For borrowers with educational debt, student loan mistakes are both common and costly, both when borrowing money for school and when working on debt paydown. Unfortunately, debt repayment mistakes often make it harder to accomplish other financial goals. The good news is, if you know how to avoid common student loan mistakes, you can protect your ability to accomplish financial objectives while making loan payoff as easy and effective as possible. To avoid derailing your debt-free efforts, make sure you’re aware of these seven common student loan mistakes and how to avoid them.
1. Attending a more expensive school without considering the consequences
There’s a lot of variation in the cost of college, depending on where you go. Community colleges, for example, can cost less than state schools, which are less expensive than private schools. While in some cases, paying for a better education makes sense, one of the most common student loan mistakes is assuming a costlier institution is always the right option. That may not necessarily be true in every situation — especially if you must borrow more to afford it.
Avoiding this common student loan mistake
To avoid student loan mistakes related to choosing the wrong school, be sure to research each academic option available to you. Consider the total cost of attendance, including room and board, after subtracting for financial aid. If one school is much more expensive than another, evaluate whether your job prospects and earning potential will be improved enough to justify paying the extra money for them.
2. Failing to take full advantage of free money for school
Missing out on free money for school is one of the most damaging student loan mistakes. If you don’t take the time to research available scholarships, grants, and other sources of aid, you may be forced to borrow more than you’d otherwise have to. This can leave you with a larger student loan balance to deal with after graduation.
Avoiding this common student loan mistake
To avoid passing up free money, complete your Free Application for Federal Student Loans as soon as it becomes available. The FAFSA opens up the door to federal and state grants and scholarship money that doesn’t have to be paid back. You should also start searching early for scholarship opportunities. There are online databases such as FastWeb and BigFuture where you can search and apply for free sources of aid. Check them regularly well before the start of each school year and apply for as much money as possible, so you won’t have to worry about repaying it later.
3. Borrowing more than you need
Student loan debt is widely considered to be good debt, because it allows you to improve your earning potential. But borrowing for more than just the basics is another of the most common student loan mistakes. If you take out debt for luxuries such as spring break trips or an expensive car, you’ll end up with a much larger loan balance that will be harder to repay.
Avoiding this common student loan mistake
When figuring out how to avoid student loan mistakes, this is one of the easiest traps not to fall into. Set yourself a budget with basic living expenses and don’t borrow for anything other than the necessities. If you can find ways to lower costs, such as living with roommates instead of having an off-campus apartment of your own, try to take advantage of those opportunities.
4. Taking out the wrong type of student loans
There are many different kinds of student loans, and choosing the wrong ones is another of the more common student loan mistakes. The “wrong” loans are those that are more expensive with less favorable terms, and they can make it harder and costlier to pay back your debt after graduating.
Avoiding this common student loan mistake
To avoid picking the wrong kind of loans, research all of your options. Most people should maximize the amount of federal Direct Subsidized and Unsubsidized Loans they take out before using private loans. And when choosing a private lender, students should shop around to make sure they get the best rates possible.
5. Choosing the wrong student loan repayment plan
Student loan mistakes don’t end once you’ve graduated — there are also debt repayment mistakes you may make during the payoff process. For example, if you pick the wrong payoff plan, you could end up making it difficult to make payments or could pay much more interest than you need to.
Avoiding this common student loan mistake
Avoiding debt repayment mistakes related to payoff plans involves researching your payoff options. Be sure to look at both monthly payments and total costs over time when deciding which plan is right for you. A loan repayment plan with a shorter payoff time will reduce your interest costs over time, so you won’t spend as much money on paying back your debt. Of course, you will have higher monthly payments, so you’ll need to make sure this fits your budget. A longer payoff time, on the other hand, would result in higher interest over time but give you more financial flexibility due to lower monthly payments.
6. Missing payments on your student debt
Missing payments on student loan debt is one of the most damaging of the common student loan mistakes. A missed payment could damage your credit score, and multiple missed payments could result in default.
Avoiding this common student loan mistake
To avoid this error, talk with your lender if you are struggling to make payments. There are options such as deferment, forbearance, and income-driven repayment plans that could spare you from missing a payment. Both borrowers with private student loans and those with federal loans have options to temporarily pause payments without damaging their credit and future borrowing abilities.
7. Not taking advantage of opportunities to save
Finally, another of the most common debt payment mistakes is failing to take advantage of opportunities to make debt repayment easier. Specifically, if you have private student loans, you may be able to refinance them at a lower rate without affecting any borrower benefits. This can save you money on a monthly basis and over time, and there’s little reason not to explore student loan refinancing if you can drop your current interest rate. Hopefully, avoiding these common student loan mistakes and debt repayment mistakes can make loan payoff easier and improve your financial situation in the long-term by helping you to avoid errors that can derail your long-range plans.
