The great student loan debate is perhaps one of the most contentious in the country. While most students agree that borrowing money through student loans is the only way they can afford to pay for college, many find that it is quite an onerous burden to repay those loans upon graduation. While New York State is testing its unique solution of providing free tuition at its public two- and four-year colleges in exchange for academic progress and post-graduation residency, students in other states have to deal with the current borrowing situation as it stands.
Solutions for Student Loan Mistakes
Unless the Department of Education comes up with new student loan lending and repayment guidelines, here are some student loan mistakes that can get students and grads into trouble, and some recommendations for what you can do differently:
Mistake: Assuming that you have to accept the student loan offer as outlined in your school’s financial aid package.
Solution: Stop assuming, and realize exactly what you are getting yourself into for the future. Understand your financial aid offers, compare colleges carefully, and don’t just borrow what is listed in your letter. You and your parents will be committing yourselves to 10 to 30 years of repayment, so use the federal student loan repayment estimator to find out exactly what that entails. If you can find money through other sources, do that first, and then borrow less than what is offered.
Mistake: Looking at student loan money as a kind of “slush fund” to use on random college expenses.
Solution: After making the first mistake and over-borrowing, students then go on to compound this error by wantonly spending the money they receive. Although it is a good investment to use these funds on tuition, room and board, and proper college-related expenses, many choose to make a bad investment and use it for daily living and entertainment costs. They don’t realize that interest is accruing on all that money and that the seemingly innocent $100 spent on a night of fun now can end up costing hundreds of dollars in the future. Make a strict budget, stick to it, and find other ways to get money for those miscellaneous out-of-pocket expenses.
Mistake: Sticking your head in the student loan quicksand after graduation.
Solution: Following four to six years, or more, of carefree living, students finally graduate and proceed to start claiming life’s rewards. Perhaps they take any graduation gifts they receive and buy a nice car or enjoy a great vacation before really settling into the task of finding a job. After about six months they receive a rude awakening when the payment due notices start arriving and they have no payment plan in place. One of the first tasks after graduation is to tackle student loan debt. Find out exactly how much money you have borrowed, who your loan servicers are, and what your monthly payments will be.
More Money Going Out Than Coming In
Save some of that graduation money to make payments while you are searching for your post-college job. Once you can project your income and living expenses, compare them with the amount you owe. If you have more money going out than coming in, you need to contact your loan servicers immediately to discuss alternative repayment plans or possible loan consolidation. It’s too late to wait until the bills start coming in, because your debt will keep growing, along with late fees and extra interest charges, while you try to work out a payment solution.
The Biggest Mistake
The biggest mistake is waiting too long to take any post-graduation action. Young adults in their first months of handling their own financial situation may not realize how quickly they are getting themselves into a deep financial hole. They miss a payment or two, figuring that it is no big deal, and don’t take any action to address the situation. That is when things really start to get out of hand and they end up facing a situation where they owe more money than they can realistically expect to repay. Student loans are great support, but think before you borrow.