Biggest Student Loan Mistakes
One of the defining characteristics of a college education is that it is not cheap. There is an entire industry based on answering the hundreds of questions of how to pay for college. Navigating this sea of options, restrictions, exclusions, rates, and criteria for qualification can be as arduous and overwhelming as the undertaking of applying for school itself, let alone actually maintaining good grades and plotting out your future.
Thinking You Don’t Have a Choice
Borrowing money to get into university has become so widespread that many people come to assume that it is an inevitable part of the process. While 60 percent of students do (that’s around 12 million of the 20 million students who attend college in a given year, according to American Student Assistance), the fact that 40 percent of students – roughly 8 million people – don’t borrow money implies that borrowing money is not a mandatory step in the ordeal of paying for college. It’s not, and many people make the mistake of thinking that they have to borrow money to afford college.
The truth of the matter is that there are a number of alternatives at your disposal if you don’t want to find yourself paying off loans for years after graduating. For example, you could:
- Apply for scholarships or grants
- Apply to a cheaper school
- See if your school offers assistantship programs (you work for them, they pay for your education)
- Delay school while you work and save up
There’s nothing inherently wrong with student loans, insists Fox Business, but there is plenty wrong with assuming that borrowing money is a must-do on your list of how to pay for college.
Putting Too Much Hope on Scholarships
So you read the above point and thought, “Well, I’ll hit the books even harder and qualify for a scholarship; that way, I completely avoid the trap of locking myself into a loan that I may never even need.” Working hard for a scholarship is admirable, but Lynn O’Shaughnessy, the author of The College Solution, warns that just around 7 percent of college students receive scholarships. Adding insult to injury, the scholarship money awarded to students averages to about $2,500. Adding even more insult to injury is that some schools will reduce the amount of aid you can get if you have been awarded a scholarship.
This is certainly not meant to dissuade you from trying to qualify for a scholarship; they are magnificent incentives and rewards for hard work, and they help many deserving and needy students in a mercilessly competitive race. But assuming that all you need is one scholarship to dodge the jungle of a student loan is a mistake that will, despite your best efforts, cost you.
When you get the notification that your request for a loan has been approved, your jaw might drop at some of the numbers involved. There are two reasons you could have this reaction: you’re amazed at how much of the tuition is covered, or you’re amazed at how much money you will eventually have to pay back – and with interest, too. Many students and parents make the misstep of taking on unrealistic amounts of debt, especially when considering the likelihood of the student getting a job that can pay off potentially hundreds of thousands of dollars of student loans. Not everyone is going to start pulling six-figure salaries right out of university.
In other words, unless you have the most lucrative job offer in the world in hand, one of the biggest student loan mistakes you can make is to sign up for a massive loan, and then have no concrete plan for how to pay it back. That means that even after you walk across the stage and collect your diploma on graduation day, you will have to put off plans on putting down a payment on a house or a car. Paying off your student loans comes first, and if you made the error of requesting an unnecessarily big loan (thinking that that would solve your money problems, without considering whether you need that much money to pay for your school of choice, or whether you can realistically keep up with your payments when you finish school), you’re going to be paying those loans off for a very long time.
Not Staying in Touch With Your Loan Service Provider
After you graduate and celebrate with your friends and family, the last thing you want to do is think about calling up your loan service provider and giving them the good news. But after you move out of college (and back to your parents’ house or into your own place), how else will your service provider know where to send you your statements? How will they contact you to let you know that you’ve missed payments? How will they inform you that after months of no payments from you and multiple warnings from them, they’ve passed your account on to a collections agency?
That’s why not staying in touch with your loan service provider is a massive mistake to make. Paying off your student loans requires as much diligence and consistency as paying off a credit card. Be sure to let your loan service provider know of any changes in your life that might affect your ability to pay off your loans. If you’ve moved, tell them what your new address is so that you don’t miss any statements. If you’ve lost your job, ask them if it’s possible to switch to a more accommodating payment plan. The worst thing you can do is to ignore (or forget) about the people who can eventually wreck your credit score.
Not Making Interest Payments
The overall numbers of your student loan can be so big – in the tens of thousands of dollars – that it’s easy to forget those smaller numbers with percentage signs: the dreaded interest rates. But if you forgot to make those interest payments, the thousands of dollars of your loan will look like small change compared to what you’ll have to pay now. Letting interest capitalize (when outstanding interest gets added to the principal of the loan) will balloon your original payment, further straining your resources when you’re done with school and have to juggle real-world responsibilities (locking down a job, paying for a house and/or a car, supporting a family, etc.).
It’s impossible to completely avoid paying interest – after all, loan providers don’t give you money altruistically; they fully expect to get something extra out of the deal – but there are precautions you can take to limit the damage. Prepaying consistently may hurt your checkbook in the short-term, but it will keep the interest rates on your loan to manageable levels. More and more of your payments will go towards actually paying off the loan itself, rather than the surcharges surrounding it (such as late charges, collection costs, and interest).
However, assuming that interest is only a peripheral part of the payment equation is a deadly mistake to make.
Giving Parents Too Much Control
It’s tempting to let parents take over the financial side of things while you deal with the academics. They’re older, they have money, and they’re more experienced and knowledgeable than you when it comes to these things. But you incur a big risk when you wash your hands of the student loan processes. Melanie Weaver, Director of Financial Aid for Ohio Northern University, says this is one of the biggest mistakes students can make.
Why? For one, it keeps you completely in the dark about things you really should know about, such as the simple question of how much your college education is costing your family (of which you are a part), and how much you will be expected to pay back when you are in a position to do so. No matter the reasoning behind the intentions, your parents taking sole care of the finances of your student loan means that when you have to step up to the plate and assume some of the responsibility, you will be entirely bereft of the information you need to adequately settle the loan on your own terms.
Being more involved in the business of student loans will make you take ownership of your academics too. Melanie Weaver says that when students understand the cost of each class, there is a positive impact on how they perform in those classes. On the other hand, if you have no conception of what sacrifices have to be made to put you through college, you don’t have a great deal of incentive to make those sacrifices worth the effort.
Furthermore, if your parents co-sign your student loan, they will be held accountable if payments are not made on time. With their own lives to live (and their own payments to make), there’s only so much they can put on their plate before they are in danger of harming their credit score. They may certainly want to help you pay for college, and rightfully so, but their contribution should be limited to nothing more than exactly that – help to avoid making a significant mistake in the student loan process.