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by CampusESP | Estimated Reading Time: 6 minutes

Graduation day - whether from high school or college - is a major milestone where your student flings their cap high, basking in the glory of their hard-earned diploma. But as the confetti settles, many grads find themselves about to embark on a less celebratory journey: taking out or repaying student loans. With the average student debt hovering around $39,000, the financial decisions your student makes now can greatly impact their post-grad life. Before even stepping on campus, it pays to know the common pitfalls that can snare unsuspecting borrowers. We're diving deep into how your student can navigate the world of student loans without falling victim to common mistakes that could derail their financial future.

Avoiding These Common Student Loan Mistakes

When it comes to funding your student's college education, the mantra 'loans as a last resort' cannot be overstated. Many students and families gloss over the plethora of "free money" - scholarships, grants from colleges, or funds available through the FAFSA. With organizations, corporations, and community groups offering a bounty of scholarships, it's crucial to tap into these resources before signing off on a loan.

Yet, the financial missteps don't stop there. A glaring error is not calculating the realistic affordability of your student's education. Borrowing more than what your student anticipates their annual starting salary might be can start their career on a financially precarious note. Creating a projected post-graduation budget, inclusive of their student loan payments, is an excellent way to grasp what your student can reasonably manage without financial strain.

Moreover, failing to conduct a cost-benefit analysis of your student's chosen college can be detrimental. Prestigious institutions come higher "sticker prices", and public colleges can be a great return on investment. But the costs for either option do add up. And both types of schools can offer substantial financial aid and scholarships that can significantly reduce what your student actually pays. Before your student get swayed either way, they should consider the quality education and career access of their chosen school, after all financial aid and scholarships are accounted for.

One of the most critical choices your student will make is between federal and private student loans. Federal loans come with lower interest rates, flexible payment plans, and potential loan forgiveness programs - benefits that private loans seldom match. Before considering a private loan, exhaust all other financial aid avenues and ensure you and your student fully understand the implications.

As we peel back the layers on how to tread carefully in the realm of student loans, remember, being forewarned is forearmed. Steering clear of these common mistakes not only helps you and your student avoid potential financial pitfalls but also paves the way for a more secure financial future.

Mistakes to Avoid When Applying for Loans

Forgetting About Free Money

When it comes to financing your student's education, remember that loans should be your last resort. There's a surprising amount of "free money" available in the form of scholarships and grants from colleges, nonprofits, corporations, and community groups. These financial aids are granted based on various criteria such as academic achievements, financial need, or special talents. Failing to explore these options means your student is potentially missing out on significant funding that doesn't need to be repaid, adding more debt than necessary.

Not Calculating How Much is Too Much

One common trap students fall into is taking on more debt than they can handle. A useful guideline is to not borrow more than their expected annual salary post-graduation. Creating a future budget projection, including their student loan payments, can provide clarity on whether they're over-borrowing. If the numbers don’t add up and strain your student's budget, it may be wise for them to reconsider their college choice or seek additional financial resources.

Neglecting to Do a Cost-Benefit Analysis

Before locking themselves into a high tuition bill, your student should conduct a cost-benefit analysis. Investigate the return on investment of their education, and determine which school is the best option once all financial aid and scholarships have been accounted for.

Relying on Private Student Loans

Federal student loans should always be your student's go-to option before considering private lenders. Federal loans offer fixed and lower interest rates, flexible repayment plans, and the possibility for loan forgiveness under certain conditions, without requiring cosigners. If federal loans, scholarships, and grants are exhausted, and private loans become necessary, ensure you and your student fully understand the terms and commitments involved.

Mistakes to Avoid While You're in School

Living It Up on Borrowed Money

It's easy to get carried away with spending when your student has access to student loans that cover more than just tuition fees. However, using borrowed money for non-essential expenses can significantly increase their debt due to interest accumulations. Instead of inflating their college lifestyle, your student should look for scholarships, grants, or part-time employment to cover extra expenses.

Ignoring Your Loans for Four Years

If your student has unsubsidized loans, ignoring them while in school means the interest will keep accruing, significantly increasing the total amount they owe by graduation. Making payments towards these loans, even small ones, during their school years can greatly reduce the total interest paid over the life of the loan. If managing payments seems daunting, your student should consider finding a part-time job to help alleviate some of the financial pressure and keep their debt from ballooning.

Mistakes to Avoid When It's Time to Pay Loans Back

When the celebration of graduation subsides, the reality of student loan repayments takes its place. For many, this period marks the beginning of financial independence, and how your student manages their loans can significantly impact their financial future. Let's dive into some common missteps your student will want to avoid as they start paying back those student loans.

Paying Late — or Not at All

Missing student loan payments or skipping them entirely can have far-reaching consequences. Late payments may result in fees and can negatively affect your student's credit score, complicating their ability to make other significant life purchases, such as buying a house or car. For federal student loans, becoming too delinquent can lead to default status after 270 days, subjecting your student to potential wage garnishment and legal action. Private lenders might pursue legal action even more swiftly. To avoid these scenarios, encourage your student explore options like alternative payment plans, deferment, or consulting with a non-profit credit counselor if they're struggling to make payments on time.

Never Paying More Than the Minimum

Paying just the minimum amount on student loans might seem like an easy option, especially when your student is trying to balance a budget. However, adhering strictly to the minimum payments prolongs the life of their loan and increases the total interest accrued over time. If your student's financial situation allows, they should consider paying more than the minimum each month. Not only will this decrease the total interest paid, but it can also shorten the loan term. They should consider it an investment in their future, enabling your student to allocate resources toward other financial goals sooner. Prioritizing early repayment over luxury expenses, even if it means scaling back on discretionary spending for a while, can lead to significant savings and a quicker path to financial freedom.

Navigating the landscape of student loans can feel like traversing a minefield, ripe with opportunities for missteps that could impact your student's financial health for years to come. But equipped with the right knowledge and a plan, your student can avoid common pitfalls and manage your loans confidently. What's important is for you and your student to stay informed, plan ahead, and take proactive steps to manage their student loans effectively. Your student's future self will thank them (and you!).