Introduction
The increasing cost of higher education has turned student loans into a norm among the financing tools of students seeking higher studies Unfortunately the loan quickly turns out to be an ongoing burden culminating into immense debt and lifetime regret for the borrower Numerous borrowers lack clear comprehension of the long term effects of student loans and get caught in the maze of payments, interest rates, and repayment periods following graduation In order not to become victims of such a financial pitfall, students and parents should make themselves well informed of the most frequent mistakes relating to student loans and then proactively circumvent them
Overborrowing Without a Clear Budget
One of the most harmful errors students commit is borrowing more than they actually need Often students take the entire loan amount provided in their package of financial aid without making a realistic budget or looking for other alternatives for funding Borrowing too much increases the overall repayment sum and extends the duration of the loan by significantly long years or even decades Repayment can be avoided for too long by students if they make a precise budget for all costs including tuition fees lodging books and living costs They should also look for other funding options like scholarships grants part time jobs and contribution from family members Only the sum which cannot be met by these means should be borrowed through loans
Not Accounting for Interest While Still in School
A critical oversight for many borrowers is the failure to understand how interest accrues on student loans Federal subsidized loans do not accumulate interest while a student is enrolled at least half time but federal unsubsidized loans and most private loans begin accruing interest immediately Even if payments are not required during school that interest continues to build and eventually capitalizes increasing the total amount owed To reduce this burden students should attempt to make interest only payments during school if possible These small contributions can significantly decrease the long term cost of the loan and make repayment more manageable after graduation
Not Reading the Fine Print of Loan Agreements
Numerous students sign loan agreements without reading the language or comprehending the terms and conditions. This can involve important details regarding interest rates repayment schedules deferment options and the effects of default Borrowers must never have the attitude that all loans are alike or that they qualify automatically for favorable repayment terms Every loan agreement is different and must be reviewed thoroughly Borrowers must query unfamiliar language when they see it and must refer to financial literacy tools or consult with a financial aid representative to make sure they grasp the entirety of their borrowing choices
Dependent Solely on Borrowing Rather than Diversifying Sources of Funding
A frequent and expensive mistake is relying solely on student loans to finance a college education Students tend to forget other funding sources like scholarships grants work study programs employer tuition reimbursement and cost saving measures like going to a community college first and then transferring to a university By not investigating these options students lose the opportunity to lower their borrowing and gain important financial experience Students need to apply for as many scholarships and grants as possible work part time while in school and obtain financial assistance from family where possible Cutting back on loans will result in less debt and greater financial independence upon graduation
Choosing a College Without Considering Cost and Return on Investment
Selecting a college strictly on prestige location or campus experience without regard to cost and possible return on investment can leave students with huge student loan debt that is not offset by future income Students must consider the overall cost of attendance which includes tuition fees living costs and travel Students should also investigate average starting salaries in their desired field of study and factor into their calculation how long it will take to pay their loans with those wages Going to an in state public university or community college for the first two years can provide huge cost savings with no decrease in education quality
Ignoring Income Driven Repayment Options After Graduation
Most borrowers use the traditional ten year repayment option without investigating alternatives that could work better with their financial resources For low-income and variable employment income income and family size driven payment plans can fluctuate monthly installments based on income and household size potentially decreasing the monthly amount These plans also result in loan forgiveness after twenty to twenty five years of qualified payments Not availing themselves of these plans may lead to economic hardship missed payments and eventual foreclosure Borrowers should investigate all their repayment alternatives and select the option that best accommodates their income and career plans
Missing Out on Loan Forgiveness Opportunities
Federal loan forgiveness programs like Public Service Loan Forgiveness and Teacher Loan Forgiveness can wipe out a significant amount of student debt for borrowers who qualify However many qualified borrowers either are unaware of these programs or misinterpret the requirements and thus miss out on valuable benefits To be eligible borrowers must work for a qualifying employer make timely payments under a qualifying repayment plan and fulfill other requirements It is important to monitor progress stay in compliance with program regulations and provide required documentation on a regular basis Borrowers should start researching forgiveness programs while in school to see if they qualify and map out their career path accordingly
Making Late Payments and Harming Credit Scores
Missing or late student loan payments can have serious repercussions beyond the loan itself A payment history of missed payments can negatively affect a borrower’s credit score making it more difficult to secure credit cards auto loans mortgages or even rental properties Poor credit can also lead to increased interest rates and security deposits Even a single missed payment can activate penalties and late charges Borrowers should establish automatic payments or calendar reminders to make timely payments If financial difficulties occur it is important to immediately contact the loan servicer to discuss deferment forbearance or alternative repayment plans instead of allowing the account to become delinquent
Relying on Private Loans Too Early
Some students resort to private loans after they have utilized all available federal financial aid sources Private loans usually have higher interest rates limited payment flexibility and less borrower protection than federal loans Private lenders may not provide income driven repayment plans deferment options or forgiveness programs as federal loans do Students should always fill out the Free Application for Federal Student Aid FAFSA and pursue all federal aid opportunities including grants and work study before turning to private loans If private loans are unavoidable borrowers should shop around for terms from several lenders understand the interest model and borrow no more than absolutely necessary
Neglecting the Possibility of Refinancing Loans
After being in repayment some borrowers forget about the possible advantages of refinancing their student loans Refinancing is a process of replacing one or more previous loans with a new loan that has a reduced rate of interest or improved terms of repayment Borrowers having good credit and stable income can sometimes save thousands of dollars during the duration of the loan by refinancing But refinancing the federal loans with a private bank means that the borrower loses federal benefits such as access to income-driven repayment and forgiveness plans Borrowers should think really carefully about the point at which the advantage of refinancing the loan will be greater than the disadvantage particularly if the job prospect or income is not stable
Only Concentrating on Monthly Payments Rather Than Total Cost of Loan
One such error is not considering the amount of the entire loan when setting the monthly payments A lower payment each month will sound appealing, but it actually leads to the loan being outstanding for a more extended period with much higher overall interest paid If the borrower works out the complete amount they would pay including the interest under all the different repayments plans Then the borrower may be able to make better long term financial decisions and prevent extra debt build-up Borrowers will need to make more than just the minimum possible whenever they can in order to pay off principal quicker and lower total interest rates
Lack of a Repayment Strategy Prior to Graduation
Finishing college without having a solid repayment plan can bring about confusion lost payments and long term financial struggles Borrowers should start planning their repayment plan in school by approximating their future income familiarizing themselves with repayment plans and having a post graduation budget This budget should factor monthly loan payments alongside basic needs such as rent utilities transportation and food Having an emergency fund will also allow borrowers to cover unexpected costs without getting behind on loan payments Planned ahead will be a less painful financial shift from student life to career life
Underestimating the Psychological Impacts of Student Debt
Aside from the financial costs, high student loan debt can place enormous emotional burdens and stress on individuals Many consumers express regret helplessness and fear regarding their financial lives The financial strain of high monthly payments can affect mental well-being relationships and life choices such as marriage home buying and having children Acknowledging the emotional cost of debt is essential to making smarter and wiser borrowing decisions Students need to look to emotional support when needed and reassure themselves that with planning commitment and assistance they can surmount their debt issues
Allowing Debt to Limit Career Freedom
If payment on student loans is burdensome, borrowers commonly feel compelled to seek higher salaried occupations even if these jobs are not aligned with a borrower’s interests or long-range aspirations This has the potential to create dissatisfaction burnout and unstable careers Excessive debt can also deter borrowers from launching a business entering a non-profit career track or entering arts or other low starting salary occupations Students need to consider loan payment responsibilities when making a choice regarding a major or career but must also investigate the possibility of such things as forgiveness of loans for public service, public service jobs, and extended repayment plans which can provide for greater career versatility
