Editor’s Note: In Part IV of our Financial Illiteracy series we point out the costly student loan mistakes students and their parents make.
1. Taking out student loans in the first place
Too many student and parents are not diligently looking for other means to help them pay for their higher education. The first thing you should do is fill out a FAFSA. They can be difficult to understand, though it’s possible that this could be changing soon.
Parents and future students should investigate 529 savings accounts, local civic organizations that provide aid to good students, ROTC options, and more. Go to your high school guidance counselor, explore the web, and hit up the local library for scholarship-based databases. There are some very weird scholarships, too, that almost anyone can apply for.
The point is, a variety of ways to help pay for college are available. Don’t just rely on college loans, because you could end up joining those Americans that owe $1.16 trillion on student loans.
2. Not knowing what your monthly payments will be
It’s crazy, but students and parents accept loans without ever inquiring how much their monthly payments will total. Would you buy a car and just walk out of the showroom without knowing your monthly payment? It’s no wonder so many graduates are floored by the amount they owe each month.
Use one of these calculators to figure out what you’ll owe, because like it or not, you’ll have to pay back your loan unless you qualify for a student loan forgiveness program. But that’s not something you should count on. Check out this Debt.com source for any student loan questions you may have.
3. (Not) paying interest while you’re in school
If you take out an unsubsidized loan, the interest starts adding up the moment your loan is disbursed. That interest won’t stop accruing until you pay off the loan. Where does the interest go? It’s added on to your principal, which is the total balance you owe.
That’s not the case with subsidized loans, which are based on financial need and don’t start gathering interest until you’re done with school. Get all you can of these before turning to unsubsidized loans, and you won’t have to worry about interest until later.
But when you ignore your unsubsidized loans for four or more years, the principal quietly grows. A $10,000 loan could realistically end up being a $12,000 loan after graduation, so make sure you find out the interest rate on your loan before signing up for one. If for some reason you can’t make interest payments while attending school at least you’ll know how much more money you’ll owe, though that’s not much of a consolation.
4. Refusing to work while in school
One way to solve the interest problem is getting a part-time job. Restaurants are always looking for part-time help. Many colleges also have job boards. Ask your college counselor about the availability of jobs on campus and off. Once you have a job, you can pay off the interest on your loan each month and build credit.
Students who work part-time and pay off debt will start establishing a credit history. That credit history is what creditors look at when they’re deciding on whether or not you qualify for a loan or credit card after college. It’s really a bonus. You earn a degree and, at the same time, develop strong credit, along with better time-management skills.
5. Ignoring student loan basics
Students must fully understand what these loans entail — things like how much they’re borrowing each year, the type of loans, the interest rates, when to contact their loan servicer, and the types of repayment plans. It’s a pain in the butt. But it’s necessary.
Once the student graduates and the repayment process begins, many act stunned and angry. Paying back a loan is the cost of borrowing. It’s the same as a car loan, mortgage or private loan. You pay back what you borrow, with interest. Don’t ignore the basics.
We hope this information is helpful and you’ll put it to good use. Don’t forget to check out our last installment of Financial Illiteracy month next week.