Posted on: June 23, 2022
When you take out student loans, there’s a good chance they will impact your financial life for years. There are many choices you make before you take them out and as you pay them off that can make your financial future easier or harder to digest.
Here are eight common pitfalls to avoid when it comes to taking out, managing, and paying back student loans.
- Not taking advantage of tuition reimbursement or tuition assistance. More employers are offering programs to help employees attain degrees or certifications by reimbursing partial expenses or even paying the full costs for your education. Check with your employer to see if they offer benefits that reduce the amount of education debt you need to take on. If you’re considering an advanced degree, taking advantage of employer assistance through a tuition reimbursement program can greatly reduce your overall debt.
- Missing application deadlines. Do your research early – and start by paying attention to the financial aid and tuition deadlines of your college. You’ll want to complete the FAFSA® form to make sure you qualify for all possible federal financial aid – grants, scholarships, work-study, and loans – you can receive. If you need private loans to supplement federal financial aid, you’ll need time to apply and get approval for those, too.
- Over-borrowing (aka borrowing for wants, not needs). You may qualify for more in financial aid than you need. You’re not obligated to take all of the money you’re offered. Whatever you borrow now, you’ll be paying off for 10 or 25 years, so use the loans to help you get an education that will benefit you down the road – not for things that make your life more fun now. Borrow only what you need for tuition, books, and basic living expenses – and keep other debt to a minimum, too. When your student loans go into repayment, credit card debt added to student loan payments can feel overwhelming.
- Choosing the wrong payment plan. When selecting your payment plan, it’s tempting to go with a longer repayment term that keeps payments low, but it’s important to remember the longer you make payments, the more you’ll pay in interest. Choose a plan with the highest payment you can afford to make each month to minimize the amount of interest you’ll pay. If your loan payments will be higher than 10% of your pay, consider a graduated or income-based plan, but make sure you reevaluate your plan later if you find you can afford a higher payment.
- Missing payments. Every time you’re late or miss a payment on your student loans, it’s marked on your credit report and will hurt your credit score. Skipping a payment and making it up next month isn’t a good idea. Making those payments on time is essential to building your credit score and keeping you on track for successful repayment. If you’re having trouble making payments, reconsider your payment plan – don’t be late or miss them. (If you’re struggling with private loan payments, talk with your lender to find a solution.)
- Defaulting on your loan. When you fail to make payments on your loan for more than 270 days, your loan will default. This is where your financial life becomes very messy. Dealing with collection companies is not fun. While many types of debt can be difficult to collect, the federal government can keep your income tax refund and garnish your wages to recoup your student loan debt. If you’re in a tough situation, contact your federal student loan servicer to work out a deferment or forbearance, or your lender to find a solution. Don’t wait. Take action well before your loan defaults and negatively impacts your credit.
- Not using refinancing wisely. If you have several loans at various interest rates, you may benefit from refinancing them into one loan at a lower interest rate. This allows you to choose your new lending company, too. BenefitEd partners with Nelnet Bank to offer student loan refinancing. Remember, any loans you refinance no longer qualify for deferment or loan forgiveness, so make sure you’ll no longer need those borrower protections – or exclude federal loans from your refinance if you think you may.
- Not taking advantage of employer-assisted student loan repayment. Some employers offer student loan repayment assistance. If your employer offers this type of financial benefit, make sure you take advantage of the opportunity. You can opt to use employer match funds toward your student loan payments, helping to chip away at your balance faster.