A student loan is often the very first loan that many of us take out. And it can often be quite a big loan – per borrower, the average student loan is about $37,853.
Of course, such a loan is often necessary in order to afford higher education. Most of us aren’t lucky enough to have savings set aside for us and cannot obtain a scholarship. A loan is our only option.
Taking out a student loan can be a little confusing – especially for those of us with no experience of loans. There are different loan options, eligibility criteria and repayment methods to get our head around. Understanding these is key to getting the most out of your loan and avoiding penalties. Below are just some of the most common student loan mistakes to avoid.
Not knowing the difference between a federal and private loan
Federal student loans are given out by the government, while private student loans are given out by private lenders. Federal loans tend to be more popular and can be the default option for many people, but there are times when a private loan may actually be better suited.
When you apply for a federal loan, the amount you are able to receive is based on your income. Some people are only eligible for a small amount of funding, which does not cover much of their tuition fees. This is where college loans from private lenders can come in use – many people use them to cover tuition fee costs that aren’t covered by a federal loan.
However, private loans have their downsides. They can often have higher interest rates, less flexible repayment methods and cannot be forgiven (one of the biggest benefits of federal loans is that they can be written off after 10 years, providing you have been contributing the minimum monthly repayment required for your income).
Lying on your federal student aid application
Not everyone is eligible for a federal student loan – you could be rejected if you’re not a US citizen, have a criminal record, are not getting certain grades or have enrolled for an academic program that is not covered by federal student aid. Some people are also only eligible for a small amount of funding due to coming from a high income background. As a result, this can tempt some applicants into lying in order to be approved or receive a larger loan.
Lying on a federal student loan application is definitely not advised as it can have serious negative consequences. You could be heavily fined and in some cases could even be sentenced to prison for fraud. Your student finance will also be cut off, and your college may suspend or expel you if they find out you’ve been fraudulently approved for finance.
Choosing the wrong repayment method
It’s important to consider the repayment terms of the loan that you’re taking out. Do you have to start paying it back immediately, or do you not have to pay it back until you’ve graduated? Will repayments be based on your income or a flat fee? How long will the term be, and will you be able to get your loan forgiven?
With federal loans, you have the option to pay them back after you’ve graduated, and can pay repayments based on your income with the option of your loan being forgiven after 10 years. Not all private loans will offer this flexibility – it’s vital that you carefully consider the repayment terms when taking out one of these loans so that you’re not having to make repayments that you cannot afford.
Using your student loan to pay for non-education-related expenses
Federal and private student loans are typically sent directly to the college to cover tuition fees. You usually cannot claim more than your tuition fees are worth when taking out a federal loan. However, when taking out a private student loan, it is possible to apply for more than your tuition fees are worth. The remaining money gets sent to your bank account. However, this money must be spent on agreed education-related expenses – such as books or equipment (such as a laptop).
Using your student loan to pay for things that aren’t related to education is something you must avoid. If you need that money to pay for books and equipment for your studies, it could leave you unable to pay for these supplies. Some lenders may also include terms in the contract that result in extra interest fees or even cancellation of the loan if it is discovered that you used your loan for other expenses.
Not keeping up with loan repayments
Once you become eligible to start paying back your student loan, it’s essential that you keep up with repayments. Failing to keep up with payments could result in harm to your credit score. Some private lenders may also charge late payment charges, while federal loans in arrears will not be eligible to be forgiven after the 10 year period. Continuously fall behind on repayments, and you could even be visited by debt collectors or be sent to court.
Know in advance how much you are expected to pay each month and keep a tight monthly budget in order to afford repayments. Try to prioritise your student loan repayments as much as you can. Obviously, rent/mortgage and utility bills should still come first. However, student loan repayments should be prioritised ahead of other debt repayments if possible.
Overlooking the option to refinance
If you find that repayments are too hard to keep up with or you cannot budget repayments due to variable interest fees, consider whether you may be able to refinance your student loan in order to make it more affordable and easier to manage. This is something that a lot of post-graduate students overlook.
It might be possible to take out a loan with lower fixed interest fees if you’re currently paying off a loan with high variable fees. Meanwhile, if monthly repayments are too high, it’s possible that you may be able to take out a new loan over a longer term with smaller monthly repayments (just be wary that this could come with extra interest). This guide delves more into how to refinance a student loan.
Assuming federal student loan forgiveness is automatic
Federal student loans can often be forgiven after a 10 year term – providing you have been keeping up with the repayments based on your income. However, what a lot of people don’t realize is that student loans are not automatically forgiven after this period. Instead, you must apply for forgiveness through the Federal Student Aid website. There is a form that can allow you to do this.
It’s worth noting that there are other scenarios where you may have your student loan forgiven. It is worth doing your research to find out if you are eligible to have your loan repayments cancelled – you don’t want to be continuing to pay a loan when you’re not entitled to keep paying it.
Conclusion
By not making the above mistakes, you can avoid paying more than is necessary towards your student loans. Choosing the right loan, using the funds correctly and exploring the best ways to pay it back will help you to avoid penalties and excess fees. You can find plenty more information about student loans online. Make sure to do your research before applying for a loan if you are still unsure of certain aspects. There are free student loan advice resources that could be worth exploring.