The student loan is a concept that no one likes. However, they’re frequently a necessary evil because paying for college is the only way to have a decent job and a fulfilling profession (despite recent controversy). Having said that, there are wise methods and foolish ways to borrow money.
The following list of six common student loan blunders should be avoided before receiving funding, during receiving funding, and once you must begin repaying the funding.
1. Making a false application
The first error you may make is to lie on your application for a student loan. In addition to losing your loan and paying fines, if you are found to have made any false statements on your financial aid application, you run the risk of being charged with fraud and receiving a prison sentence. In prison, you will receive a free education but probably not the esteemed degree you had hoped for.
2. Investing on wants rather than needs
Taking out loans to fund an investment in your future—your education—is wise debt. It is really terrible debt to use loan funds to get a cutting-edge smartphone or super 4k TV that will be outdated ten years after you start paying for it.
You should occasionally indulge since you are only human, but it is terrible money management to mortgage your future in order to pay for today’s transient pleasures. Either you lack the ability to distinguish between requirements and wants or you just don’t want to face those difficult choices.
In other words, while using these monies, consider tuition rather than treats; allocate money for books rather than alcohol. And if you get a bigger loan than you actually need to get by, put the extra money in the account with the greatest interest rate you can find and use it to start repaying your debts once you graduate. Or check to see if you may use the money to pay the loan’s interest while you’re still in school.
3. Picking the Incorrect Repayment Strategy
It might be tempting to select the repayment option with the lowest required monthly payment. However, the payback period of the payment plan with the lowest monthly payment is also the longest, which raises the total amount of interest you would have to pay. Income-based or “Pay As You Earn” plans sound great—who wouldn’t want 25 years, as opposed to ten, to pay off a debt?—but in the end, they end up costing you more money in total. Basically, you should choose to pay the biggest monthly amount you can.
What is that then? According to some experts, you shouldn’t pay more than 10% of your anticipated wage each month toward your student loans. Start by figuring up your monthly loan payments (including interest) using a 10-year repayment plan, which is frequently the default choice.
We all know entry-level incomes are more than 10% of salary, so if your loan payments will be more than that, think considering enrolling in a longer, less expensive program. But promise yourself that if and when your financial condition improves, you’ll take another look.
4. Ignoring Refinancing
Speaking of looking again, consider refinancing your loan if interest rates have significantly decreased. A rate that was competitive years ago may suddenly be on the high side. Additionally, if you have many loans, merging them may cut your monthly payment and overall interest costs.
Of course, lenders might have a wide range of interest rates and lending conditions. Make sure you thoroughly compare prices and do the figures to ensure that you are, in fact, receiving a better bargain. Keep in mind that when you refinance, you are trading in your federal student loan for a private loan if you have one. That indicates that you are leaving the federal loan program, including the options for loan forgiveness based on your income. However, you might not be able to carry out those plans.
It is legal to occasionally make extra payments or to pay more than the required minimum each month, even if you are unable to refinance the full debt. The duration of your debt might be shortened by even a single little gesture. Simply make sure your student loan servicer puts the extra payment or amount to your principle debt rather than simply the subsequent month’s payment to affect the interest.
5. Insufficient Funds
Many students have bounced checks in the hopes of paying twice as much the following month. That must not be done. Whether you make up the missed or late payment or not, it will still reflect negatively on your credit record and lower your credit score. It can also negatively impact your capacity to obtain additional loans for years by being on your credit history.
Before you start skipping payments each month if your repayment schedule is too much for you to handle, speak with your lender to find a solution.
6. Not Paying Back Your Loan
Your loan will go into default and your financial situation will spiral out of control if you miss more than 270 days of payments. Avoid avoiding your lender. They’ll track you down, and there are severe consequences if you don’t pay. The federal government (the loan guarantor for the majority of student loans) has the power to withhold your income tax refund or garnish your wages in order to repay the debt plus any collection penalties, in contrast to credit card firms, who can only truly threaten.
Once more, get in touch with your lender or loan servicer before things go worse. If your issues are the result of an unanticipated setback, such as getting laid off, you might be able to negotiate a deferral or forbearance agreement to buy some time. The worst thing you can do is simply cease making payments without providing any justification.
Conclusion
The first significant chunk of money that a young adult frequently has to handle on their own is a student loan. When it comes to paying for your college education, avoiding common money blunders is essential to graduating with only good debt and as little of it as possible.
