Student Loans – What to Know Before You Owe

Thinking about higher education can be stressful, especially if you’re not sure how you’re going to pay for it. Student loans are an excellent option for many people. If you’re worried about going into debt or if you have other questions about how financing your education will affect your future, we’re here to help.

We want to give you all of the information we have to help you make an informed decision for your future. We’ll cover the mistakes you’ll want to avoid with student loans. We’ll also talk about lowering your interest rate, budgeting and loan refinancing, and federal versus private student loans.

Private versus Federal Student Loans

There are a few key differences between federal and private student loans. First, federal student loans come with terms and conditions that are set up by federal law [1]. The terms and conditions of these loans often include fixed interest rates, income-driven loan repayment plans, and sometimes options for loan forgiveness based on your future career.

Private student loans do not have terms and conditions that are driven by law. Terms and conditions are instead set up by the organizations that provide loans like banks, credit unions, or even state-affiliated organizations. Generally speaking, private student loans are more expensive, at least over time, than federal student loans.

Most of the time, both types of student loans do not come due until after you graduate or are no longer a full-time student. Some private student loans require you to pay while you’re still in school. You’ll want to ensure that is not the case if you plan to be a full-time student and not work while studying. Federal loans are available as subsidized loans, which means that the government will pay the interest at least partially while you’re in school. Private student loans are seldom subsidized, so you’ll be responsible for all interest, even that which is accrued while you’re in school.

In the case of both loan types, you can deduct interest from your taxes each year. Federal loans offer benefits that most private or personal loans do not, such as loan forgiveness options, zero prepayment penalties, and various repayment plan options.

Avoiding Mistakes With Student Loans

You might think a student loan is reasonably straight forward, but that’s not always true. There are common mistakes that you’ll want to avoid. We’ll go over five of the worst mistakes to help you keep your budget intact and avoid new debt.

1. Deferring Payments or Not Refinancing

Although it may be appealing to defer payments over and over while you’re starting, doing so can turn into a significant financial struggle later on. Deferring may help your credit score and your pocketbook in the short term, but long-term, it can cause your debt to balloon very quickly.

Instead of completely deferring, you may want to consider going with income-based payments where
they are available. If you have all private loans, you could consider refinancing. Refinancing your private student loans once you’ve been in the workforce for a year or two and have built up a better credit score is often quite lucrative.

If you have several private loans, you can refinance them all into one bundle with an overall lower interest rate. This business can be profitable for banks if you refinance without thinking about your budget, but it’s more likely to be valuable for you by lowering your interest rate and potentially shortening the length of your loan overall.

2. Not Applying for Student Loan Debt Forgiveness

It’s tough to qualify for student loan forgiveness, given all of the restrictions out there, but if you do qualify, you should always apply. Loan forgiveness only works for federal student loans [2], but it can still save you thousands. It can also help you avoid compounded interest if you’ve needed to use income-based repayment options or other deferments.

There are a few different types of loan forgiveness and even some ways in which loans can be
discharged or canceled through various programs. The two forgiveness programs that you’ve likely
heard of already are public service loan forgiveness [3] and teacher loan forgiveness. These programs help individuals who need lots of schooling but end up with a relatively low income.

3. Only Making Minimum Payments

This is true for personal loans as well, but choosing only to make minimum payments when it’s time to pay back your loans can hurt you in the long run. It’s best to ensure your budget will allow you to pay at least slightly more [4] than the minimum payment or to make a double payment once a year to avoid paying more interest than necessary on your loan.

It’s especially easy for student loan interest to accumulate since students often defer them while they are still in school. You’ll want to be conscious of not allowing that interest to compound further by paying minimum payments, especially if you’re already utilizing tools like income-based payments with your loans, which will draw out there length anyway.

You can also work on lowering your interest rates by increasing your credit score while you’re still in school and then eventually refinancing private loans with high interest rates. It’s generally not in your best interest to refinance federal loans, as these already come with ultra-low rates and have terms that are nearly unbeatable in the private sector.

4. Not Knowing How Much You Owe or What Loans You Have

When budgeting for any expense, you’ll need to know what you’re already spending or how much you
owe or will eventually owe, and it’s no different with student loans. If you don’t know that you already owe $10,000 after your freshman year of school, then you may be tempted to take out unnecessary loans, or you may stop seeking financial aid.

When you know what you already owe, it can help encourage you to seek out alternative ways to pay for supplies like textbooks. It can also keep you realistic when you’re looking into financial aid options and keep you motivated to apply for more scholarships or grants.
If you’d like to know how much you owe, you can visit the National Student Loan Data System [5] website, which will show you how much you owe in federal loans. You can also check your credit score to find out how much you owe overall. Doing so will show you both private and federal loans in your name, and there are plenty of free resources available online.

5. Not Paying Back Your Loans

Student loans are your responsibility as soon as they are paid out to your school. That means that you’ll need to pay them back as soon as they come due, which is often only a few months after you graduate. Understanding that having too many open loans and not enough good credit from other sources could be hurting your credit scores right off the bat.

Bad credit has many consequences, but one that has become a problem more recently is its ability to stop you from getting a job you’ll love. Companies have used background check technologies for years, but more recently, many large organizations also check the credit of candidates during the interview process.

If your loans are hurting your credit, they could stop you from getting the job of your dreams. Because of this, you’ll need to ensure that you budget to pay back your loans as soon as they come due, and you’ll also want to work to increase your credit using other means while you’re in school.

Conclusion

Student loans can be confusing to apply for and even more confusing to pay back. We hope that the information we’ve provided here will help you to wrap your mind around the idea of student loans as you prepare to apply for, defer, or pay them.

Another tip: you should always ensure that you have an emergency fund set up in your savings when you graduate and as you begin your career to back you up in case you find yourself unable to pay your loans for a month or two. You can also build this fund over time and eventually use a portion of it to make a large lump sum payment on your loans to lower your total interest.

Utilize the resources we’ve provided, family or friends who have gone through the process in the past, government websites, and your school to help you make the best loan choices for your future. We wish you luck as you head into the adventure of college life, and hope these tips will help make the student loan process a little bit easier.

Student debt has grown to become a major concern, and the following statistics might surprise you.

student loans Infographic

Article References:

[1] https://studentaid.ed.gov/sa/types/loans/federal-vs-private
[2] https://studentaid.ed.gov/sa/repay-loans/forgiveness-cancellation
[3] https://studentaid.ed.gov/sa/repay-loans/forgiveness-cancellation/public-service
[4] https://www.forbes.com/sites/zackfriedman/2019/09/27/student-loan-mistakes-avoid/#6e242d997f6b
[5] https://nslds.ed.gov/nslds/nslds_SA/