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A college education is a wise financial investment for most people. On average, college grads earn more money and tend to have better career opportunities compared to people that didn’t go to college.
If you’re like many students, you need help affording college. That’s where student loans can be a significant help.
Loans can also hurt you financially if you’re not careful. Fortunately, you can avoid the pitfalls of student loans by staying clear of some common mistakes.
8 Student Loan Mistakes to Avoid Like The Plague
Here, we share eight of the most common mistakes students and their parents make regarding loans. We’ll also offer guidance on how to choose and repay your loan so you can avoid these errors.
1. Failing to Shop Around for The Best Rates
Finding the best student loan is a daunting process. If you’re tempted to just go with the first Google result for “student loans,” we don’t blame you. But failing to compare rates can end up costing you thousands of dollars.
Every lender sets its own interest rates and fees. The difference between two similar rates might seem small, but it adds up over the life of the loan. So, you’ll want to find the lowest interest rate you qualify for.
For private student loans, Juno has the lowest rates anywhere on the private student loan market. They work with groups of borrowers to negotiate deals with lending partners. In the unlikely event that you find a lower private student loan offer, Juno will match the cost and beat it with a cash bonus.
In addition to the interest rate, look out for any fees. Federal loans, for example, include origination fees for processing the loan.
2. Taking More Loans Than You Need
Sometimes when you apply for a loan, a lender offers a higher amount than you requested. The more money, the better, right? Not exactly. You’ll need to repay your loan with interest, so it’s best to take only what you need.
If you borrow more than necessary, you also increase your risk of missing payments. Missed payments can result in late fees and damage to your credit score.
The best strategy is to use your loan funds for needs, not wants. The money you receive from a lender should go toward tuition and necessary costs, like textbooks. For “fun” money, consider a part-time job or side hustle.
3. Not Knowing Your Loan Options (Variable vs. Fixed Rates)
If you don’t understand your interest rate, you can wind up paying much more than you expect.
An annual percentage rate, or APR, comes in two varieties: fixed and variable. A fixed-rate stays the same throughout the loan period. You’ll know exactly what your rate is going to be each month. While the payment is predictable, fixed interest rates often start off higher.
A variable-rate changes over time. Variable rates are more of a gamble because your rate might start low and then go up. But depending on when you start your loan, they can cost less overall.
When you’re ready to borrow, do some research into variable-rate trends. Make sure you talk to the lender if you have any questions about your interest rate or loan terms. Then you can decide which type of rate is best for you.
4. Choosing The Wrong Repayment Plan
As you compare loans, find out about your repayment options. Private loans often have a single repayment plan. With federal loans, there are several different options.
Here are some of the repayment plans you might encounter:
- Standard repayment plan: Fixed payment amounts over ten years.
- Graduated repayment plan: Payments start low and increase over time.
- Extended repayment plan: Payments are spread out over 25 years.
- Pay as you earn: 10% of your income goes toward your loan payments.
There are also plans that allow you to pay an amount based on your income and family size.
Regardless of the specific plan, remember that you’ll pay less over time if you make higher payments now. Paying down your high-interest loans first is also a great way to ensure your debt burden grows at a slower rate. Also, some lenders offer a discount for automatic payments.
5. Failing to Refinance Your Loans (When Necessary)
Many borrowers don’t know that they may be able to refinance their student loans. Refinancing can lead to benefits like a lower interest rate or a consolidated monthly payment. You might be able to save a significant amount of money, especially if you have a private, high-interest loan.
Refinancing can also have downsides. A lower monthly payment, for example, isn’t worth it if it means you’ll pay more in interest over time. Make sure you understand the terms before you proceed.
6. Making Only Minimum Payments
Paying all of your minimum payments on time helps you avoid serious penalties and harm to your credit. But did you know you can make extra payments? Doing so will shorten your loan period and can save you hundreds or thousands of dollars in interest.
Student loans don’t have prepayment penalties. That means you don’t have to worry about fees for paying off your loan early.
You can add some extra money to a scheduled payment, or even make a separate lump-sum payment. Any time you have room in your budget, consider putting some extra cash toward your loan. Your future self will thank you.
7. Failing to Apply for Scholarships and Other Grants
Any loans you take out must be repaid with interest. But scholarships and grants are basically free money. Don’t overlook these opportunities to reduce your student loan debt.
Even a partial scholarship will help. You can then use a loan to make up the difference between the scholarship amount and your overall costs.
You don’t need to be a straight-A student with tons of extracurriculars to qualify for a grant or scholarship. Some scholarships are based on what you plan to study. Others are based on your financial needs. There are also grants made specifically for women and members of different minority groups.
8. Selecting The Wrong Loan
There are several different varieties of loans, and they all have their own eligibility requirements and terms.
Federal loans come from the government. For a subsidized federal loan, you won’t pay any interest until you graduate. To receive this type of loan, you’ll need to qualify based on your financial need. Only undergraduate students are eligible.
With unsubsidized federal loans, you don’t need to show financial need, but you’ll pay interest while you’re in school. Both undergraduate and graduate students can apply.
While you’re an undergraduate, your parents may qualify for a Direct PLUS loan, also known as Parent PLUS. These loans come from the federal government with a fixed interest rate, currently at 6.284% for July of 2021-2022. They also come with a loan or origination fee, which is currently at 4.228%. Parents can take these loans out in their name to help pay for their child’s education. If your parents can’t obtain a Parent PLUS loan, you may be eligible for additional federal direct unsubsidized loans.
Private loans come from credit unions, banks, or other companies rather than the government. The interest rate for a private loan is based on your credit score (or your parents’ score).
Many students take more than one type of loan. Let’s say you qualify for a federal loan, but you need more than the annual $5,500 government lending limit. You might consider a Parent PLUS loan to make up the difference, or a private loan from a company like Juno. If your parents have good credit, Juno’s rate is likely lower: one member scored a rate of 5.04%, compared to 6.284%. Juno also doesn’t charge an origination fee, while the Parent PLUS loan has a fee of about 4.2%.
To help you research, try this Parent PLUS loan calculator, which includes both federal and private options. If you’re applying for grad school, use this calculator. For graduate students whose credit score is 650 or above, Juno might have the best deal there is.
An investment in your college education is an investment in yourself and your future. Many students and families need loans to afford college. By avoiding the mistakes above, you can get the most out of your loan while saving money.
This is a post sponsored by Juno. All opinions are our own.
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Amy Besen is a freelance finance writer who covers topics including the gig economy, small business funding, and FinTech. Before starting her writing business in 2019, Amy worked in financial services for 12 years. She believes in helping people access the tools and knowledge they need to make better decisions about money.