Knowing that student loans are available can be a huge relief to students who would otherwise not be able to make their dreams of higher education come true. But making a mistake when taking a student loan can negate all the good it does, and put you in an tough position. If you are not careful, you could end up hurting your finances for years to come.
Avoid these mistakes when taking a student loan to keep the amount of debt you have to a minimum.
Taking A Loan Without First Exhausting All Your Gift-Aid Options
Although in general, the interest on student loans is considerably lower than that of private personal loans, student loans still attract some amount of interest. They are not free money and with time, the interest will keep mounting up.
That does not mean you should discount student loans completely, of course. You should definitely consider this as an option but only after exhausting all of your gift-aid options. Start by exploring which scholarships and grants you qualify for. Check if you qualify for military aid. (Also consider student employment, employer tuition assistance, and work study options.)
Calculate all the gift-aid that you qualify for, file the FAFSA, and only then apply for a student loan to cover the deficit.
Looking at Private Student Loans First Instead Of Federal Loans
Once you’ve determined that you need to borrow some amount in addition to the gift-aid you’ve earned, the first place you should start your search is with federal student loans. Federal loans are significantly cheaper, they have better repayment terms, and also offer options for deferment, income-based repayments, forbearance and public service loan forgiveness.
Borrowing Too Much
Many students make the mistake of borrowing the full amount that they are approved for. It may sound like a good idea at the time—the extra money can come in really useful for covering extraneous living expenses and maybe a few luxuries too. When you have it, it’s easy to spend it all. The harsh reality only hits them after they graduate and realize how much they have to pay back.
Instead, only as much as you need to cover the cost of your education. You may have to live frugally while you are in college but then again, that is the way it is supposed to be. Besides you’ll be glad you made this decision when it’s time to start paying the money back and your debt actually looks manageable.
Overlooking Costs And Fees
Most students only take a look at the interest rates when comparing different lenders, and while that is a significant factor, there are other costs that need to be taken into consideration as well. Some lenders may charge an origination fee, others may charge handling fees, or other miscellaneous fees that can add to the total cost of the loan. If you ignore these costs and fees, your student loan could end up costing much more than you initially calculated.
Lying On Your Student Loan Application
A small fib may sound harmless, and it can be tempting when you know that it could make the difference between getting the loan approved and getting it rejected. Harmless or not, lying on a loan application can be prosecuted as fraud. This could result in jail time and a blemish on your spotless record. Lying to get your student loan approved, no matter how small the lie may seem, is not worth the risk involved. Best to stick to the truth when filling in your application.
Using Forbearance Liberally
You can apply for a forbearance or deferment under certain circumstances. This allows you to postpone your federal student loan repayments temporarily and is a good option to fall back on and avoid default when you absolutely cannot make payments towards your loan. If your forbearance application is accepted you will not need to make any payments during that period.
It may seem like an easy solution when you are in a financial bind, but what you need to keep in mind is that in most cases, the interest will continue to accrue even though there are no payments due. Once payments resume, you will more than likely end up owing more. Forbearance should be considered only if you absolutely need some relief from making payments for a particular period. And even then, paying some amount towards the balance every month will help to reduce the interest charges.
Living Off Your Student Loans
Tempted to splurge because you manage to ‘wrangle’ more financial aid than you actually need for tuition and books? Think again. Just because nobody is going to ask you what you spend the money on does not mean that you should use it for a quick trip to catch the Carnival in Rio.
Far too many students fall into the trap of taking the excess money and spending it on a lifestyle they couldn’t otherwise afford. This is a mistake. In the end you will have to pay back every cent you borrow with interest. Student loans should only be used for expenses related to education—tuition, books, and other relevant items. They should never be used for anything other than that. The goal should be graduate with as little debt as possible.
In general, the most common mistakes students with respect to student loans, is borrowing more than they need for their education. The excess funds then go towards sustaining a ‘lifestyle’ and making their college life more exciting. The truth is this can seriously backfire and can make your post-college life more stressful than it has to be. On the other hand, with some careful planning and self restraint, you can borrow less, finish off the payments faster and graduate with far less debt than your peers.
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