College education might be expensive. Yet, it does have a considerable effect on the personal and professional lives of many students. The federal government provides college aid to several students each year. Despite this, the rising costs of college have made it next to impossible for many students to think of attending college without taking out a student loan. Unfortunately, many students have little knowledge of how to manage their finances appropriately. As a result, their ignorance and unwise choices often end up having a significant effect on their lives.
American Retirees Increasingly Contending with their Student Loan Debt
It has become clear that the class of 2015 is the most indebted class for the next 12 months at least. Yet, a recent report highlighted that an increasing number of retirees are still paying off their student loan debts. The report states that in 2013, American seniors collectively owed about $18 billion in student debt. A year later, they owe almost $20 billion.
The issues that are resulting in an increasing number of retirees continuing to repay their student loans are all too apparent. They include:
- Rising College Costs: College is an expensive investment. With each year, college costs continue to rise. In this scenario, each successive cohort has a higher average student loan than the preceding cohort does. As a result, they will take longer to repay their student loans.
- Increasing Deferments: When student loan borrowers face financial hardships, they are quick to defer the repayment of their student loans. They don’t realize that doing this pushes them further into debt. This is because the interest continues to accumulate on the loan. In addition, deferments often ensure that borrowers extend the duration of their student loans. This is especially if they’re only paying the minimum amount each month.
- Poor Financial Awareness: Student loan borrowers often are not savvy about their finances. Therefore, they believe that they owe a specific amount on their loan and pay the lender accordingly. By doing this, they fail to account for the benefits of loan consolidation. Oftentimes, consolidating your loans results in lower interest rates. By ignoring this possibility, borrowers continue to pay more than they need to.
The Costly Mistakes that Student Loan Borrowers Often Make
Several retirees might fail to make informed decisions on their student loans. But the latest cohort of college students is not any wiser. They often have little (or no) financial awareness. As a result, they usually end up taking their student loans lightly. AJ Smith writes that some of the most common mistakes that students make include:
- Borrowing More Than Needed: Many students take out student loans for the entire amount that lenders offer. Instead, they should calculate the amount they really need. The lesser the amount they borrow, the faster they would be able to repay the loan.
- Shirking Their Homework: Student borrowers often take out student loans from the first lender they visit. By doing so, they often underestimate the benefits of taking out federal student loans. These loans offer greater protection and lower interest rates. By failing to examine the rates and terms offered by various lenders, these students often miss getting the best deal. It is worth noting that some private loans could well be predatory.
- Neglecting Alternatives: Student loans might be unavoidable. But, borrowers can certainly reduce the burden of debt they take on. For instance, they could consider alternatives such as:
- Attending an in-state or online school
- Attending a work-based school
- Attending school on a part-time basis while working
- Applying for various scholarships and grants and,
- Deferring attending school for some time and using that time to save money
- Selecting the Wrong Repayment Strategy: Students often opt for monthly payment options thinking that smaller repayment amounts will fit into their budgets more easily. By doing so, they neglect the total cost of the loan over the life of the loan. Smaller repayment amounts tend to increase the life of the loan. As a result, borrowers end up paying more interest than they need to.
- Missing Payments: Taking student loans is easy. Repaying them is cumbersome. Students who are yet to take to assume responsibility for their actions often lack the financial skills needed to manage their finances. As a result, they end up missing payments or making late payments. This increases the chances of them defaulting on the loan. It could potentially affect their chances of qualifying for loan forgiveness in the future. Even worse, late or missed payments usually wreak havoc on their credit scores.
- Neglecting Prepayments: Several students fail to realize the benefits of taking steps to pay off their loans while they’re studying. For instance, students can earn (and save) money by working on a part-time basis, taking up a paid internship, tutoring, freelancing etc. By doing this, they would be able to reduce their outstanding balances considerably.
- Acting in Haste: Many students have the misimpression that they need to lock in their student loans at the earliest. They also believe that once they make a decision, they cannot change their minds. As a result, they get stuck with a loan that is more of a bane than a boon.
- Believing in Full-Ride Scholarships: Some students feel that their high grades will enable them to avoid taking out student loans. Unfortunately, this is not the case. Full-ride scholarships are rarer than many people realize. This makes taking outs student loans a hard-to-avoid activity.
Students need to be fully aware of the consequences of taking out a student loan. By avoiding the mistakes listed above, they could save themselves years of stress and a lot of money, they might pay as interest on their loans. As the old proverb rightly says – forewarned is forearmed.