Often students and their parents get caught up in the whirlwind of excitement and prospects for the future when it’s time to figure out what their college situation will look like.
It certainly is exciting, and there’s no downplaying that. It’s the cumulation of years of hard work and dedication, getting into a good school, especially if it’s one of your top choices. And if you’re one of the 45 million borrowers in the U.S., you’re likely to have a few concerns about financial aid.
You might wonder if it’s a good idea at all, or if it’s worth the investment. You might be panicking at the thought of owing thousands of dollars and interest. You’re not wrong to be worried. Federal student debt has reached an all-time high, at nearly $1.56 trillion.
There are a few crucial choices and practices to avoid when taking on and repaying student loans. Albeit common and often avoidable, you’d be surprised to learn how often people end up making these mistakes:
1. Not Researching Scholarships and Grants
While a loan is intended to help you finance your education, living, and other expenses for the duration of your degree, it’s important to look into grants, scholarships, and funding that might help finance part of your education.
Look at external and internal scholarships that will give you a ride into the school of your choice—another factor that’s important to consider. Choosing a college based on the short-term benefits, such as the party scene or travel opportunity, can cost you in the long-run.
2. Borrowing Too Much
This is another major mistake that you’re making without realizing it. Just because your lender allows you a certain amount, doesn’t mean you need to take all of it. Remember that you have to pay it back in its entirety and then some. For every $1 you take, you give back $2.
When you start thinking of it like that, you’ll be more careful about how much you take. Work on a budget before college starts, factoring tuition, textbooks, food, and living costs, and stick to that.
This is part of thinking long-term; right now, it might feel great to take on extra because it gives you a chance to indulge, or have more than you need, but the greater the amount, the more the interest too.
3. Using Your Loan for Recreation
Don’t be the person that uses their loan money to spend a weekend or spring break partying in Miami. People end up using their loan amount to vacation, party, indulge, and enjoy their time in college, which is more often than not a violation of their loan agreement and an added burden for their future selves.
That trip with your friends might seem like a great idea right now, but when you’re paying off twice that amount after college, it’s not something you’ll look back on fondly.
Yes, your loan is intended to help cover basic living costs, which do include food and clothing, but indulging in fancy dinners and shopping sprees is not only a bad idea, it’s unethical. Treating yourself isn’t entirely off the table; you can and should work part-time if possible to save up for travel because that is an important part of the college experience.
4. Not Saving and Managing
Building good financial habits is important before, during, and after college too. You need to be able to save wherever possible, instead of treating this as an afterthought.
Auto-debit might result in lowered interest rates, if your vendor allows, and help you avoid delayed payments and penalties on them.
You should also file your loan payments and interest as part of your taxes to help reduce the amount of taxable income.
Another way to save in the long-term is to pay off interest during college. Working and saving can help you accrue a small amount of the interest you’ll be paying throughout your repayment plan. Speak to your lender about this option, because they can have varying policies.
5. Deferring Payments Unnecessarily
You might think it’s okay to skip your installment for the month by making up for it next month, or paying a larger sum a couple of months in. But this can end up reflecting poorly on your record and still lead to interest accruing.
If there is a legitimate reason for not paying, contact your lender and let them know. However, if you can afford it, don’t defer or delay payments for any reason. It’s not worth the long-term effects.
If you’re going on to grad-school or post-grad, for instance, some lenders offer you the chance to freeze your loan for that duration; however, interest rates are likely to remain.
6. Choosing the Wrong Repayment Plan
Another mistake that a lot of people end up making is choosing the wrong repayment plan. The smaller monthly payments might seem like a good idea because you can focus on paying for other expenses and luxuries.
However, you should consider the fact that smaller payments make for a longer repayment period and more interest.
If you choose to pay off your loan sooner, paying larger installments at the start, you can focus on a debt-free future within a few years. The more you pay off from the principal amount, the smaller your interest gets and adds up to, and the faster your payments are cleared.
7. Not Refinancing Your Loan When You Can
Taking another loan to pay off your first one doesn’t sound like the best idea at first. But refinancing is a practical and effective solution to clearing off major loans. Consolidating and clearing out multiple loans, smaller payments, older loans, and choosing lower interest rates will help you work toward a debt-free tomorrow.
A lot of lenders provide student loan refinancing options that give borrowers a chance to get their finances in order and focus on one loan, as opposed to multiple others. However, it’s important to speak to your lender in detail, tallying out the pros and cons of refinancing based on your current schedules and monthly payments.
The right planning and foresight can help you stay clear of debt and manage your finances better, freeing you up for major life changes and investments in the future. From buying a home to moving across the country, starting a family, or switching jobs, all become significantly easier when you’re not worrying about thousands of dollars worth of student debt.
You can reach out to the team at Education Loan Finance (ELFI) to know more about loan repayments and refinancing plans.
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