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The school year is quickly approaching and if you or your student are going to college in the fall, you will probably spend much of this summer analyzing your finances. How will you pay the tuition? What about housing, supplies and books?
Both federal and private student loans It can be helpful, but for new students it can also be quite complicated.
Want to make sure your student loan application process is a success? Make sure you avoid these mistakes that many people make when borrowing money for school.
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4 Big Student Loan Mistakes Experts Say to Avoid
Here are the four Experts say mistakes should not be made.
Not maxing out your federal loans first
Federal student loans should always be your first line of defense. Not only do they have lower interest rates than private student loans, but they also offer more repayment options, which can come in handy if you find yourself in financial straits later on.
“Always start with federal student loans in the student’s name first,” says Angela Colatriano, marketing director for College Ave. “If you still have a gap to fill, that’s when private student loans could come into play.”
Federal loans also don’t charge interest while you’re in school, and they may be easier to qualify for since they’re not based on credit.
“Federal loans do not require a credit check or endorsement, making them more accessible to a broader range of students, including those who do not have an established credit history,” says Joel Bauman, senior vice president of enrollment management at Duquesne. University.
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Don’t think about the future
Thinking only about the here and now is also a big mistake, experts say. For one, you need to consider how your loans could affect your (or your family’s) future finances.
“Taking out a student loan, whether private or federal, will impact a family’s credit and ability to do other credit-related activities, such as getting or refinancing a mortgage,” says Jack Wang, wealth and financial aid advisor at Innovative Advisory Group. “Especially with federal loans, since there’s really no income test. Low-income families can borrow large amounts and then not be able to pay back the loan when the student graduates.”
That’s another future problem to think about: over-indebtedness. If you borrow more than you really need, it could mean financial problems, or even a loan default, down the road.
“Borrowing more than necessary, especially for non-essential or lifestyle-related expenses, can lead to significant financial strain after graduation,” Bauman says.
Waiting too long to make payments
You won’t need to make federal loan payments while you’re in school, and many private student loans also offer grace periods. But this doesn’t mean you should take them out, at least not if you don’t absolutely have to.
If you can add a little to your monthly payment, or even make occasional extra payments on your loan after you graduate (like when you receive your tax refund or other windfall), it can make a big difference.
“When borrowers can pay more on their loans, they should,” says Stacey MacPhetres, senior director of education finance at Bright Horizons.
Just make sure the lender applies it to your principal balance rather than holding it until the next payment date, he says.
“Paying off some of the principal can reduce the total repayment time and the total interest paid over the life of the loan,” MacPhetres says.
Skipping payments when you are in financial trouble
If you find yourself in financial trouble, it may be tempting to skip your student loan payments — but that can damage your credit and seriously limit your future financial options.
Your best option is to be open and contact your lender as soon as you think you may have trouble making payments.
“Contact your loan servicer immediately to see what options are available to you,” says Colatriano. “Don’t ignore the problem.”
Some lenders offer options like deferment or forbearance, or with federal loans, you can opt for an income-based repayment plan. These allow you to base your monthly payment on the amount of income you have.
The bottom line
Both federal and private student loans can help finance your education, but it’s important to understand how they work and what they mean for your finances in the future. Exhaust your federal options first and then, if you need additional funds, turn to private student loanswhich can fill any gaps. Be sure to compare lenders as well, as Requirementsrates, feeRepayment terms and other factors can vary widely from company to company.
