Big Student Loan Mistakes

student loansStudent loans have become a fact of life for many families facing the high cost of the college. The average college student now ends up owing around $30,100 in student loans. What many families don’t realize is that proper planning can help students avoid costly mistakes and lower the total amount of student debt. Here are the most common mistakes students make with student loans.


Overlooking the Importance of College Choice
Colleges vary widely in how well they meet student financial need and in how generous they are with merit scholarships. The reality is that the cost of college can range from $0 to nearly $70,000 a year for the same student. Every student concerned about the cost of college needs to have a well-developed college list designed around their individual financial and academic profile. The single best way to cut the cost of college is to choose a college that makes good financial sense in the first place. Some colleges have bigger endowments and provide much better financial aid. Other colleges can offer more generous merit based scholarships for students irrespective of financial need. Generally the financial offer you get the first year is the best one you’ll ever see from a college. Colleges make their best offer when they are trying to attract you to enroll. If the financial aid and scholarship offer isn’t good the first year, it probably never will be.

Taking Out the Wrong Kind of Loans
Loans are not all created equal. Subsidized federal loans are the best deal for students. With these loans, no interest is accumulating while the student is in college. Students should always max out these subsidized loans before they consider taking on other types of loans. Other loans will have less favorable interest rates and often interest accumulates the whole time the student is in college. Private loans can be particularly problematic. They are sometimes compared with financing college on credit cards. With these loans interest is high and students aren’t eligible for programs like income-based repayment.

Borrowing Too Much
Students are not required to take out the full amount of loans that are offered. Students may underestimate how much debt can accumulate and how much they may owe after graduation.  Even if the money is available to borrow, it is a better decision to live at a lower student standard of living and avoid funding a higher standard of living with student loans.

Failing to Graduate
Taking out student loans can be a worthwhile investment if you graduate and get a good job. If you leave college without a degree, it can be very tough to find a job that will offer sufficient income to pay back loans. If you don’t graduate, you still have to pay back loans.  While media horror stories may talk a lot about recent graduates being unable to get any kind of job to pay back student loans, the reality is that the vast majority of students who go into default on loans never graduated from college. Just over half of students who start college finish, so one of the very best bits of advice for any student considering taking out student loans is take your studies seriously. It isn’t always a good decision to go to college. Go if you are ready to work and do well, don’t go if you are just doing it because you don’t know what else to do with your time.

student loab graphicNot Understanding Loans
Many students sign on the bottom line and really have not even a basic understanding of what they are borrowing. Students should take the time to understand interest rates, loan terms, and how much they will owe at graduation. The website is a great place to begin to research student loans in more detail. On this site you will find articles explaining student loan calculators that will allow you to estimate your total debt and your monthly payments. Students who are leaving or graduating from college, should take the time to meet with the financial aid office and make sure they understand all of their options for repayment. If a student is having difficulty paying back loans they need to know what to do before the situation spirals out of control. Taking action right away can prevent a student from getting into a financial crisis that is difficult to recover from. Most student loans cannot be discharged during bankruptcy.

Failing to Look for Scholarships
While scholarships are most plentiful for students as they enter college, it is possible to earn scholarships during college. Students who work hard and earn top grades may find themselves eligible for new scholarships. Students should be aggressive in continuing to seek out new sources of funding, including scholarships from the department they are majoring in. Borrowing less means not just less principal but less interest to repay, so even smaller scholarships can add up.

Bottom Line
For students who will study hard and do well, student loans can be a wise investment in a better future. College graduates on average earn 98% more per hour than students who only graduated from high school. College graduates are much less likely to unemployed in a recession. The key to making student loan debt work is to do your research and make a sound investment. Encourage your student to make a responsible start on adult life by understanding their student loans and making wise decisions.


1 comment

  • Another mistake I see people making is deferring loans by continuing with higher education.

    Yes, your loans can be deferred while you’re working on a graduate or doctorate degree, but they are still incurring interest, and you’re probably taking out new loans for the higher degree, which just adds to your overall debt.

    So not worth it unless you have a very specific career plan that requires a higher degree. This post is very much helpful and a lot of students didn’t know where they are getting themselves into and then regret it afterwards.

    Hopefully more students would be able to reach this post for them to be reminded. Thank you for sharing this list!

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