7 Worst Student Loan Mistakes (Avoid!)

Last updated on December 10, 2023

In today’s educational landscape, loans often become the sole solution for funding higher education. However, navigating the borrowing journey wisely is key.

Here, we’ll explore the 6 worst student loan mistakes that can significantly impact your student loan experience—pre-acquisition, during, and post-commencement of repayments.

Each of these missteps poses a threat to your financial stability. By steering clear of these pitfalls, you pave the way for a more secure and manageable financial future.

Remember, a well-informed and cautious approach to student loans is instrumental in securing a brighter tomorrow.

Highlights:

Be honest on your loan application. Integrity matters and misrepresentation could backfire.
Ensure that your loan funds cater strictly to educational necessities. This is crucial to sidestep financial pitfalls down the road.
Opting for the lowest monthly payments or extended repayment terms might seem appealing. However, consider the long-term consequences of these choices.
Missing payments can snowball into bigger financial burdens. Even if you plan to compensate later, the repercussions could be substantial.
Defaulting on your loan should be a red-alert situation. Promptly reaching out to your lender if repayment becomes challenging can save you from dire consequences.

What you'll learn:

Student Loan Mistakes

1️⃣ Falsifying Your Application

Falsifying details on your student loan application can lead to severe consequences. With audits on financial aid applications, the risk of getting caught is high.

The repercussions include losing the loan, facing fines, and potentially encountering fraud charges, which can result in a criminal record. While prison might offer free education, securing a well-paying job with a criminal record is notably challenging.

2️⃣ Not Spending Wisely (Wants over Needs)

Strategic utilization of student loan funds is crucial. Channeling these funds solely into education is advisable. However, splurging on temporary pleasures can jeopardize financial stability.

If you have surplus loan funds, consider saving in high-interest accounts or allocating towards loan interest payments, kickstarting repayment even while in school.

3️⃣ Going With the Wrong Payment Plan

Choosing a repayment plan based solely on lower monthly payments might seem appealing initially. However, it often translates to a longer repayment period and increased overall interest.

Opting to pay a higher affordable amount monthly could significantly reduce long-term interest costs. Experts often suggest a monthly payment not exceeding 10% of expected salary, but adaptability based on financial changes is key.

Striking a balance between affordability and loan repayment duration is crucial. Exploring longer yet less expensive programs might be beneficial initially, but reevaluation as financial circumstances evolve is essential.

4️⃣ Not Considering Refinancing

Overlooking the prospect of refinancing amidst fluctuating interest rates can prove to be a costly oversight. A significant drop in rates presents a potential avenue for substantial savings on your student loan.

Refinancing or consolidating multiple loans can potentially reduce monthly payments and the overall interest burden.

Yet, it’s crucial to delve into meticulous comparisons among lenders. Variances in interest rates and loan terms necessitate a careful assessment to ensure securing a superior deal.

However, the decision to refinance federal student loans demands thoughtful consideration. Refinancing shifts the loan to a private setup, forfeiting federal loan benefits, such as income-based repayment or loan forgiveness options.

This transition might result in a loss of specific financial protections associated with federal loans.

Remember, even if a complete refinancing isn’t feasible, making occasional additional payments or exceeding minimum monthly payments can significantly impact loan duration.

Prioritize ensuring that any extra payments directly chip away at the principal balance, effectively reducing interest and expediting loan repayment.

Understanding the nuances of refinancing and its potential trade-offs is essential in navigating the student loan landscape effectively. Your proactive financial approach can make a substantial difference in managing and mitigating loan obligations.

5️⃣ Missing Student Loan Payments

Missing or delaying even a single loan payment can have lasting repercussions. While intending to catch up the following month might seem plausible, it’s a significant error.

Each late or missed payment marks your credit report, adversely impacting your credit score, irrespective of subsequent repayments. For federal student loans, delinquencies exceeding 90 days are reported to major credit bureaus, leaving a lasting imprint on your credit history.

This negative mark can persist for years, affecting your ability to secure future loans or credit facilities.

If your monthly payment surpasses what you can manage, proactively engaging with your lender is crucial. Seeking solutions or alternative arrangements before resorting to skipped payments is advisable.

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6️⃣ Defaulting on Your Student Loan

Failure to honor loan payments for over 270 days leads to default, spiraling your financial stability into chaos. Avoid evading communication with your lender as the consequences of nonpayment are severe.

Federal loan guarantors possess the authority to retain your income tax refunds or garnish wages, alongside additional collection costs.

Prioritize proactive engagement with your lender or loan servicer before reaching a dire financial state. Unexpected misfortunes like job layoffs may warrant exploring deferment or forbearance options, offering temporary relief.

However, non-payment should be a last resort as it can severely impact your financial health.

FAQ

Is It Risky to Lie on Your FAFSA?

Lying on your Free Application for Federal Student Aid (FAFSA) is highly risky. Even if you evade immediate detection, the repercussions can be costly.

Down the line, this dishonesty could lead to increased fees and potential legal troubles, impacting your financial well-being.

Can I Skip My Student Loan Payment?

Skipping a student loan payment isn’t advisable. Such actions reflect negatively on your credit report, causing a drop in your credit score.

If monthly payments pose financial challenges, it’s recommended to contact your lender. Exploring alternative repayment plans better suited to your current financial situation is a more prudent approach.

Using Student Loan Money for Clothes?

Student loans often outline specific usage guidelines, typically limited to essential educational expenses like books, tuition, and sometimes room and board. If you receive surplus loan money, using it for necessary clothing might be permissible.

However, it’s advisable to prioritize essentials and avoid excessive spending beyond basic necessities to maintain financial prudence.

Final Thoughts

Managing a student loan is often the initial significant financial responsibility for many young adults. Steering clear of common money mistakes in financing your college education is pivotal.

It sets the stage for graduating with what’s deemed as “good debt” and minimizing the overall financial burden.

By avoiding these pitfalls, you not only aim to graduate with a manageable financial load but also lay the foundation for sound financial habits that can serve you well beyond your college years.

References

These Are the 6 Worst Student Loan Mistakes You Can Make