While you can certainly burden yourself with crushing student loan debt for the next several decades, there are better ways to tackle your college budget. Read on to find 10 common student loan mistakes and how to avoid them.
1. Don’t Automatically Apply for Loans
OK, so all of your friends told you how expensive college costs can be, and how taking out student loans is as much a part of college as actually attending classes. News outlets sure have done a good job harping on the rising cost of college admissions, but you don’t need to jump on the bandwagon. Student loans are the easy way out – start now, and set yourself up for failure down the line when school gets tough.
There are plenty of options for avoiding high-cost, name-brand money pits. For example, not every school costs a second mortgage to attend. There are plenty of 4-year universities offering top-notch education without the hefty price tag. Extend the time it takes to graduate by a year or two, and work part-time to help pick up the tab. Or, put off school for a year, and save up money to help lessen the burden of loans once you decide to attend.
2. Create a List of Other Options Before You Apply for Student Loans
Scholarships and grants can offer tons of money to future students – but sometimes you have to work for it. Libraries, guidance offices, and online databases are three great resources for finding ways to pay for college. And, unlike loans, grants and scholarships don’t need to be paid back. It’s free money, sometimes given just for showing up.
When it comes down to a choice between federal and private student loans, the federal ones should almost always be higher in priority. They offer lower interest rates, and some of them are subsidized, meaning no interest accrues on your balance while you attend school.
If it seems like a lot of work to fill out dozens of grant and scholarship applications, think again. A hundred hours spent applying for free money now could save you hundreds of thousands of dollars in the near future.
3. Don’t Always Say “yes” to Assistance
After you fill out the FAFSA, you’ll soon receive a federal student loan package. If your school costs $12,000 per semester and the government offers you $18,000, that means you’ll be able to take a month-long vacation twice per year, right?
Think again. You never have to accept all, or even any, of this federal aid. If you’re content working a part-time job and living off-campus, your annual need is probably a small fraction of the all-inclusive $12,000 quote. Remember, even federal student loans aren’t really free – you’ll soon be out of school and on the hook for all that cash. Figure out a monthly budget incorporating both education and personal costs, and take out a realistic loan.
4. Think Ahead, Figure Out Monthly Payments
Figure out your monthly payments before you take out a massive loan, not four years from now when you’re forced to move back in with mom and dad because of your crippling debt. These payment estimates should take into account your current loan amount, interest rate, and expected future salary. You can use our student loan calculators for help; be prepared, and be realistic.
5. Your Debt is Your Responsibility
The National Student Loan Data System (NSLDS) is your new best friend. Inevitably, you’ll throw out important loan documents, exit interviews, loan repayment terms…they all blend in with the other boring junk you receive. Use the NSLDS in case you forget who your lenders are, how much you owe, or when your payments are due.
Don’t throw out any loan paperwork. Keep it in a file somewhere readily accessible. Since loans are usually taken out in semester or year-long chunks, it can get a bit confusing keeping track of how much you owe. Update your monthly repayment estimation every time you borrow more money to keep yourself in check.
6. Don’t Sleep on Unsubsidized Loans
Taking out a $10,000 unsubsidized loan means more than meets the eye. Don’t expect to owe $10,000 in 54 months, after four years of school and the typical six-month grace period. Every month, unsubsidized loans accrue interest, which can be huge for private loans, and is still significant for federal loans. This interest is added to your principal balance, typically every month or every year. Then, your new monthly interest rate is based off of the old balance plus the capitalized interest. The process repeats itself as long as you aren’t keeping the payments in check.
What does this mean? You could end up paying anywhere from double to triple the original loan amount once everything is said and done. The smart option is to, at the very least, pay off your interest every month to keep your loan at sane levels.
7. Do You Need a Private Loan?
Only take out one of these if you absolutely have to. Private loans have much higher interest rates and less flexible repayment plans – for example, federal loans offer income-based repayment plans, which take into account your salary when calculating payments – while most private loans do not.
Always compare rates and terms between private lenders. Definitely take out the bare minimum, and make repayment of these loans your top priority when planning your future budget.
8. Try to Avoid Co-signers
Many parents and students assume that student loans will automatically need a co-signer, and this is usually the case with private loans. However, there are options for student loans without a cosigner.
Ask yourself if you’re really OK leaving your parents on the hook if you experience financial hardship down the line. If you fail to make payments, their credit suffers. Plus, if you happened to become disabled or otherwise unable to make the payments, your parents will be responsible for the loan’s balance. Make sure your parents are actually fine with co-signing before you put them on the spot.
9. Always Update Your Loan Service When Your Address Changes
Loan providers are pretty good at keeping up with address changes of their debtors. Wherever you go, there they are. However, accidentally or purposefully forgetting to update your mailing or email address could ruin your credit score. If you aren’t able to receive updated repayment terms and documents, you could miss payments – which will really hurt your credit score.
10. Pick the Right Repayment Plan
If you’re financially stable, stick with the standard repayment plan, which is usually for 10 years. You might have to give up a few creature comforts at first, but you’ll end up paying much less than with an extended plan. However, there are other repayment options available to student borrowers.
The government offers several income-driven repayment (IDR) plans. These plans cap monthly payments at a percentage of income which can be helpful to student borrowers who start out in low-earning career fields. However, it pays to know that many IDR plans end up costing the borrower more over the life of the loan.
Have you considered adjusting your term length through student loan consolidation? Consolidation involves combining your student loans to form just one loan. There are two ways to consolidate student loans, federally and in the private sector. With a federal consolidation loan, you can extend repayment up to 30 years, but be careful, since this could make you pay more over the life of the loan. Alternately, you could refinance student loans with a private lender. If you have great credit, then you could get a lower interest rate which could save money. But if you extend your repayment term, then it still might cost you in the long run.
Whatever you decide, take a long-term approach to student loans. There are options out there for anyone willing to put in the work. Having a plan and sticking to your budget will leave you with financial freedom long after you graduate.
Author: Jeff Gitlen
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