The story of loan debt isn’t too often told. As a matter of fact, the story isn’t told at all, and hardly ever treated with a sense of urgency.
Most people with student loans try their hardest to forget them while in school. That’s because it has the ability to make the entire college experience kind of unpleasant when you think about the massive price tag you’re paying.
But as you get closer to graduation, the thought will come back sooner or later. “I’ll need to start paying my loans off.” The bad news is, if you don’t have a full-time job lined up after receiving your degree. The thought of paying your loans back can be downright terrifying.
Thankfully for students with federal loans – and a few private ones – there exists something called a student loan grace period. This is a system that sets a time period after you graduate, leave school, or drop below half-time enrollment before you must begin repayment on your loan.
The grace period gives you time to get settled financially, allowing you to select the best plan when it comes to paying back the money you borrowed. Note that for most loans, interest rates will be attached to your total amount.
Luckily, students also have the option to apply for student loan refinancing in order to help lower the interest rates.
Curious to know how the repayment plan works? Read on to find out.
Common Mistakes We Make When It Comes to Student Loans
1. Failure to understand income-driven repayment plans.
When it comes to government loans, many people stick with “standard” repayment plan. This default payment, however, requires borrowers to make a fixed monthly payment for up to 10 years – an approach that can help minimize the interest rate, BUT will maximize the monthly payments.
The good news is that government loans also offer the possibility of loan forgiveness after a set number of years of on-time repayment from 10 to 25 years. It all depends on the plan selected and the borrower’s profession. But those who benefit the most from these plans typically have debt in excess of their income.
2. Defaulting on the loans.
The federal government has very strong powers when it comes to getting their money back that may include administrative wage garnish, an offset of federal and state income tax refunds, social security retirement, and disability benefit payments.
There is NO reason a borrower should choose a default payment plan, as it’s normally higher than the monthly loan payment under income-based repayment or pay-as-you-earn repayment.
In this case, the borrower will also have to pay collection charges up to 20 percent of each payment. To put it another way, there is NO getting away from debt and NO financial benefit to defaulting and taking on a loan plan you can’t afford.
This could also affect the borrower in the long run; if they wish to purchase a home, a car, or take on other loans such as home loans in order to avoid a massive financial disaster, resulting in losing ownership of something.
3. Failure to understand loans.
There are two types of student loans: federal and private. Understanding the difference is vital, and can even help the borrower choose the best repayment plan.
Interest rates on federal loans, for example, are set annually by a formula based on a 10-year plan. With private loans, on the other hand, banks actually set interest rates based on borrower’s credit history.
In order to understand repayment plans, it’s wise for students to compile a list of all their different loans, including the loan type, and interest rates. Lenders should be able to provide the exact details to you upon request. For federal loans, borrowers can find this information by getting in contact with the National Student Loan Data System.
BEWARE of companies that charge upfront fees to help individuals with student loans obtain debt relief.
4. Living off your student loans.
Depending on the student loan chosen, you may be able to borrow more than the actual cost of your tuition and books. Although it’s tempting to spend the “overage” on a lifestyle you can’t afford.
Remember: you still have to pay that money back eventually with interest. Just because you can use student loan money on vacations, it doesn’t mean you should.
To clarify, student loans should ONLY be used (for) education expenses – NOT going to the bar, or planning a vacation with. Accept the fact that you may have to get a part-time job. In the long run, this will make the difference between owing $38,000 and owing $50,000.
Once you graduate and get a real job, then you start planning that trip to Belize, or Cancun.
5. Failure to exhaust scholarship options.
Although there are multiple ways to pay for college, scholarships are without a doubt the best way to go. Like grants, scholarships do NOT have to be paid back and are available from a variety of sources.
They can also help reduce education-related costs as the borrower is essentially getting free money (the best kind). For upcoming students who choose NOT to search for scholarships, you’re missing out on a HUGE financial opportunity.
Generally speaking, the most common problem that young scholars are faced with involves resources. In other words, they don’t know where to go for help.
If they can’t afford payments, don’t know which student loan payment plan is best for their current situation, or considering consolidation, a professional would be the best option moving forward. By understanding these options, they’ll be empowered to start building a more secure future.
Student loans can be overwhelming. But with proper research and planning, the debt can be brought down by a substantial amount. Keep in mind, the ultimate goal is to graduate with as little debt as possible.
Thanks for the read. Did I miss anything? What are some other common issues that borrowers face when taking on student loans? I’ll be checking for comments.