For many students, graduation day marks the beginning of years of student loan repayments. In fact, recent grads who take out loans owe, on average, upwards of $39,000. With that much money on the line, it’s all too easy to mess up your finances before the ink on your diploma dries … or even before you step foot on campus.
To help you sidestep crushing debt as you launch into the real world, we’re sharing some of the biggest mistakes to avoid when it comes to student loans.
MISTAKES TO AVOID WHEN APPLYING FOR LOANS
Forgetting about free money. Everybody knows that loans have a cost. You’re subject to interest rates, fees and potentially dire consequences if you don’t follow the rules for repayment. So loans should be your last recourse when you’re funding your college education.
What most people don’t realize is just how much free money is out there for students. Many colleges offer scholarships or grants for applicants who meet certain criteria — academic prowess, musical ability or athletic skill, for example. And there may be no-strings-attached money available for those who can demonstrate financial need via the FAFSA.
Beyond these resources, search online for portable scholarships you can take to any school. You’ll find a bounty of free funds offered by nonprofits, corporations and community groups.
Not calculating how much is too much. Where people easily get into trouble is buying more college than they can reasonably afford. As a rule of thumb, some experts recommend you borrow no more than the annual salary you expect to earn right out of school.
Here’s a handy exercise: Peer into the future and sketch out a post-graduation budget. Plug in at least the monthly minimum required for your student loan payments. Can you afford that amount? If the math doesn’t work, or you’ll be stretched too thin, you may need to consider a different college or find additional funds.
Neglecting to do a cost-benefit analysis. Right now, the tuition alone for the most expensive colleges in the U.S. exceeds $250,000 for a four-year degree. But you can absolutely enjoy a high-quality education and access to excellent careers without the sticker shock. In fact, Money reports that graduates of public colleges actually see a higher return on their tuition investment than students of private schools.
So look for reputable options beyond the pricey universities. You may be surprised how many top-rated schools can benefit both your future and your wallet.
Relying on private student loans. Ready to get that student loan? Look to the federal government instead of a bank or other private lender.
Federal loans almost always win out over private loans because of their fixed and lower interest rates, more flexible payment options, and sometimes even loan forgiveness, if you go into a qualifying field. Plus, federal loans typically don’t require your parents to put their finances on the line as cosigners — something many private loans insist upon.
If you’ve exhausted your options for scholarships, aid and federal loans, make a point to truly understand what it means to work with a private lender.
MISTAKES TO AVOID WHILE YOU'RE IN SCHOOL
Living it up on borrowed money. Welcome to college, where it’s all too tempting to treat your student loan like an ATM. And some lenders are happy to help — allowing you to borrow money beyond your tuition costs in order to pay for other expenses.
While having seemingly free money may seem like a dream come true, living on someone else’s dime will cost you — with interest — later. Just as inflating your lifestyle with credit card debt is a dangerous road, avoid using your student loans for anything but essential school costs. If you’re short on cash for the lifestyle you want, search for more free money or pick up a few hours of part-time work.
Ignoring your loans for four years. If you’re able to get a subsidized federal loan, the government will kindly cover your interest payments while you’re in college. But if you’ve got an unsubsidized loan, that interest accrues and gets tacked on to your existing principal. So by the time you graduate, the amount you're actually borrowing has grown.
Suppose, for instance, you borrow $20,000 via an unsubsidized loan at 5.05% interest with a 10-year repayment period. If you sit on it until graduation day, you’ll wind up paying back more than $31,000. But, if you cover the monthly payments of about $200 while you’re still a student, you could save yourself nearly $5,800 in total loan repayments.
If you’re working off an unsubsidized loan, create a student budget and prioritize debt repayment. Need some extra income to make the numbers work? Wait tables, work as a tutor or tackle a freelance gig.
MISTAKES TO AVOID WHEN IT'S TIME TO PAY UP
Paying late — or not at all. When it comes to your student loans, flaking out on due dates will cost you. In addition to the fees you may incur, your credit score could take a hit — making it difficult for you to buy a house, rent an apartment or even secure a job.
The federal government is willing to cut you some slack if you’re late on a loan payment. But, once you’re a full 270 days late, your loan will officially be considered in default. At that point, you may be subjected to wage garnishment, steep collection penalties, and even a lawsuit and lien on your assets. Private lenders are even more likely to drag you to court.
So, if you’re struggling to make your minimum payments, get help now. (Waiting until you default will severely limit your options.) Depending on your job and financial circumstances, you may qualify for alternate payment plans, deferment, forbearance or even loan forgiveness. And consider getting assistance from a non-profit credit counselor who specializes in student loans.
Never paying more than the minimum. You know how important it is to cover your minimum loan payments on time each month. And, if you’re busy building a strong financial foundation for yourself, it’s possible that the minimum is the most your budget can handle. But, if you’ve got some wiggle room as a recent grad, think seriously about paying more every month. The longer you sit on your debt, the more it’s costing you.
So, instead of springing for that trip abroad or endless bottomless brunches, give yourself the gift of early loan repayment. With your debts out of the way, you can not only save on interest, but you can be free to put more money toward your priorities and financial dreams.
This article originally ran on LearnVest.com.