Published on November 1st, 2023
When it comes to debt, student loans stand out as one of the largest source present right now in personal finance.
Only home mortgages are higher. This is why it is so important to make smart decisions when you take out a student loan.
If you make the mistakes presented below, you are setting yourself up for failure in the long run, not just when it comes to education.
Borrowing Way Too Much
There is a limit to how much you can borrow and it does not mean you should take advantage of that.
The golden rule is to borrow just what is needed for the college bills. Think about it as a financial aid. It is not free money.
Keep in mind that if you borrow $1, you will end up paying around $2 as you repay it. Student loans need to be in sync based on how much income you are going to receive after you graduate.
Just borrow what you need and plan to get at least a part-time job to help you out after graduation.
Not Looking For Great Interest Rates
Every single lender has its fees and interest rates. When the advertised rate is lower, there might be some other fees that would make the loan not appropriate for your situation.
Borrowers rarely actually qualify for really good rates when it comes to student loans.
As a result, before choosing the lender, look at the fees and the interest rates available from several lenders. You can even consider government student loans, of course.
Not Thinking About ConsequencesWith Cosigning
The only case in which you should consider cosigning the loan is when you are sure you will be able and are willing to actually make the repayments alone.
The cosigner is practically a co-borrower. That person is obligated by law to repay if you do not manage to.
Even with cosigner release options, this is something that happens in only 1% of cases. You can easily get someone in big trouble because of your financial decisions.
Using Student Loans To Pay For Living Expenses
Only use the money you get from the student loan to deal with educational expenses.
This includes things like textbooks and tuition. We can say that we are talking about good debt as long as you use the money for better education.
This actually helps you to repay the money. But, when you use the loans for luxury purchases, this is a huge mistake.
For instance, you should never pay student loans for shopping sprees or spring break. It is very easy to be tempted since you have access to the money but you should never actually do it.
Not Considering Federal Student Loans
The first option you should consider is always the loan offered by the federal government. This is due to the fact that they are a lot cheaper.
The availability is high and repayment terms always end up being better than what you are offered through private student loans.
You should know that the federal student loan has a deferment and forbearance of 3 years. The private option only has a one year period for that.
Also, there are discharges available for disability and death. This is only possible with 50% of the private student loans.
Loan forgiveness and income-driven repayment are options available with federal student loans, which makes them so much better to take into account first.
Improper Repayment Plan
The common tendency students have is to choose those payment plans that offer very low monthly payments. They rarely even consider the higher payments they can actually afford.
It is very important to understand that the low monthly payment plan comes to the table with the longest possible repayment term.
This means you end up paying more interest. What you pay at the end of the contract period is so much more than what you would obtain with higher monthly payments.
To keep things as simple as possible, the best step is to be as close as possible to the maximum amount you are going to be able to repay on a per-month basis. If you do this, it is a certainty you will save money.