3 Questions to Answer Before Taking Out Student Loans

Loans, Student Loans
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By Brett Tushingham

Learn more about Brett on NerdWallet’s Ask An Advisor

America has a student loan problem. Default rates are more than 11%, and based on recent research those numbers might be understated. Student loans should be the last option when funding an education. However, they appear to be the first option for many people.

The good news is that each family can develop its own strategy to pay for college, one that reduces the reliance on student loans and the overall cost of an education. It starts by answering three questions.

1. Are you being flexible enough in your college selection?

If your child insists on going to one particular school, your chances of finding an affordable way to fund higher education may be limited. The more flexible you are in the selection process, the greater the opportunity to reduce your need for student loans.

>>MORE: How to know if your college choice is affordable

Begin by researching schools to determine where your child will be a good fit and how their academic profile compares with those of current students. College Navigator is a great resource for assessing this. If a school finds your child academically desirable, he or she is more likely to be accepted and awarded financial aid in the form of grants and scholarships.

Community colleges are also an excellent option, as they can offer quality education and flexibility at a fraction of the cost of most other schools.

2. How will your selected schools assess your finances for aid purposes?

After you find schools where your child will likely be accepted, you will need to determine your eligibility for financial aid. Colleges use one of two aid applications, the Free Application for Federal Student Aid (FAFSA) and CSS Profile.

Each application has its own aid methodology that produces your expected family contribution, or EFC.

Your EFC is the minimum amount that you will be expected to contribute each year toward your child’s education. Two schools might produce a dramatically different EFC, so it’s important to do research and determine beforehand what your EFC will be. The cost of attendance minus your EFC will produce the amount of need-based financial aid, if any, that you qualify for.

3. What financial return can you expect from obtaining your degree?

Not all gains can be measured in dollars, but for now let’s focus on the financial aspect of the return on your investment in your education. We are told that earning a degree will open the door to more career opportunities and greater income. And although I generally agree with this statement, there are a number of caveats.

College is an investment, and like any other investment you have initial costs. Keeping your upfront costs to a minimum should logically help boost that return.

Once you confirm your initial costs, you can then calculate a future salary based on your degree. PayScale offers salary projections for specific majors and offers a return-on-investment calculation based on future income and college costs. Students pursuing advanced degrees might have greater upfront costs, but their starting salaries after graduation generally justify the expense.

Almost anybody can qualify for student loans nowadays, regardless of credit score or future income potential. For this reason, most students neglect to consider their ability to pay them off or the impact they can have on meeting their goals. Be proactive, establish a college planning strategy, start saving early and make education your greatest investment.

Brett Tushingham is a financial advisor and the founder of Tushingham Wealth Strategies in Wilmington, North Carolina.