The secret to repaying your student loan is choosing the right student loan options when borrowing. For instance, as a borrower, you should take advantage of forbearances and deferments such as the economic hardship deferment, if you qualify. Certain costly mistakes can ruin your credit score and cause substantial financial consequences. Here are seven common mistakes to avoid when repaying your student loan.
Borrowing to The Limit
Just because lenders allow you to borrow a lot of money, it doesn’t mean you should go for the maximum limit. Instead, borrow the amount you need for your college bills. Remember, you may be required to repay double the financial aid you get from these financial institutions.
This means that if you aren’t able to keep your debt in sync with what you earn after graduation, you may end with an impossible hurdle later on in life. Alternatively, you can minimize the loan debt by working part-time jobs and applying for scholarships.
Spending The Loan Money Recklessly
Many students make the mistake of spending their loan money on trivialities that are not directly related to their college programs. For instance, relying on your loan to pay for living expenses is a grave financial mistake.
Don’t give in to the temptation of spending your loan money on shopping sprees or paying for your spring vacation. If you need some emergency funds for your other expenses, consider applying for quick loans from a reputable organization online, rather than using the student loan money recklessly.
Failure to Make Lump-Sum Payments
A student loan doesn’t attract a prepayment penalty. So, regardless of the amount of money you want to pay, you won’t be required to pay any fees if you pay your student loan in advance.
If you get a gift from your grandparents or earn some annual bonus, dedicate that money toward paying off your student loan. This approach will help you save a substantial amount of money in the long run.
Paying the minimum payment
Once you get approved for a student loan, interest will start accruing on the principal balance on a monthly basis. In order to lower the cost of your loan, avoid focusing on repaying the monthly minimum payment. If possible, commit yourself to repay more than the minimum amount so you can repay off your student loan faster and more affordably.
Failure to Utilize Federal Student Loans
Currently, there are several federal student loan options out there designed specifically for students. These types of loans are way cheaper and come with better terms compared to loans from private lenders. For example, while the forbearances for student loans are limited to a year, Federal student loans can offer you better forbearances and deferments of up to three years. Other benefits of federal student loans include loan forgiveness, disability discharges, and income-driven repayments, which you can’t find in most private student loan packages.
Speeding Payment for the Wrong Loan
The snowball approach is considered an effective method of repaying loans. While some people use this approach to repay loans with the lowest balances, others opt to apply for extra payments on loans with the highest rates to save money.
Although the snowball method may give you a psychological boost, paying extra for your student loan is a more practical approach. This is mainly because prepayments don’t attract penalties, and you’ll end up paying off the loan much faster.
Failure to Shop for Better Rates
Lenders set their own interest rates. Furthermore, even some of the lowest rates on the market are not the most affordable options. This means that you need to research extensively, shop around, and do your due diligence to get the best interest rates. Compare different private lenders and government-sponsored programs before choosing a lender.
Falsifying Your Loan Application
Although it may sound inconsequential, some students don’t consider forging their identities to be a severe mistake. Faking your identity when applying your student loan can lead to serious legal repercussions.
If a lender or your college discovers that you’re misrepresenting your personal information, you may be sued for committing financial fraud. In addition, you may lose your loan and incur huge fines.
Defaulting on Your Student Loan
Failure to repay your student loan for over 270 days will lead to a default. Dodging your lender is not being smart, but rather sending your future financial health into a nosedive.
The penalties of defaulting your student loan will come to plague you later in life when you want to settle down and perhaps plan your future with your family. Moreover, you may incur substantial collection costs when the lenders start following you around.
Always be organized and ensure you don’t miss your first repayment. Just like any other loan out there, a student loan can quickly rack up interest and overwhelm your repayment strategy, if you’re not careful. Seek free advice and find out more effective ways of resolving loan repayment disputes from established organizations such as The Institute of Student Loan Advisors.
Doris’s passion for writing started to take shape in college where she was editor-in-chief of the college newspaper. Even though she ended up working in IT for more than 7 years, she’s now back to what he always enjoyed doing. With a true passion for technology, Doris mostly covers tech-related topics.