Studying can be expensive. You have to pay your tuition, pay rent for your dorm, and live on your own for the first time in your life. And while it’s an exciting time in almost everyone’s life, it could be quite expensive, too. To make ends meet during college, most students rely on student loans. As tuition is costly and most people don’t have the time to work and study full-time, a student loan is many students’ savior in the pursuit of a degree.
Though, while a student loan can help you get a degree, it could cause a lot of headaches and stress, if not managed right. We see many students make the same 5 mistakes time and time again, and we want to make sure you don’t have to anymore. The less you owe when you graduate and the better you manage your debt during and after your studies, the easier it’ll be for you to focus on the things in life that matter. Because being able to build wealth, buy a house if you want to, and live a financially stress-free life, is a way cooler prospect than having to deal with student loans, right?
To help you make your life a little easier, in this article, we’ll go over the 5 most common student loan mistakes we see students make. We have categorized these mistakes chronologically. We start with mistakes to avoid while you’re applying for a student loan. Then we’ll move on to what not to do while you’re in college. And we end the article by talking about what actions you want to avoid while you’re in your repayment period.
And don’t worry, we’ll not only tell you exactly what they are but also how you can avoid these mistakes. Preparation now can save you a lot of time, money, and headaches in the long run, so you might want to pay attention here. Ready? Let’s dive in!
[To keep in mind while you’re applying for a student loan]
1. Taking out a private student loan right away
If you’re applying for a student loan, many students go to their bank right away. But, it’s a good option to first explore your options for getting a scholarship, government aid, or a federal loan, instead of a loan from a bank or other private lender. The first step is to fill out the Free Application for Federal Student Aid (FAFSA), as this unlocks federal student aid, including grants, scholarships and federal student loans.
Getting your Federal Direct student loans from the government will almost always win from a private loan in terms of the interest rate and your number of repayment options. Plus, if you go into a qualifying field, the government may even grant you student loan forgiveness! Another potential benefit of a federal student loan is that federal loans typically don’t require your parents to put their finances on the line as cosigners-something many private loan providers insist upon.
If you’ve exhausted your options for scholarships, federal student aid (such as grants and work-study), and federal student loans, then it might be a good time to explore private student loans. Remember if you need to borrow, always start with federal student loans in the student’s name first in most situations.
2. Not getting the right payment plan
Another mistake we see a lot of students make is that they’re not choosing the right repayment plan. Sure, we get it. Going with the repayment plan with the lowest monthly payment is tempting. But, this also means that this repayment plan has the longest repayment period, meaning that you’ll potentially pay a lot more in interest in the long run.
The best way to get the cheapest student loan possible (meaning that you’ll pay the least amount of money in interest and fees), is to opt for the highest repayment amount you can afford each month. This may sound counterintuitive, but the higher the repayment amount, the shorter the repayment period, the lower the total amount of interest you’ll probably pay on the loan.
How much of your income should you use to pay back your student loans? Experts often recommend using no more than 10% of your monthly gross income to pay back your student loans. If your loan payments are higher than the “10%-rule”, you may find it difficult to make your student loan payment each month. Apart from hurting you financially, this may give rise to a series of other issues which you want to avoid.
Here’s an example. Let’s say you’re in university to be an engineer, and you’re expected starting annual gross income is $42,000. This means your monthly gross income is $42,000 / 12 = $3,500. Taking 10% of this monthly gross income equates to $350. Based on the “10%-rule”, this is your maximum monthly student loan payment. Student loan calculators that allow you to estimate interest rate and amount borrowed are a great place to start and get a sense of what your monthly student loan payment could be when you graduate.
[The mistake to avoid while you’re in university or college]
3. Using student loan money on random stuff
Spending your student loans on an education is good value for money. The lessons you’ll learn and the diploma will be with you forever, opening new doors you wouldn’t think existed. Hence, using your student loan money for necessary things like your tuition, rent, and food, could be classified as good debt.
However, we see way too many students splurge their student loan money on random stuff like spring break, the latest iPhone, or a new pair of sneakers. In 15 years’ time, when you’re still in the midst of paying off your student loans, you won’t have anything to show for these purchases… So why splurge on them today?
Try to be tactful about what you’re going to spend your student loan money on. Think to yourself, will I have anything to show for this purchase in 15 years’ time? Will this aid my future career? Or is it just a fleeting want that I want to satisfy? Be honest.
And if you find that you receive a higher loan amount than you need to survive in college or university, try to save or invest that excess cash. That way you will not lose too much of those loans, and you can use the interest you earn on your savings or investments as extra payments on the loan!
For your everyday purchases, instead of using your student loan money, use the new Ambition Student Card – which is built specifically for students. What I love about this card is that it doesn’t require a credit check to qualify, no interest or late fees, and you’ll get cash back on items from textbooks to take out. Plus, you’ll build your credit history, which may come in handy if you ever want to buy a house or get a car loan. Now that’s being smart with money!
[What not to do while you’re in your student loan repayment period]
4. Not making payments on time
Many ex-students have missed one month’s student loan payment. They’ll say “I’ll double my payment next month!”, but unfortunately, more often than not, this won’t happen. In fact, after the pandemic-induced payment pause ended, more than half of 43 million Americans (6 out of every 10) with student loan debt have missed a payment.
Sure, things like this may happen. But every missed or late payment will be marked on your credit report, potentially lowering your credit score. This mark may stay on your credit report for years to come, affecting your ability to take out other loans, such as a mortgage or car loan.
Before you even take out a loan, you want to make sure you can handle the monthly payment. To ensure this, keep the 10%-rule in mind, and include repaying your student in your monthly budget. If you are already in your repayment phase and struggle to make your monthly payment, you should talk with your lender immediately about a potential solution. They might be willing to adjust your payment terms if that means you won’t skip any monthly payments.
5. Not taking refinancing seriously
Another mistake we see a lot of students make is that they don’t take refinancing seriously. It’s powerful, as refinancing your student loans has the potential to save you 100s to 1,000s of dollars-if you’re able to get favorable terms on the new loan, of course. Hence, ignoring potentially refinancing your debt could be a costly mistake.
If, for whatever reason, interest rates drop significantly, it could be lucrative to refinance your student loans. You’ll take out a new loan at favorable terms, pay off your old loan in full with that money, and repay the new loan at a lower interest rate. Easy.
What you could do as well, is consolidate your student loans into one loan, if you have taken out multiple loans with multiple lenders. This also has the potential of lowering your monthly payment and reducing the total amount of interest and fees you’ll pay. Plus, it has the added benefit of leaving you with a debt that’s easier to manage, since you now have only one creditor to answer to.
Please keep in mind that taking out a new loan may have repercussions for your credit score. Hence, if you’re currently in the market for a house or a new car, or need your stellar credit score for any other reason, it might not be a good idea to refinance your student loans.
And to add to that, if you have a federal student loan, refinancing may mean exchanging your federal debt for a private debt. This may result in you losing the benefits you enjoy from having federal student loans, such as an income-based repayment plan, potential loan forgiveness, and other financial protections.
Let’s make those student loans work for us, not the other way around!
In this article, we’ve listed the 5 most common student loan mistakes and how to avoid them. Did you know about these mistakes? Or have you made one or more of them in the past? We sure hope that by reading this article, you’ve gained the knowledge to fix the mistakes you’ve been making or prevent you from making them altogether!
When applying for student loans, first explore scholarships and federal student aid. Maybe you don’t need a student loan at all. And if you need one, start with getting a loan from the government. And, if you’re going to take out a student loan, make sure you get the repayment plan that’s right for you, as this might save you a lot of money in interest payments over time.
While you’re in college or university, please use your student loans for necessary stuff like tuition, books, and rent. Don’t buy random stuff you will get nothing to show for in 15 years time (how tempting it may be), as this may cost you a lot of unnecessary money in the long run.
After you’ve got your degree and you’re in your repayment period, make sure you don’t miss any payments. Straightforward, yes. But extremely important to remember. Work those student loan payments in to your budget, stick to it, and you’re golden. And don’t sleep on refinancing options, as this has the potential to save you plenty of money in the long run. Let’s make those student loans work for us, not the other way around!
