The bad news: Unfortunately, there’s several mistakes we see students make when dealing with their student loans.
The good news: We’ve compiled them into a list with steps on how to avoid those mistakes so you don’t make them.
Here we go!
1. Borrowing Too Much Money
These aren’t in any specific order, but this one definitely deserves to be first. Borrowing too much money is a classic student loan mistake.
Just because you can borrow it, doesn’t mean you should. Borrowing money may be a quick fix to pay for your dream school, but it’s important to consider the reality that that money will have to be paid back eventually.
How to Avoid: Think realistically about what it would look like to pay this amount back after you graduate. Always look for grants and scholarships first before even considering student loans.
2. Not Looking Around for The Best Rates
All too often, college students take out a loan at the first lender they find after a Google search. (you can’t see us right now, but we’re screaming)
Once you commit to taking out a loan somewhere, you can’t really back out. So, if you decide to borrow $10,000 from Lender A at an 8% interest rate, only to find Lender B five minutes later who would offer you $10,000 at a 4% interest rate, you’re locked into Lender A. This is why searching for the best rates is crucial.
How to Avoid: We usually save our shameless plugs for the end, but we’re putting it here, upfront: Use Sparrow. In less than 5 minutes, we’ll find the lender with the best interest rate for you, without you having to do the search yourself.
3. Relying on Student Loans for Unnecessary Expenses
Student loans are intended for school-related expenses such as tuition, textbooks, and campus housing. However, students often pull from their available student loan funds to pay for spring break vacations or shopping trips.
While tempting, this isn’t a great use of debt.
How to Avoid: Only use your student loan debt for school-related expenses.
4. Going to Private Loans Before Federal Loans
Private student loans tend to have both higher interest rates and less favorable terms and conditions than do federal loans. While the private loan route may be a bit more simple than the federal route (we get it, the FAFSA is an absolute animal), it ultimately isn’t where you want to start.
How to Avoid: Always exhausted your federal loan options before dipping into private student loans. Be sure to fill out the FAFSA before the deadline, and always examine your aid package carefully to decide which aid you want to accept.
5. Thinking the Federal Aid Options are The Only Options
While exhausting federal aid options first is incredibly important, it’s important to understand that federal aid isn’t the only option. Always pursue aid in the following way:
Scholarships/Grants (free money) → Work-Study (federal aid; earned money) → Loans (federal first, then private; borrowed money)
When looking at your federal student loan options, it’s also important to consider their interest rates and terms. While rare, some private student loan options may have lower interest rates than some federal loan options. Most private student loans, however, will accrue interest while you’re in school. Federal student loans tend to not accrue interest while you’re in school. So, if you opt for a private student loan over the federal student loan that’s offered to you, be sure to check both the interest rates and the terms to determine which option will be better for you in the long run.
Again, be sure to use Sparrow to confirm before making any move to commit to one lender over another.
How to Avoid: Before accepting federal aid, students should apply for any and all scholarships and grants they can get their hands on.
6. Not Taking Advantage of Opportunities to Save Money
Many lenders offer ways to save money on your student debt, but they can be easy to miss. These opportunities come in a variety of forms such as automatic payment discounts and GPA rewards.
For example, Sallie Mae, a large private lender, offers a 0.25% discount on student loans if the borrower opts in to automatic payments.
Similarly, Discover Student Loans offers a one-time cash reward for new borrowers who earned a 3.0 GPA in college or graduate school.
While these may be small bits of money here and there, we don’t miss ANY free money in this house.
How to Avoid: Actively look for opportunities to save money. Contact your lender and ask if they provide any discounts or rewards to borrowers.
7. Never Looking into Refinancing
The idea of refinancing can be scary, but that doesn’t mean you shouldn’t look into it. If your interest rate seems a bit high, or if your credit has improved greatly since you took out the loan, you may be able to secure a refinance loan at a much lower interest rate which would save you money over time.
How to Avoid: Consider refinancing if it makes sense for you. Don’t sit with a loan at a super high interest rate if you feel like you may be able to get lower! Looking into refinancing can’t hurt.
8. Postponing Payments When it Isn’t Necessary
There are options to delay repayment, but you shouldn’t use them if you don’t absolutely need them. Even with a deferment or forbearance, interest will still continue to accrue on some loans. Delaying repayment will only put you in more debt.
How to Avoid: If you can afford to make payments, keep making them. Only request a deferment or forbearance where absolutely necessary.
9. Never Making Extra Payments/Only Paying the Minimum
If you make only the monthly payment, it will take you the full repayment period to pay off your student debt. While that technically works out in the end, you’ll end up paying a lot more in the long run, especially if your interest rate is on the higher side.
How to Avoid: Make more than the minimum monthly payment when possible. Any extra money you can throw at your loans will help hack away at the interest, and eventually the principal balance, saving you money over time.
10. Not Considering the Bigger Picture
When looking into student loans, remember to think about them as a real part of your future. If you choose to accumulate $50,000 in student loan debt, you will eventually have to pay that back. It’s important to be realistic about how this will impact your future self.
Many students blindly agree to student loans year after year without actually knowing how much debt they are agreeing to or how they will actually pay it back.
How to Avoid: Always think about the future and consider how student debt will factor into that.
While it’s a lot to think about, you should ask yourself:
- What career do I plan to pursue? Will the average salary for that career support me in making loan payments?
- Do I plan to move out immediately after school? Will my career support both rent and loan payments?
Summary
While some of these mistakes are fixable, others aren’t that simple. Thinking ahead when it comes to these mistakes will help prevent you from making them.