The Most Common Mistakes When Borrowing Student Loans

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Bethany McCamish

By Bethany McCamish

January 8, 2019

Not all student loans are created equal. Some student loans have advantages and some have disadvantages. Avoid these common mistakes that have cost consequences when borrowing a student loan. Understand your borrowing options and do your research before taking on student loan debt.

Before even considering taking out a student loan make sure you have considered alternative options for college and exhausted all avenues for free funds. Many students get enthralled by a specific school they want to attend and make these mistakes:

Overlooking State or Community Colleges. Out-of-state and private college tuition can be expensive and can cause students to take on too much student loan debt. Before enrolling in an out-of-state school consider the cost difference and how that will affect your finances.

Not Exhausting all Free Funds. Most students know that they need to file the FAFSA. Filling out the FAFSA is how students can qualify for grants (free money), scholarships, and a chance to participate in a work-study program.

However, a huge mistake is not looking for additional funds after receiving your financial aid award letter. Scholarships abound for every odd interest (not just sports) and some require as little as an online application. Search for private scholarships in addition to what the government has given you. Check out our Guide to Scholarships for College.

Thinking it is Good Debt. Student loan debt is not like other forms of debt. Student loans are generally not dischargeable in bankruptcy. Nor can you return your education back for a refund if you do not graduate or your career doesn’t work out. Even if education debt is good debt, too much of a good thing can hurt you. This is debt that should be taken seriously and is a main priority for paying back.

See also: How to Pay for College without Student Loan Debt

If you have still decided that taking out a student loan is a necessity for your education, then enter into the agreement knowing to avoid these mistakes:

Borrowing Too Much Money. Your ability to repay your student loans will depend on your future salary. If you borrow more money than you will be able to pay back based on your career choice, it can keep you in debt for decades. Don’t borrow more money than you need to pay for college costs. It may be tempting to borrow for hobbies or adventures, but student loans are not free money. You will have to pay back the student loans, with interest that can double the cost of the debt.

Borrowing Private Loans before Federal Loans. Private student loans are not as forgiving as federal student loans. Private student loans require a full credit underwriting process and offer fewer borrower protections such as income-driven repayment than do federal student loans. Federal student loans offer potential for subsidized loans, more generous options to pause payments, options to make payments based on your income, and even potential forgiveness programs.

Private student loans should be borrowed only if all federal student loan options have been taken and you still need more money. Even so, needing to borrow private student loans may be a sign that you’re borrowing too much money.

Not Looking for Subsidized Federal Loans. Subsidized loans are offered as part of the financial aid package. If you qualify for subsidized Federal Direct Stafford Loans, these are among the best student loans. The U.S. Department of Education pays the interest on subsidized loans while you are in school. This is better than unsubsidized loans where interest starts accruing as soon as the loan is disbursed.

Misunderstanding Fixed versus Variable Interest Rates. The interest rate affects the overall cost of the loan. Fixed interest rates stay the same throughout the life of the loan. Variable interest rates can change and may increase over the life of the loan. With a variable interest rate loan, your monthly payments will fluctuate.

Cosigning a Loan. Cosigning a loan is a risk for the cosigner, but it is also a risk for the student borrower. Cosigning can cause friction within the relationship, especially if you are unable to repay the debt. Never seek a cosigner as a way of avoiding responsibility for repaying a student loan.

Not Making Payments on the Student Loan while in School. If you have taken a private student loan or any unsubsidized federal loans, interest is accumulating while you are in school. If you ignore this interest, it can result in capitalized interest when you enter repayment on the debt. Interest capitalization means the unpaid interest will be added to the principal balance. This can increase the amount of debt by as much as a fifth. The best way to avoid capitalized interest is to pay the interest that accrues while you are in school.

Losing Track of Student Loans. School can be a busy time. However, losing track of your student loans can cost you in more ways than one. In order to have control over your finances and ensure you can afford to pay your loans back you need to know the type of loans and how much you have borrowed thus far.

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