Avoid These Student Loan Pitfalls
College is expensive! Even though applying for scholarships can help cut the cost significantly, many students still rely on student loans to help them pay for college.
While loans make college more accessible, there are some pitfalls to beware of before you borrow.
Borrowing Too Much
It's easy to borrow money now when you don't have to think about repaying it for at least four years. But this can be a trap for students, leading them to borrow far more than they'll be able to afford to pay back.
Don't borrow more than you absolutely need to, and, even more importantly, do your research before you borrow. Check out the typical starting salary for someone with your intended major; your total borrowing shouldn't exceed your starting salary. If it does, you'll find it much more difficult to pay back your loans.
Not Knowing How Much You've Borrowed
Some students get through college without a clue of how much they'll have in loans once they graduate. This can lead to serious financial repercussions, especially if they assume their debt load is far less than it actually is. Make sure you're keeping track of every cent you're borrowing so you're able to make informed decisions and ensure you won't encounter any unpleasant surprises once you're done with school.
Not Understanding the Terms of the Loans
Loans are all different. Federal loans have different interest rates, grace periods and repayment plans than private student loans. If you took out the loans without understanding the stipulations attached, you may miss payments or not realize that signing up for an auto-debit on your federal loans can lower your interest rate. Here are a few things to know before you start repaying your loans and 10 tips for graduates with loan debt.
Relying too Much on Income-Driven Repayment Plans
Income-driven repayment plans can be helpful because they allow graduates with low incomes to make smaller loan payments each month. However, many grads don't realize they're extending the repayment period and can end up making loan payments for 25 years instead of the standard 10 years. That's a long time, and stretching out the repayment period means you'll pay much more in interest in the long run. Instead of immediately opting for a longer repayment period, see where else you can cut costs to pay that balance off more quickly.
Living at home with your parents for a few years, holding off on a new car purchase and creating a sensible budget may help you put more money toward the loan.
When financial aid and federal student loans aren't enough to cover all college costs, consider financing the gap with private student loans. Shop around to find the loans that best fit your needs.