Common Student Loan Mistakes to Avoid
When it comes to student loans, a common refrain we hear from LearnVesters is, “I wish someone had told me …”
So, now we are telling you. The student loan system can be exasperating, confusing and just plain mystifying. Plus, even your own parents, all-knowing beings that they are, probably don’t know any more than you do. High school counselors aren’t infallible either.
Whether you’re planning to take out loans, you’re in school or you’ve graduated and your payments are about to kick in, we’ve gathered up the mistakes that can cost you money and cause you grief.
When You’re Taking Out Loans
1. Not Pursuing Grants, Scholarships and Financial Aid
What we mean: Make sure to first fill out your FAFSA form, even if you think you might not get any money, and go after as many grants and scholarships as you can before you turn to student loans.
Why: What if someone said, “Hey, you’re so smart, I’m giving you $50,000!” That’s what grants, scholarships and financial aid are, essentially. Yes, it can take a bit of work to find them, fill out the paperwork and apply. But man, what other job would pay $5,000-100,000 just for a couple hours or days of filling out paperwork and writing an essay? (Not the one you get after college when you have to pay your loans back, that’s for sure.) While financial aid isn’t free money, it can help you manage your education expenses.
Help to avoid it: The first step is to fill out a FAFSA form. You can get started looking for grants and scholarships by using a free service (or two) that helps you search for grants and scholarships, like FastWeb, Scholarships.com, FindTuition.com, ScholarshipExperts.com and Sallie Mae’s The College Answer.
Already made this mistake? You can still get scholarships and grants, even when you’ve already entered school, from small prizes for academic performance, to larger grants and scholarships found through the above search services geared to current students. If you secure one or more, consider using the money you save to pay off your student loan earlier, or see if you can have your scholarship or grant applied directly to your loan. And you can fill out a FAFSA every year you’re enrolled, so you can always apply for the next school year.
2. Discounting the Value of a Cheaper or Community College Education
What we mean: You might have the perfect college in mind, and it might be private and/or located in a different state. But don’t get so caught up in dreaming that you ignore the subsidized education in front of you!
Why: Many in-state schools have excellent reputations. (In fact, a number appear in U.S. News and World Report’s Best College Rankings.) And let’s put it this way: Say you expect to get paid $10,000 more a year (or $8,000 more after taxes) if you go to a brand-name school instead of your in-state option. But when you graduate, you may be paying $800 a month, or $9,600 a year to pay back your student loans. That’s a bad deal.
Help to avoid it: If you’re bent on graduating with a degree from your dream school, but it will mean going into serious debt, you should consider completing your first two years at an in-state school or community college, then transfer and finish up your degree at the school with the marine biology program. After all, even if you want a college with a specialized program, you would still probably spend the first two years getting general education credits out of the way. You could even spend those first two years saving up and working on your GPA so you’re better able to afford those last two years with savings and scholarships.
Already made this mistake? Check with your college to see if they will accept credits from summer classes you can take at your local community college or state university.
3. Taking Out Private Loans
What we mean: Don’t get your loan from a bank, non-profit organization or Sallie Mae when federal student loans are available. According to the Consumer Financial Protection Bureau, more than 54% of private student loan borrowers don’t exhaust their federal loan options, and many don’t even try to get federal loans at all.
Why: Private student loans usually offer fewer protections and options to students. The interest rates can be higher, or variable, which means they can go up. (Rates are really low right now, which means they probably will go up.) After you graduate, if you can’t find a job or you find only a low-paying one, private lenders can refuse to adjust your payments to accommodate your situation. With federal loans on the other hand, you can typically change your payment plan so it takes into account your financial situation, or defer your loans, so you can avoid default. (You don’t want to default.)
Help to avoid it: If you’ve maxed out your scholarships, grants and federal loans, and you still need more money to pay for college, it’s time to consider looking at a more affordable school or consider taking on a job while you’re in school to make up that gap.
Already made this mistake? Prioritize paying off your private loans ahead of federal loans, try to make interest payments while you’re still in school (work-study or a part-time job could be a great idea) and if you need to take out any more loans, turn to federal loans first!
And that brings us to …
4. Asking Your Parents to Co-Sign Your Loan
What we mean: If you decide to take out a private loan, you will probably have to get a co-signer on it. This is someone–probably your parent–who agrees to cover the loan if you cannot pay. Most federal loans don’t require a co-signer, but private lenders will usually want to see someone with a credit history sign the paperwork.
Why: If you and your parent think she could cover your payments if you can’t (and she is prepared to), then by all means, have her sign the paperwork. The problem comes when a parent co-signs your loans, you’re unable to pay when you graduate, and your parent can’t pay either. Then you’ve put your parent in a situation where she is probably being harassed by debt collectors, potentially ruining her credit as well as yours.
Help to avoid it: It’s best to avoid private loans altogether if possible, especially if your parent can’t afford to make payments of $500 to $1,500 a month when you graduate.
Already made this mistake? Prioritize making your payments on time and in full, so you don’t damage your co-signer’s credit.
5. Failing to Do the Math
What we mean: Before you take out a student loan, you should calculate what your payments will look like out of college, especially against the kind of salary you expect to make when you graduate.
Why: If you get out of school and realize then that your student loan payments are high, you could be forced to give up your ideal career to either get something more lucrative/soul-sucking, or have to move in with your parents and let job opportunities in the city of your choice pass you by while you pay off your loans.
Help to avoid it: A good rule of thumb to consider: Don’t take out more student loans than you expect to make your first year out of college. For example: If want to work in marketing after college using your business major and get a starting salary of $40,000, don’t take out more than $40,000 in loans. If you’re studying to work in finance, $75,000 could be appropriate. And if you’re studying to be an artist or actor, well … try to get some robust scholarships.
You should also get wise about what your monthly student loan payments will be out of school. $800 or $1,000 per month? Not uncommon. Use this student loan calculator to find out what yours might be before you commit to a loan.
Already made this mistake? Do the math today! If you are chastened by what your student loan payments will be, you can consider either getting a part-time job to start paying them off now and avoid taking out more, or switch direction with your major.
6. Not Reading or Losing Your Documents
What we mean: You should receive at least one Master Promissory Note (MPN) for signing. It’s a binding legal document by which you agree to repay your loan or loans. You could have one that covers all your loans, or one for each separate loan.
Why: It includes a Borrower’s Rights and Responsibilities statement that explains the terms and conditions of the loans you received. In other words, all that important stuff you should know.
Help to avoid it: Make sure you read your MPN carefully, now and before you make any decisions regarding your loans, like putting them in deferment or deciding on a payment plan. Keep it in a safe place, because you’ll probably need to refer to it when you have to start paying back your loans. You might also consider copying it and uploading it to a cloud storage service like Evernote or Google Docs, so you can access it online.
Already made this mistake? Go here to retrieve a copy, then read it from top to bottom!
When You’re in School
1. Using Loans for Living Expenses
What we mean: You might have the option of taking out a student loan that is larger than your tuition so you can pay for living expenses.
Why: This can be an expensive option, because you are being charged interest for doing so. Your loans are big enough without having them cover pizza and spring break trips, too!
Help to avoid it: Look into participating in your college’s work-study program, or getting a part-time job to cover living expenses.
Already made this mistake? It’s not too late to bring in extra income. Consider picking up a part-time job or freelancing gigs to pay for your living expenses and also to start paying off the loans you took out already.
2. Waiting to Pay Your Unsubsidized Loans Until You Graduate
What we mean: An unsubsidized loan is one in which the government does not pay for your interest while you’re in school. That means if you don’t pay anything while you’re in school, your loan is growing even while you study.
Why: If you make your interest payments while you’re in school, you’ll probably save a bundle. For example, if you pay just $50 a month, you could save yourself more than $1,000 in interest expense on a typical $15,000 loan.
Help to avoid it: Again, try to pick up part-time work or work study to make your interest payments while you’re in school.
Already made this mistake? It’s not the end of the world, you’ll just have to pay a little more. But you can start paying interest now to save.
When Payments Are Due
1. Paying Just the Minimum if You Can Afford More
What we mean: It’s OK to pay the minimums if you are aggressively working toward financial goals like building an emergency fund, paying off credit card debt and getting on track for retirement, or if you have a really tight budget. But don’t pay the minimums just so you can have more disposable income for going out on the weekends.
Why: That can be an expensive choice. While many student loans–federal especially–have lower interest rates compared to credit card debt, they still have interest, which is accumulating while you pay the minimums. You’re also delaying the moment when you will finally be free of your student loan debt!
Help to avoid it: If you have more income to send to your student loan payments, you can either send in more money than the minimum, or even get in touch with your lender and restructure your payment plan so that the monthly payments are higher and the payoff period shorter.
Already made this mistake? Re-evaluate your budget and start paying more for your loans today. It also can help to calculate how long it will take you to pay off your loans if you just pay the minimum, versus if you increase your payments.
2. Choosing the Wrong Payment Plan
What we mean: If you don’t do anything before payments kick in, you’ll typically be automatically enrolled in the standard payment plan: set payments of at least $50 a month for ten years or less. This is just fine if you can afford it–the standard payment plan means you’ll pay less in interest. But if you have federal loans, you have several options for your payment plan.
Why: If you’re struggling with payments, you can choose another option with lower monthly payments. Here’s the catch: If you choose another payment plan, especially the graduated payment plan (extended repayment will cost you more than graduated because it’s over a longer time period), you will pay much more in interest over the life of the loan. So think carefully about the payment plan that is best for you–whatever you decide could be a $10,000 choice.
Already made this mistake? Get in touch with your lender today about your options.
3. Putting Your Unsubsidized Loans Into Deferment or Forbearance When You Don’t Need To
What we mean: Deferment and forbearance can be life savers when you are struggling to find a job or can only find a low-paying job at the moment. They allow you to put your payments off until your financial situation changes. However, this option should only be taken if you absolutely need it.
Why: If you have unsubsidized loans, interest will accumulate during deferment and be capitalized–tacked on the principle of the loan. All loans–unsubsidized or not–will accumulate interest if they are in forbearance. That means higher payments when your payments start up again.
Help to avoid it: Consider a different payment plan or getting extra income before you delay your loans. If you do decide to put your loans into deferment or forbearance, try to at least pay the interest.
Already made this mistake? Contact your lender and see about taking your loans out of deferment or forbearance, if you can afford it. At the very least, start making interest payments so the balance of your loan doesn’t grow.
LearnVest Planning Services is a registered investment adviser and subsidiary of LearnVest, Inc. that provides financial plans for its clients. Information shown is for illustrative purposes only and is not intended as investment, legal or tax planning LearnVest Planning Services and any third parties listed in this message are separate and unaffiliated and are not responsible for each other’s products, services or policies.