Federal student loans offer several more benefits than private student loans. However, many students do not take the time and trouble to understand how these loans work over the long term and they end up making wrong decisions that can have a big impact on their finances and their credit history.
Before you apply for a federal student loan, take care to avoid these mistakes:
Taking Loans Indiscriminately
It’s relatively easy to apply for and get federal student loans, and sometimes this can be a problem. Many students take loans indiscriminately without a second thought. They do not keep track of the amount of loans they are taking each semester and are in for a huge shock when it is repayment time.
Don’t do this to yourself. This is unnecessary stress and can mar the euphoria that you should be feeling after you graduate. To avoid getting into this mess, take a proactive approach to applying for federal student loans. Speak to your parents or a financial advisor and try and find ways to reduce your debt right at the get-go.
Accepting a Loan Without Exploring Free Money Options First
There is plenty of free money available to college students by way of scholarships. It is always a good idea to explore all of these opportunities before taking on any loan. When looking for scholarships, don’t just look in the obvious places. There are several private organizations and local businesses that offer scholarships to students and these are not necessarily for top scorers or the best athletes either. Spend time looking for unusual scholarships and apply to all that you are eligible for.
Federal student loans may have lower interest rates and fairly flexible payment terms but the fact remains that you still have to repay that amount and with interest too. Scholarships on the other hand are free money. You do not have to return anything. Before you take on any loan, ask yourself whether you have exhausted your search for scholarships that you could avail of.
Maximizing Your Loan Entitlement To Attend The Most Expensive College On Your List
As we said earlier, getting federal student loans is relatively easy and it can be tempting to accept the entire amount awarded to you and attend the most expensive college on your list. You have to remember that you will have to pay it all back post graduation. The bigger the loan amount you take, the more in debt you will be and the longer you will have to wait to enjoy that much-talked-about financial freedom.
Your goal should be to graduate from college with the minimum debt possible. Do you really need to enroll in a college that charges premium tuition fees? Ask yourself why first and think about whether the college is worth taking on that huge debt.
Using Your Federal Student Loans To Fund Your Lifestyle
Using loans to live a more comfortable or even a lavish lifestyle is a mistake students make over and over again, without realizing the consequences. Sure, the federal government will not be checking up on you to determine where you are spending the money they loaned you. But they will not be so easy on you when it is time to pay that money back. Regardless of what you spend the money on, you will have to pay it all back with interest. The more you spend now, the more you will pay back later.
Financial experts suggest that students must exercise restraint when it comes to taking and spending federal student loans. This means, taking only what you need to fund your college expenses and nothing else. Learning to live on a budget is an education in itself and one that will come in very useful when you start earning.
If your rent and meal allowance is very tight, consider getting a part-time campus job but don’t take the easy way out and use your loan money to splurge on luxuries.
Not Paying Back Extra When You Can
Did you know that interest on all loans, including federal student loans, accrues every single day? Think about that for a moment. Every single day, the interest gets calculated for the outstanding loan amount. One of the best ways to reduce this ongoing daily interest accrual is to pay off your loan as quickly as possible. If you have additional funds, put it towards your payment. This will lower the total amount of interest that you end up paying and consequently lower the total cost of your loan.
When you are making early payments, you must make sure to inform the lender that you would like to apply the extra payment to the loan that is attracting the highest rate of interest. It is equally important to make sure that the additional payment is made towards the principle amount and not towards any future payments.
Refinancing Without Doing The Calculations
Refinancing is not a good idea for everyone. You must do your due diligence before you decide to refinance your loan. When you refinance you may get a more competitive rate from private lenders but by surrendering your federal loans, you may lose out on several other protective programs such as deferment, income-driven repayment, and forgiveness programs.
Before going ahead and refinancing your federal student loans, you must discuss this option with your financial advisor and decide whether it is worth giving up the benefits associated with federal loans in exchange for the lower interest rate.
Missing or Late Payments
When you are dealing with multiple loans with different payment dates, it is easy to miss a payment. However, this can damage your credit score and make it more difficult for you get another loan further down the line. If you miss multiple payments, it gets even worse. To avoid missing or making late payments, consider setting up an automatic payment plan so the money gets debited directly from your account.
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