Student loans are dynamic. And, sadly, the freshest freshmen sign the promissory notes without getting a hint about student loans (let alone know what a promissory note is).
Before you sign on the dotted line, take the time to consider the possibilities for your student loan. And be confident that you make the right decisions. Avoid these 10 typical student loan errors while you’re at it.
1. You may actually not need a loan
Get a cheaper education and pay in cash. Choose a school with a perfect scholarship for you. Go to a work-based school free of charge. Work while attending a part-time university. Put the school off for a year to save up some cash. When you select your college, don’t just presume that college loans (tens of thousands of dollars) are a necessary evil. In some situations, you would be fine to take out some student loans, but you don’t have to do that to get a good degree.
Before you even apply for school loans, you’re expected to be shooting for any single grant or scholarship you can potentially get. This involves investing time on the internet, talking to the local librarian (they generally have access to scholarship databases), and searching for colleges that offer excellent scholarship programs.
Remember, the more free cash you receive, the less student loan money you need! And when you’re at it, be sure you recognize education-related tax incentives that might bring money back in the bank for you (or your parents) to make school more affordable.
3. Take everything that you can
When you get a Federal Student Loan Offer (after filing the FAFSA), you’ll see how much the government is giving you in loans. If you’ve (irresponsibly) selected a really costly school that you just can’t afford, you might probably need the entire amount to finance your education.
But if you’re like most university students, including those in state colleges, you don’t even need the entire amount of money to pay school, or even room and board. Sadly, all of these same students choose the entire student loan amount—either because they intend to use loans to finance their own parties or because they don’t realize they should receive less than they are provided. Closely examine your exact needs, and then take the sum that you have to spend for the year. If you need student loan money to pay books, auto insurance and other costs, try finding part-time jobs.
4. Not Realizing Monthly Payments
One way to stop taking out more than you can in student loans is to take a bit of time to work out your monthly payments. Most college graduates are surprised to find out how large a portion of student debt fees will come out of their brand new post-college earnings.
5. Not accounting for your debt
We’ve got it. You’re a student, man. You’re dealing with a lot of documents, and you’re likely often not organized. This makes it impossible to keep track of student loan documents. But throwing those papers into a recycling bin can be disastrous later on. If you can’t seem to find your student credit suppliers, how do you know where to take payments? (If you lost the paperwork, the National Student Loan Data System will help you figure out who is handling each of your federal student loans.)
The real amount of your debt must also be tracked. You will quickly loose tabs on how much to borrow when you only borrow once a year on a 4 to 6 year education program. Create a table of how much you borrow every year and possibly recurring installments you would finally fork out. Alone, that’s meant to search the loans.
6. Avoiding Interest Payments
Your debt will automatically start accruing interest until you apply for a discounted student loan (which is dependent on revenue). The main thing here is that your debt will be capitalized, which ensures that the outstanding interest will be applied to the principal of the loan. This means that you pay interest on an even higher principal balance today. The current student loan variable interest rate for undergraduates is 2.75% for the 2020-21 school year.
7. Switching to private loans
For certain students, private student loans have a role, but most should not turn to them first. Usually, federal student loans have lower interest rates and payment periods that are far more flexible. Shop around for the right interest rate and conditions if you need to take out private student loans, and take out the very minimum possible sum.
8. Convincing your parents to co-sign
Many parents immediately believe that student loans must be co-signed, and this may be the case for private loans. Yet on their own, most students will take out federal loans. And because they’re still OK to handle your student loan contributions, your parents can not co-sign if you later get into financial difficulties.
It sounds fine on the outside to have a relative as a co-signer, but it basically leaves your parents secondarily accountable for your student loans. This means their credit suffers if you forget to make payments. That also means if anything could happen to you, your parents will be liable for servicing your debts.
9. Not keeping your information up-to-date
Student loan servicers are also accustomed to transferring addresses for their debtors, and are excellent at tracking people down. But you could skip crucial details about your loans, such as where, how, and how much to pay, if your student loan servicer doesn’t have your current address.
10.Deciding on the Incorrect Payment Plan
You will pick a number of installment options after you reach the repayment on your student loans (assuming your loans are backed by the federal government). In the actual payout, these policies give you more versatility, which can be beneficial if you can’t find a job or don’t make much cash.
The regular repayment plan will see your loans repaid within 10 years, which is a positive thing. You want to pick this one if it’s at all feasible, even if you have to give up coffees and evenings in downtown to pay off your college loan. For the regular package, you’ll pay a lot less interest over the duration of your debt. Other alternatives, such as extended repayment and income-based repayment, are appealing because of their lower monthly payments. But make sure to determine how long it will take to pay off your loan under these schemes, and how much interest you’ll pay throughout time.
And be super cautious about income-based arrangements. Sometimes for these programs, the full contribution does not really cover any of the student loan interest. Your interest will be capitalized in that situation.
Would you take a loan in order to pursue a degree?