Taking out student loans is a big financial decision, so it’s important to understand how they work before you borrow. Common mistakes, such as forgetting to file the FAFSA, borrowing more than you need, or rushing into refinancing, could end up costing you or make your debt harder to manage. Here are some common student loan mistakes to avoid before graduation, along with what to do instead to keep your borrowing costs under control.
1. Forgetting to submit the FAFSA
The Free Application for Federal Student Aid (FAFSA) is your gateway to federal financial aid, including grants, work-study, and federal student loans. Many states and colleges also use the FAFSA for their own aid programs.
Students with financial need may qualify for grants, work-study, and Federal Direct Subsidized loans, while any eligible student can take out Federal Direct Unsubsidized loans. Submit the FAFSA on an annual basis to access financial aid.
Try to file the FAFSA as soon as it becomes available (usually on October 1 each year), since some financial aid is awarded on a first-come, first-served basis. If you wait too long, some aid might run out.
And if you don’t submit the FAFSA at all, you won’t have access to federal financial aid.
2. Borrowing before you explore other financing options
Taking out federal and/or private student loans for college should generally be a last resort after you’ve exhausted other sources of aid. These could include:
- Savings
- Contributions from family
- Grants
- Scholarships
You might also consider participating in the work-study program, if you’re eligible, or getting a part-time job to make money for school. Picking a more affordable school could also reduce how much you need to borrow.
If you still have a funding gap, federal and/or private student loans may come in handy. Just keep in mind that you’ll have to pay back every dollar you borrow, plus interest.
3. Taking out more student loans than you need
You don’t need to accept the full amount of student loans offered to you if you can get by with less. Before accepting an offer for loans, calculate exactly how much you need.
Colleges share an estimated cost of attendance online, but you should customize these numbers to fit your lifestyle. Once you have your total, subtract other financial aid available to you, like savings, scholarships, and grants.
The difference is the amount you may need to borrow, but you could look for ways to reduce it further. For instance, you might work part-time during school or cut costs by buying used textbooks or living with roommates.
Keeping your borrowed debt as low as possible could help make your future payments more affordable.
4. Not estimating your monthly payments
Taking out a student loan can feel abstract if you don’t know what repayment looks like. Before you borrow, use a student loan calculator to estimate your future monthly payments based on your loan balance, interest rate, and repayment term.
For example, a $25,000 loan with a 6% interest rate would require monthly payments of $278 on a 10-year repayment term. Over the course of 10 years, you’d pay a total of $8,306 in interest.
Estimating your monthly payments can help you make a clearer decision about how much to borrow and how they impact your future plans. Skipping this step, on the other hand, could lead you to over-borrow.
5. Not paying attention to interest rates
The interest rate on your student loan has a major impact on your monthly payments and total borrowing costs. Federal student loan rates are fixed by federal law each year, so everyone who borrows at the same time gets the same rate.
The rates on private student loans can vary, though. Private lenders usually offer a range of rates, with the best ones going to borrowers with the strongest credit, a stable income, and having a cosigner. You can often choose between a fixed rate, which stays the same, and a variable rate, which can change with market conditions.
It’s also important to understand when interest starts accruing. It typically starts adding up right away on private student loans, as well as federal Direct unsubsidized loans. Direct subsidized loans have an interest subsidy, where the government covers interest while you’re in school, during your grace period, and during other deferment periods.
6. Not considering in-school payments
You usually have the option to not make payments on your student loans while you’re enrolled at least half-time in school and for six months or so after you graduate. But even though loan payments aren’t required, you could choose to start paying sooner.
If your budget allows, making interest-only or small monthly payments could prevent your balance from growing while you’re in school. Many private lenders have the option of $25 per month or interest-only payments while you’re in school.
There’s also no penalty for paying student loans ahead of schedule to save on interest.
7. Spending loan money on non-essentials
When you take out a student loan, you’re agreeing to spend it on education-related expenses, like your tuition, fees, books, housing, food, and transportation. But nobody is tracking the money once it hits your account, so it’s up to you to follow these guidelines.
Avoid spending student loan money on non-essentials like travel or entertainment. Not only may this violate your loan contract, but it could also leave you short on funds later. Plus, you’ll end up paying for those purchases with interest for years after you graduate.
8. Ignoring communications from your loan servicer
Your student loan servicer might contact you about your loans, whether to inform you about when payments are due or give you an update about interest charges. Sometimes student loans are sold or transferred to a different loan servicer while you’re in school.
Make sure to read these communications so you’re informed about any important changes or updates. You can also double-check that your loan servicer has your most up-to-date contact information. This is especially important after you graduate, since you’ll probably move and switch from your school email to a personal email address.
9. Rushing into refinancing federal loans
Refinancing student loans can help some borrowers get a lower interest rate and save money on their loans. But it can also have some drawbacks, especially for federal student loans.
When you refinance federal loans, you lose access to federal benefits, including income-driven repayment and loan forgiveness programs. You can’t reverse the process, so avoid refinancing your federal loans if you want to keep these borrower protections.
10. Not researching loan forgiveness or repayment assistance programs
You’re not necessarily on your own when it comes to paying back your student loans. Depending on your career and employer, you might qualify for a loan forgiveness or repayment assistance program.
The Public Service Loan Forgiveness program, for example, offers federal loan forgiveness after 10 years of working in public service. Teacher Loan Forgiveness forgives up to $17,500 for qualifying teachers after five years.
Many states and some schools also have loan repayment assistance programs for certain professionals. These often require you to work in a shortage area for a few years in exchange for help paying off your loans.
Researching these options early can help you make a more informed choice about your post-graduation career plans and approach to repayment.
11. Waiting until graduation to make a repayment plan
Payments may not be due right away after graduation, but don’t wait until the last minute to make a repayment plan. Before your grace period ends, take some time to review your balances, identify your loan servicer, and compare your repayment plan options.
If you have federal student loans, you can use the federal Repayment Plan Calculator to compare payments and interest costs on different plans. If you have private student loans, you likely chose a term when you borrowed, often between five and 15 years.
You can use an online student loan calculator to estimate your payments and consider how you’ll work them into your budget. Federal loans and some private student loans also qualify for deferment or forbearance if you run into financial hardship, go back to school, or have another qualifying reason.
Make a plan before you borrow
Student loans can be a useful financing tool, but your borrowing decisions can affect your finances for years after you graduate. Before you take out a loan, explore other sources of funding, like savings, grants, and scholarships. Estimate how much you need to borrow, and make sure you understand your interest rate and repayment terms. By taking these steps now, you can avoid taking on too much and help make your payments easier to manage in the years to come.
