First things first–let’s get the answer to the question out of the way. A student may only borrow up to thecost of attendancedetermined 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.
It might seem convenient or even cost-effective due to current low interest rates to finance an entire education up front. However, the student wouldstill be accruing or paying interest on the full amount borrowedwhile 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.
How Much Can You Borrow?
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 studentmay borrow under theDirect Student Loanprogram increases from $5,500 for freshmen, to $6,500 for sophom*ores, to $7,500 for juniors and seniors.
Theschool will not only determine your student’s cost of attendance each year, but they will also certify the amount the studentis eligible to borrow when the lender of theprivate 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 studentdoes not borrow more than eligibility allows.
Even if a studentcould take out one private student loan for all 4 years of college, it wouldn’t make financial sense to borrow more funds than wouldactually be utilized. If a borrowerdefers all payments, interest will still be added to the original amount borrowed.
Even if a studentmakes interest-only payments while enrolled, the hewouldstill 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 toNCES, only 64% of first-time, full-time undergraduates seeking a bachelor’s degreeat a 4-year degree granting institution in the fall of 2014 had graduated by 2020.
One final note, it’s very important for students toborrow only what theyreally need for any given academic year. The school’s cost of attendance for each year includes not only the actual costs a studentwill 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 pursueall other options for paying for college before borrowing at all. Regularly searching and applying forscholarships, saving money earned at work,and buying used books whenever possible are all good places to start.
