The 6 Worst Student Loan Mistakes You Can Make

The 6 Worst Student Loan Mistakes You Can Make

Student loans are a bad idea for everyone. But they’re often a necessary evil. For many borrowers, a loan is the only way to pay for college, which, despite some recent debate, is still the best way to get a good job and a fulfilling career. Still, there are smart and not-so-smart ways to borrow money.

Here are six big mistakes to avoid when it comes to student loans, both before you get the money and after you have to start paying it back.

1. Making a false application

The first mistake you can make is to lie on your loan application. If you lie on your financial aid application, you’ll lose your loan and have to pay fines. You could also be charged with fraud and sent to prison, where you’ll get a free education but probably not the prestigious degree you were hoping for.

Spending money on things that you don’t need

Getting a loan to pay for an education that will help you for the rest of your life is a good use of debt. Taking out a loan to buy the newest phone or 4K Ultra HD TV, which will be out of date before you finish paying it off, is a very bad idea.

You’re only human, so it’s fine to treat yourself once in a while, but mortgaging your future to pay for the fleeting pleasures of today is a bad way to handle your money. It shows that you don’t know the difference between needs and wants, or that you don’t want to make the hard choices.

In other words, if you use these funds, think about tuition, not treats; set aside money for books, not alcohol. And if you get a loan for more than you need to live, put the extra money in a savings account with the highest interest rate you can find and use it to start paying back your loans when you graduate. Or, see if you can use the money to pay the loan’s interest while you are still in school.

3. Picking the Wrong Plan to Pay Back

It can be tempting to choose the plan with the smallest monthly payment. But the plan with the lowest monthly payment also has the longest time to pay off the loan, which means you will pay more interest overall. Income-based or “Pay As You Earn” plans sound great—who wouldn’t want 25 years instead of 10 to pay off a debt?—but they end up costing you more in the long run. Basically, you should choose to pay the most each month that you can.

Then what is it? Some experts say that the amount you pay each month on your student loans shouldn’t be more than 10% of what you expect to make. Start by figuring out your monthly loan payments, including interest, based on a 10-year repayment plan, which is usually the norm.

If your loan payments will be more than 10% of your pay, which is possible since most starting salaries aren’t that high, you might want to think about a longer, cheaper program. But promise yourself that you’ll look again if and when your finances get better.

4. Forgetting to refinance

Speaking of taking another look, if there’s been a significant drop in interest rates, look into refinancing your loan. A rate that was competitive a few years ago might be a bit high now. On the other hand, if you have more than one loan, consolidating them can lower your monthly payment and the total amount of interest you’ll have to pay.

Of course, interest rates and loan terms can vary considerably among lenders. Make sure you compare carefully and do the math to make sure you are getting a better deal. If you have a federal student loan, remember that when you refinance, you are exchanging it for a private loan. That means you will no longer be able to use the federal loan program or get your loan paid off based on your income. But you might not be able to do those things anyway.

Even if you can’t refinance the entire loan, it’s not against the law to make an extra payment from time to time or to pay more than the minimum amount each month. Even small things can add up and shorten the time you have to pay back your loan. Just make sure that your student loan servicer applies the extra payment or amount to your principal balance and not just to your next month’s payment. This will affect the interest.

5. Not paying on time

Many a student has bounced a payment with the idea of paying double the next month. That’s a big no-no. Every missed or late payment is a black mark on your credit report that’ll ding your credit score, whether you make up that payment or not. And it can stay on your credit report for a long time, making it hard for you to get loans in the future.