Common Mistake To Avoid When Borrowing Student Loan

Quality education is financially beneficial. On average, individuals who complete college earn higher salaries compared to those with only a high school education.

They also face lower unemployment rates. These advantages provide strong incentives for pursuing a college degree.
However, financing a college education can be challenging with personal funds. Consequently, many students resort to loans, which can lead to significant financial errors.

Many individuals rely on loans as their sole means of funding their higher education. However, it is important to be wise in borrowing money.

Here are six significant mistakes to steer clear of when it comes to student loans—prior to borrowing, during the borrowing period, and after beginning repayment.

Common Mistakes To Avoid When Borrowing Student Loan

Using A False Application:

Falsifying information on your student loan application is the initial mistake to avoid. If you provide inaccurate details like your income, there’s a significant chance of detection, as some educational institutions review all financial aid applications.

The consequences of being caught include losing the loan, facing penalties, and potentially being charged with fraud, which could lead to imprisonment.

While education may be available in prison at no cost, finding a lucrative job becomes more challenging when you have a criminal record.

Investing In Wants Rather Than Needs:

Utilizing student loan funds to invest in a lifelong education is considered beneficial debt while using the same funds to acquire a modern smartphone that will become outdated long before the loan is repaid is considered detrimental debt.

Although a minor indulgence from time to time may not have a significant impact, compromising your future financial stability to finance temporary enjoyments reflects imprudent financial planning.

If you obtain a loan that exceeds your necessary living expenses, deposit the extra money into a savings account that offers the highest interest rate available.

When you finish your studies, utilize the saved funds to start repaying your loans. Another option is to consider using the excess funds to cover the interest payments on the loan, even during your time in school.

Picking The Wrong Repayment Plan:

Choosing the repayment plan with the smallest monthly payment might be tempting, but it also means having a longer repayment term, resulting in higher total interest payments.

While income-based or “Pay As You Earn” plans may seem appealing with their extended repayment period of 25 years instead of a decade, they actually end up costing you more in the long term.

To minimize the interest you pay on your student loans over time, it’s advisable to select a repayment plan where you can afford to make the highest monthly payment possible.

Experts recommend that your monthly student loan payment should not exceed 10% of your anticipated salary. To determine this, calculate your monthly loan payments, including interest, based on a 10-year repayment plan using your expected salary, as this is typically the standard approach.

If your loan payments exceed 10% of your income, which can be challenging to manage with entry-level salaries, it is advisable to explore longer and more affordable programs. However, it is important to reassess your options in the future if your financial situation improves.

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Not Speaking With A Financial Aid Counselor:

Financial aid counsellors are highly valuable individuals who can assist you in making informed choices regarding the cost of your education.

With their extensive expertise, they can address any inquiries you might have, aid you in applying for scholarships and grants, and guide you towards the most suitable loan options.

It is crucial to explore the financial aid services provided by your chosen college upon enrollment.

By scheduling a meeting with a financial aid advisor, you could potentially discover exceptional resources that significantly ease the burden of college expenses.

Getting A Loan From Private Lenders:

When financing your education, prioritize federal student loans over private loans. Federal loans offer more favourable repayment terms, wider accessibility, and lower costs compared to private loans. Additionally, federal loans come with fixed interest rates and are not influenced by your credit history.

Only explore private loans if you are no longer eligible for federal loans or if you have already reached the federal loan limit.

Not Considering Refinancing:

If interest rates have significantly decreased, it would be unwise to overlook the chance to refinance your loan.

By doing so, you could save hundreds or even thousands of dollars on your student loan. Similarly, if you have multiple loans, combining them through consolidation can lower your monthly payment and reduce the overall interest you’ll have to pay.

Lenders differ in their interest rates and loan terms, so it’s important to carefully compare and analyze the numbers to ensure you’re getting the best deal.

If you have a federal student loan, keep in mind that refinancing it will replace it with a private loan.

This means you’ll no longer be part of the federal loan program, losing access to income-based repayment plans and loan forgiveness options, as well as certain financial protections.

It is permissible by law to make extra payments or pay more than the minimum amount each month, even if you cannot refinance the entire loan.

Even occasional bonuses can be beneficial by reducing the duration of your loan.

However, it is important to ensure that your student loan servicer applies these additional payments to your principal balance, reducing the interest, rather than simply applying them to the following month’s payment.

Ignoring Free Money:

Borrowing money incurs costs in the form of repayment and interest. Grants and scholarships provide financial aid without the need for repayment, offering valuable support for college expenses.

Military benefits assist both active duty and honourably discharged armed forces personnel. Some businesses provide tuition assistance or reimbursement for their employees.

Not Making Payments:

Several students have skipped a month’s payment, intending to make double payments the following month. This is a significant error.

Regardless of whether you catch up on the missed payment, every late or missed payment negatively impacts your credit report, resulting in a lower credit score.

This negative mark can remain on your credit history for an extended period, making it harder for you to secure loans in the future.

Before you begin skipping monthly payments, it’s important to communicate with your lender if you find that your monthly payment is unmanageable. Seek a solution by discussing your situation with them.

Extravagant Spending:

Although most students handle their loans responsibly, there is often a temptation to use the funds for unnecessary purchases.

It’s important to refrain from using loan money for vacations, shopping sprees, or other nonessential items.

Making impulsive choices like these can lead to unnecessary expenses, which can be easily avoided by practising self-control.

Taking Out More Loans Than Necessary:

Loans can assist in closing the financial gap between your available funds and the expenses of your education. However, it’s crucial to avoid excessive debt.

Consider finding a part-time job to cover your daily expenses. This strategy is straightforward: borrowing less now means having a smaller amount, including interest, to repay later.

Additionally, it’s important to consider the average salary in your desired field to determine a reasonable amount you can afford to pay monthly towards your loans.

Failure To Pay Your Loan:

If you don’t make loan payments for over 270 days, your loan will default and cause serious financial problems.

Avoiding your lender won’t work, as they will locate you and impose significant penalties for non-payment. Unlike credit card companies, the federal government, which guarantees most student loans, can seize your tax refund or deduct money from your wages to repay the loan, along with any collection fees.

Before reaching a critical situation, reach out to your lender or loan servicer. If your difficulties arise from unforeseen circumstances like unemployment, you may have the opportunity to negotiate a deferment or forbearance plan to give yourself some financial relief.

However, it’s crucial to avoid simply neglecting your monthly payments, as it is the most unfavourable course of action.

Frequently Asked Questions On Student Loan

Can I Miss A Payment On My Student Loan?

It’s not advisable to skip a payment on your student loan. When you skip payments, they appear on your credit report and decrease your credit score. If you’re having trouble affording your monthly payments, contact your lender and explore alternative repayment options that align with your financial situation.

Can You Buy Clothes With Student Loan Money?

Certain student loans have specific guidelines regarding the allocation of funds, typically for expenses like books, tuition, and sometimes accommodation. If you happen to receive extra loan money and buying clothes is essential rather than a luxury, you might be able to use it to buy a few necessary items. However, it is advisable to save for anything beyond the essential clothing items.

Conclusion:

Managing a student loan is usually the initial experience of handling a significant amount of money for a young adult. It is essential to avoid common financial errors while financing your college education to ensure you graduate with manageable debt and minimize its overall impact.