Today I have a guest post from Andrew…
Many more than half of all college students use student loans to pay for school. The average graduate, in fact, finishes school with tens of thousands in debt. A lot of students don’t truly understand how student loans work—or how that debt can affect everything from their credit to their career for years to come. Not understanding the position they’re putting themselves in with student loan debt can cause a number of problems later, so it’s important to be aware of the ramifications of taking out a student loan.
Some students hear about federal loan forgiveness and think they can apply for that as soon as they graduate, effectively getting out of having to make any payments. In reality, the Public Service Loan Forgiveness program, or PSLF, doesn’t work that way at all.
To qualify for PSLF, you need to be employed in the public service sector, such as the Peace Corps, a government position, or other eligible job. You also need to make payments on time for several years before you can even apply for the program, and those payments need to be considered “qualified,” as in you’ve made them while being employed in that public service job. Once you’ve met all of those criteria, you may be approved. It’s not a guarantee—and it’s not easy.
A lot of students believe that all student loans offer a grace period of 6 months after graduation before you’re required to start making payments. That’s not quite true. While most federal loans have a grace period of six months, private loans do not, nor do loans taken out by your parents for your education.
Many private student loans begin full repayment immediately, even while you’re still in school. Other lenders allow you to make interest-only payments until you graduate. However, none of them let you go without any payments until 6 months after graduation. Before taking out any private student loan, try to understand your obligations. If you don’t think you’ll be able to start repaying the loan when payments start coming due, look for an alternative.
One of the options available to students with multiple student loans from the Department of Education is loan consolidation. With this, all of your loans are combined into one new loan, resulting in one payment and interest rate. While many students see it as an easy way to lower their monthly payment, it’s not a smart financial move in most cases.
When you consolidate through the federal government, your new interest rate is a weighted average of all of the loans you consolidated. That means if you have some loans at a low rate but high balances, and a few loans with lower balances but higher rates, you could end up paying much more after consolidation—both over time and in each monthly payment.
If you find yourself short on funds throughout the school year, you may be tempted to take rely on leftover student loan funds to cover things like rent, food, the occasional night out, and more. After all, you can always pay it back when you get your job after graduation, right?
As we discussed, some private student loans expect you to start paying the balance right away, so relying on a loan to make ends meet in college can easily hurt you in the long run.
In addition, if you’re having consistent problems meeting your monthly obligations and living expenses, you may be living above your means. Instead of taking out a private student loan—or any other kind—sit down and go over your budget. Find out where you may be overspending, such as dining out or even subscriptions you may not be using or can do without. Every little bit helps—and if you can keep your student loan debt to its absolute minimum, you’ll thank yourself later when you graduate with less debt than your peers.
Student loans can be confusing, and sometimes students don’t want to ask for help understanding everything involved. That can lead to issues later with far more than just your credit history.
Don’t get surprised at graduation. Understand the process and expectations that go into having a student loan and have a plan to both minimize the amount you take out, and how you’ll go about repaying it. You may not be able to avoid graduating with student loan debt, but you can control how long that debt affects you.