Nobody loves the idea that student loans are available. They are often a bad idea. However, they can be a viable option to finance college. This is, despite some controversy of late. It remains the best way to get good jobs and rewarding careers. There are smart ways to borrow money, and there are also less-smart ones.
Here are six mistakes to avoid when taking out student loans: before you get the money, after you have it, and then you have to pay it back.
1. Falsifying your Application
The first mistake you can make is lying on your student loan application. If you are caught lying on your student loan application, you will not only lose your loan but also incur fines. You may also be charged fraud and sentenced to prison.
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2. Spend money on wants, not needs
Good debt is when you borrow money to finance an education that will last a lifetime. It is very bad to borrow money to purchase the latest phone or ultra 4k television.
While occasional indulgences are fine, you’re human and all that. But mortgaging your future in order to enjoy the temporary pleasures of this moment is bad money management. Either you don’t know how to distinguish between needs and desires, or you don’t want the hard decisions.
This means that you should think about tuition and not indulgences when using these funds. Budget for books and not alcohol. If you are granted a sales team amount that is higher than you need, you can save it in the highest-interest savings account and start paying your loans back when you graduate. You might also consider using the funds to make interest payments on your loan while you are still at school.
3. The Wrong Repayment Plan
It is tempting to select the lowest monthly payment plan. The lowest monthly payment will also have the longest repayment term. This increases your total interest. Although income-based plans, or “Pay As You Earn”, sound great – who wouldn’t want 25 years rather than a decade to pay off a debt? – they will ultimately end up costing you more. You should choose to pay the maximum amount each month.
What is the answer? Experts suggest that your monthly student loan payment should not exceed 10% of your expected income. Your monthly student loan payment (includes interest) should be calculated based on a 10-year repayment plan. This is the most common option.
Consider a shorter, more expensive program if your loan payments exceed 10% of your salary. However, promise yourself that you will reconsider your options if your financial situation improves.
4. Overlooking Refinancing
You might also consider refinancing your sales team if interest rates have dropped significantly. You might find that the rate you were paying years ago is no longer competitive. Consolidating multiple loans can reduce your monthly payments and the amount of interest that you pay.
Lenders can have different interest rates and terms. Compare and analyze the numbers to ensure you get a better deal. Refinance your federal student loan. This means you’re exchanging the loan for a private loan. This means that you are leaving the federal loan program, as well as its income-based and loan forgiveness options. These plans may not be possible for you.
Even if the loan cannot be refinanced, it is legal to make extra payments or pay more than the minimum monthly. The loan’s life expectancy can be shortened by even the smallest gesture. Make sure that your student loan servicer applies any additional payments or amounts to your principal balance. This will impact the interest rate and not just the next month’s.
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5. Payouts not received
Many students have bounced payments with the intention of paying twice the next month. This is a huge no-no. This is a big no-no. Every missed or late payment will be a negative mark on your credit report. It can also stay on your credit report for years, which could impact your ability to get other loans.
Talk to your lender if your monthly repayments are more than you can manage.
6. Defaulting on your Loan
Failure to pay your loan on time for more than 270 consecutive days can result in your loan going into default and your financial future in shambles. Don’t dodge your lender. You will be found by them and you could face severe penalties if they don’t pay. Contrary to credit card companies that can only threaten you, the federal government (the sales team guaranteeor for most student loans) is able to retain your income tax refund and garnish your wages in order to repay the loan.
Before you find yourself in dire straits, make sure to contact your lender. You might be able, if your problems are caused by an unexpected misfortune (like being laid off), to negotiate a deferment arrangement or forbearance agreement to give you some breathing space. It is not the best thing to do.
The bottom line
Student loans are often the first major money that a young adult has to manage. It is important to avoid common mistakes in managing money to finance your college education.
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