The topic of student loans can be frustrating. It’s not uncommon for students and their parents to have a long list of questions that they need answers for. One of the more common questions that feature on almost every list is whether it is better taking out student loans for all four years at one time or one year at a time.
The short answer to this question: it’s definitely better taking out student loans one year at a time. You should only take what you need for that one year and no more.
It may come as a surprise to hear this but even if the interest in any one specific year is set at a particularly low rate, it is still better to take the loan only for that year and not for all four years.
There are several reasons for this.
You End Up Paying Much More By Way Of Interest
Your loan starts attracting interest the moment you take it. Let’s say you need only $1,000 for your first year in college. If you limit your loan to that $1,000, your interest for that first year will accrue only on the principle amount of $1,000. During the second year, the interest will accrue on the initial $1,000 + the next $1,000 that you borrow and so on.
If you take a loan of $4,000 in the first year itself, your interest for the first year will accrue on the full $4,000 during the next four years. Even if the interest is set at a rate amount when you take the loan, this higher interest accrual over the next four years will far exceed any savings from the lower rate of interest.
You end up paying more no matter which option you choose. If you choose to make interest only payments while you are still in college, that interest will be calculated on the full amount you’ve borrowed. If you choose to defer your payments, the interest will be calculated on the original amount that you borrowed. Either ways, the interest will be much higher when you take a loan for four years as compared to taking the loan for one year at a time.
You Lose A Lot If You Drop Out Of College
Nobody plans on dropping out of college. Unfortunately, things don’t always turn out that way and the statistics are there to prove it. According to the National Center for Education Statistics, fewer than 60% of students who enrolled in full-time undergraduate programs in the year 2006, went on to graduate from their programs.
If you take the loan for all four years in the first year and then decide not to continue with the program in the middle of the second year, you will have taken the loan for the next two years unnecessarily. Unfortunately, lenders don’t care about this. You are responsible for paying back the entire loan with interest, whether you used the money or not.
When deciding how much student loan to apply for, it is advisable to always follow these two golden rules:
Only apply for one year at a time.
Only take what you need and nothing more.
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