5 Student Loan Mistakes to Avoid (Before It’s Too Late)
If you’re heading off to college this Fall or are already in school and borrowing to pay your way, there are some things you need to know to keep from getting in over your head. Student loans can rack up quickly and many students don’t realize until it’s too late that they’ve over-extended themselves on debt. Today, we’ll give you a heads up on five major student loan mistakes you need to sidestep now, before it’s too late.
#1 Borrowing blindly One of the biggest shocks to most grads is how much they’ve accumulated in student loans and they don’t even know it until they get their first bill post-graduation. Financial aid offices streamline the student loans application process so an electronic signature is all you need to rapidly amass a staggering amount of debt that you may struggle to service.
The answer: Information. You should always know how much you owe, so you can readjust your plans along the way if it’s getting too steep. Sign up for Tuition.io’s free student loan tool the moment you take on your first loan and you’ll always know your debt status.
#2 Not considering outcomes Even if you know you’ll likely owe $25,000 when you graduate, do you know what that really means and what impact it will have on your life and finances? Most students don’t. You’ve got tunnel vision because you’re focused on your academics and are just barreling on toward graduation and likely just see loans as the means to the end.
The answer: Using a student loan calculator, you can see that $25k at 3.86% results in monthly payments of $251 for 10 years. That’s a big chunk of dough. A rule of thumb is that debt shouldn’t exceed your likely first year salary but, in reality, the less you borrow, the better your life will be.
#3 Overborrowing The student loan system is set up so that you can borrow far more than you need. But just because you can take more than you need doesn’t mean you should. It’s the same principle as a giant, nearly-bottomless bowl of M&Ms. You can keep eating the candy until you gain 100 pounds, but then you have to deal with the impact and figure out how to lose it later.
The answer: Don’t gorge yourself on student loans. Only borrow the minimum, always know how much debt you’ve accumulated and never borrow for anything beyond tuition, fees and books. If you can help it, don’t borrow to cover the cost of living expenses. And never borrow for non-essentials like buying a computer, car, TV or anything else you don’t need to get through college.
#4 Not paying early and often In addition to not thinking about the impact your debt will have on finances, many don’t understand their capability to deal with their student loans. The job market is really tight for young people and whether it will improve soon is a question mark. Overestimating what your income will be or your ability to pay can be financially disastrous.
The answer: Start paying on your loans while still in school. Most loans accrue interest from the moment they are disbursed and if you don’t pay it, it will capitalize into your loan balance and drive your cost of borrowing up. By paying just a little each month you can avoid this. If you also pay some toward your principal, the impact will be even more beneficial.
#5 Not prioritizing College can be really fun. You’re out from under your parents for the first time and have no curfews and may feel like you don’t have to be accountable to anyone. There are parties every night, distractions around every corner and you don’t want to miss out. But playing heavily now can cost you big for the next decade or two and make your life as a young adult drastically harder.
The answer: Working part time during school and full time in the summers will cut into your party time, but can reduce what you need to borrow and make your life after school much better. Your priorities should be academics and finances before keg stands and dating. You’ll have plenty of time for socializing once school is done and will have more fun as an adult.
In addition to using our free tool, as we suggest in #1 above, read our blog every day for tips on getting and staying out of student loan debt. And check out our Student Loan Help Center for advice on repayment plans, forbearance, default and other student loan topics.