The 10 Biggest Student Loan Mistakes You Can Make

FT Contributor  | 

Loans are an essential part of many a student’s academic journeys. However, you should be careful about borrowing money in large quantities because it can have significant negative effects on your financial future.

Here are 10 of the biggest mistakes you can make with student loans, from the first decisions when taking out a loan on through to your last payment.

1. Falsifying Your Loan Application

Typically you must fill out an application for a student loan, such as the FAFSA (Free Application for Federal Student Aid). Lieing on your loan application is one of the first major missteps you could take.

Falsifying any of the information on your application is a very bad idea. If you’re caught in the act — and this is certainly likely, as your application may be audited — you could be denied funds, charged penalties, and even sentenced to prison. Every one of these consequences is significant enough to make falsified information a very big student loan red flag that should never be taken lightly.

2. Not Shopping Around for the Best Rates

It’s important to take the time and consider your student loan options. Student loans are not minor financial expenses. Often individual loans can be in the thousands and even the tens of thousands of dollars range. If you want to gain some additional perspective, the collective student debt for Americans alone is around $1.5 trillion. The point is, this isn’t a minor expense in either the short or the long term.

Shop around and get quotes on the various interest rates available before you take out a loan. Even a difference of half of a percentage point can save you hundreds and possibly even thousands of dollars over the course of your loan.

3. Borrowing More Than You Need

Borrowing money — especially with interest — should always be a last-case scenario. That said, it’s important that you never borrow more than you need, or you’ll end up paying unnecessary interest on money you never even used.

It would be the same as if you bought two cars, with two car payments, and let one sit in the driveway all the time. Your unspent borrowed money will be an expense as it sits unused in your bank account. Instead, borrow precisely what you need and not a penny more by calculating your essential expenses ahead of time.

4. Misusing Your Loan Funds

Student loans should be used for your education. This includes:

  • Your tuition.
  • Your textbooks.
  • Your housing and meal plans.
  • Your transportation.
  • Other basic living expenses while in college.

Note that this doesn’t include non-essentials such as spring break, down payments, or impulse purchases. It’s important to avoid misusing your loan funds for unnecessary items like these, or you’ll end up paying quite a bit more in additional interest in the long run.

5. Deferring Payments Unnecessarily

Deferring loan payments is a useful tool in some circumstances. If, for instance, you’ve come under financial hardship due to an outside event that is out of your control, such as the global coronavirus shutdown, it may make sense to postpone payments for months or even a year or two.

However, if you defer payments unnecessarily, it can have some negative effects. For one thing, deferred payments will be noted on your credit score, even if they don’t officially lower it, and you will still owe every penny of your student loans once the comparatively short window of deferment ends. In other words, this grace period should only be used in emergencies.

6. Choosing the Wrong Repayment Plan

There are many different kinds of student loan repayment plans, and the particular plan you choose will have a significant impact on how much interest you end up paying. There are standard, extended, and graduated repayment plan options. In addition, multiple plans are income-driven, such as the:

While the variety of plans offers significant flexibility for each borrower, they don’t all yield the same financial savings. The duration of the loan and your monthly payments make a significant difference. While there are many options, it’s imperative that you don’t simply opt for the loan with the lowest monthly payment.

For instance, a 20-year student loan of $30,000 at the current federal student loan interest rate of 4.53% would have a $190 monthly payment, but you will ultimately spend over $15,000 dollars in additional interest if you only make minimum payments.

In contrast, a 10-year student loan for the same amount at the same interest rate would have a monthly payment of just over $310. However, you would only end up paying a little over $7,000 in interest, thus saving you over half of the interest you would have paid over the course of a 20-year loan — not to mention the 10 extra years of your life not spent making student loan payments.

7. Making Only the Minimum Payment

Having a minimum monthly payment is helpful — and you should never miss paying at least the minimum sum, even in times of financial strain. However, that doesn’t mean you should always settle for the smallest payment.

When you have financial windfalls, you should always consider paying your loans down in lump sums. This can shave large quantities of interest off of your loan and can even shorten your loan’s duration considerably.

8. Refinancing or Consolidating Unnecessarily

Consolidating and refinancing your loans could both be excellent options at times. You may have the option of refinancing to lower your interest rates and consolidating your loans can help you organize and simplify your finances.

However, if you do so unnecessarily, it can also cost you money. If, for instance, you have two separate loans that are easy to pay, and the interest rate for both loans is currently unchanged, refinancing or consolidating your loans may cost you extra money in setup fees and other costs without any viable savings in return.

9. Missing Loan Payments

If you miss a loan payment for 90 days your loan becomes delinquent thereafter. If this happens, it will begin to affect your credit score and can give you a poor credit rating. This affects your finances by potentially preventing you from getting a credit card or a cell phone, and you may not be able to take out a home or auto loan. Poor credit could also bar you from getting approved as a renter.

If you’ve missed a payment, it’s far better to ask for a deferment than to allow your account to atrophy.

10. Defaulting on Your Loans

If you’ve missed a loan payment, that’s already bad enough. However, if you allow the situation to persist and you ultimately don’t make a payment for 270 straight days, your loan will be in default.

This is devastating to your finances, as a default loan cripples your credit score and completely hamstrings your ability to borrow money. Defaulting on your student loans is a financial catastrophe that has serious short- and long-term impacts on your finances and should be avoided at all costs.

While all of these scenarios should be avoided, it doesn’t change the fact that student loans can be very useful tools for achieving an education. However, as with all borrowed money, they must always be treated with respect and used with caution.


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