s cost of attendance each year, but they will also certify the amount the student is eligible to borrow when the lender of the private student loan requests it. The lender is required to ask the school for this certification for each academic year (or partial year) in which financing is requested. It is the school’s job to ensure the student does not borrow more than eligibility allows.
Even if a student could take out one private student loan for all 4 years of college, it wouldn’t make financial sense to borrow more funds than would actually be utilized. If a borrower defers all payments, interest will still be added to the original amount borrowed. Even if a student makes interest-only payments while enrolled, the he would still be paying interest on the full amount borrowed. Student loans do not work like a line of credit that you draw down as needed or like a credit card where you are only charged interest on the part of your credit limit that you access. Assuming a loan with a 6% interest rate, the monthly payment of interest only on $40,000 would be $200 versus $50 on a $10,000 loan.
Another thing to consider is whether the student will make it all the way to graduation. According to NCES, only 59% of first-time, full-time undergraduates seeking a bachelor’s degree at a 4-year degree granting institution in the fall of 2006 had graduated by 2012.
One final note, it’s very important for students to borrow only what they really need for any given academic year. The school’s cost of attendance for each year includes not only the actual costs a student will be billed, but estimates of other expenses like books and room and board. Take a careful look at both eligibility (how much you can borrow) and actual needs before borrowing a private student loan. Be certain to pursue all other options for paying for college before borrowing at all. Regularly searching and applying for scholarships, saving money earned at work, and buying used books whenever possible are all good places to start.