UPDATED JULY 10, 2020
Education is an investment, plain and simple. You go to college to advance your skills and make yourself more marketable in the workforce. But, like any good investment or life decision, your success depends on preparation and planning. Students need to be savvy when taking out loans to avoid the common pitfalls and ensure they are not burdened by too much debt.
College students, whether they are in undergrad or grad school, often find themselves living in a vacuum and enjoying their freedom from the “real world” while it lasts. Students must have a grasp on basic money management, be able to live within a budget, and make smart decisions regarding credit and debt.
Avoid These 5 Mistakes in the Financial Aid Process
Don’t let a lack of knowledge and proper planning regarding borrowing for college negatively affect your financial future. Be sure to avoid these five student loan mistakes:
#1. Not Pursuing Grants & Scholarships.
Statistics show that two-thirds of all college students take out loans to cover the cost of college. So what about the one-third who don’t? A majority of those who do not acquire loans are finding other means to pay for their education.
It starts with the FAFSA form – it’s free and will tell you what financial aid you can receive. Make sure you fill out this important financial aid form early in the process and seek out as many grants and scholarships as possible before turning to student loans. The federal government gives out more than $150 billion in need-based aid each year. The more free money you get, the less you’ll have to borrow.
#2. Borrowing More Than You Need.
When students receive their federal student loan offer, they are often surprised by how much the government is offering them in loans. Temptation is part of human nature, and when it comes to student loans, this can lead to the unwise choice to take the maximum amount offered. This is almost always more than you need to cover expenses. Students should carefully evaluate their actual needs (tuition, housing, and books) and borrow as little as possible, not as much as is available. Giving in to the “free payday” now will lead to regret and hardship when the time comes to repay the loans.
#3. Taking Out Private Loans.
Private loans are not student-friendly. Students should exhaust all their federal loan options before turning to private loans, which are offered by banks, non-profit organizations, or Sallie Mae. These loans offer fewer protections and options to students. Conversely, federal loans typically have lower interest rates and offer more flexible payment terms. For example, repayment of federal student loans starts after graduation, while many private loans require payments while you’re still in school. Also, if you struggle to pay after graduation, private lenders are less likely to adjust your payments to accommodate your hardship.
#4. Skipping the Interest Payments.
All non-subsidized student loans have interest, and that interest will start to accrue immediately. If you let the interest capitalize, it means you will be paying interest on an even larger principal amount when your loan comes due.
While you’re likely living on a tight budget, it’s wise to squirrel away some money each month to pay toward the interest on your loans. Typically, the interest even on larger loans won’t be too much. So, paying $50 to $100 a month on interest while you’re still in school can substantially decrease what you owe over the life of your loans.
#5. Failing to Calculate Future Payments.
Once you graduate and your six-month grace period expires, your student loan payments begin. Many graduates are shocked when they realize how much their student loan payments are going to take out of their post-college salaries. That’s why calculating your future payments before taking out loans is a good idea.
The standard recommendation is to not borrow more in student loans than you expect to earn with your first year’s salary. In other words, do some research and do the math. Your goal is to make sure the median average salary of your specific career choice exceeds the amount of student loan debt you accrue.
Get Answers to Financial Aid at Cleveland University-Kansas City
The full-time financial aid specialists at Cleveland University-Kansas City (CUKC) are experts in helping students avoid these student loan mistakes. They are ready to help you evaluate the cost of your education and help you make smart loan choices.
Click here to talk to an admissions advisor about the financial aid process at CUKC. To learn details you should know about financial aid, get this free eBook: Your Complete Guide to Navigating College Financial Aid.