College is an exciting time for any teenager. Graduating high school marks the beginning of the somewhat turbulent (but equally exciting) transition into adulthood. It’s a time of undertaking the studies that will guide them in their career. Unfortunately, there are many missteps that can occur before they even set foot on a college campus, and many of them have to do with student loans.
If you are a student or the parent of a student, here are 5 mistakes to avoid when taking out student loans.
1. Spending More Than You Need
Sometimes you receive more than you actually need for your student loans. It may be tempting to run off and spend that money on frivolous things. If you can resist that temptation, put it away in a savings account and let it accrue interest. One day, you will have to start re-paying that loan with interest. Do you really want to pay interest on the bar tabs and lattes that you bought with that extra money?
Instead, let it gain interest and use it t make payments on the loan once you have to begin repaying. In the long run, this will be most beneficial for your financial future.
2. Lying On Applications
No matter whether you took out a private loan or applied for a student loan using the FAFSA (Free Application for Federal Student Aid), you can’t lie on your application. There are consequences, some of them potentially severe. You could have your loan revoked, be kicked out of school and even brought up on charges of fraud. If you are found guilty of fraud, that could mean jail time and a big blemish on your record that never goes away and could also affect you when applying for jobs. Always be honest on your application and you won’t have to worry about any of this.
3. Borrowing Too Much
It is easy to keep taking out loan after loan while you are still in school. As long as you are still in school, you don’t have to repay them. Before taking out another loan, you should consider that your student loan expenses each month should be no more than 10% of your total income.
Though it is impossible to know exactly what your salary will be six months after graduation (when many student loan repayment schedules kick in), you have to try and estimate based on current entry-level salaries for your degree.Compare 10% of that to what your loan payments would be and see if you are already over the limit. If you are, you could be in danger of defaulting later because you can’t afford to repay the huge monthly installments.
4. Private Loans
Private loans should only be taken out if you have no other recourse. This is because private loans can be much more expensive than federal loans you can obtain using the FAFSA.
The interest rates can not only be higher, they may be adjustable, which means that the rate can balloon at any time. The repayment schedule may not have a grace period after graduation, meaning you may owe before you even get a job.
5. High Interest Rate
When applying for a student loan, many things are taken into consideration. Credit history is one of them. If your credit has already taken a hit, your interest rate may be higher than most. Also be aware that if you miss a pay mentor are late with one, your interest rate can also balloon, making the total amount you owe much larger. Look for favorable interest rates and be sure never to be late with a payment if you can possibly help it.