Over two thirds of students use loans to help finance their college education. Many of these students are still youngsters with little or no experience of dealing with finances and fail to understand the implications in signing up for loans which they could still be servicing many years later. The biggest mistake students can make is to sign on the dotted line, with no real understanding of the conditions and pitfalls that can be attached to loans.
The best advice for students is to acquire some advance knowledge regarding financial matters, whether it is through student aid services, the free NEFE cash course for students, or by asking pertinent questions from experienced adults and loan providers. An understanding of how interest accrues on loans; how deferring interest payments during college can cost more over the term of the loan; and how fees and penalty clauses work, can all help towards avoiding making mistakes with student loans.
Students should seek alternative ways of financing college before resorting to loans. Many colleges offer some form of institutional aid with many of the most expensive schools offering the best deals. Some students and their parents simply overlook the FAFSA application presuming they will not qualify. This is a mistake as it offers far more than simply student loans: it also offers federal work study packages and is a necessity for many grants. Students should always apply via FAFAS prior to even considering private student loans which are more costly.
Private student loans should be considered only as a last resort. Wherever possible it makes sense to try to make the interest payments on such loans whilst in college, rather than deferring the interest until graduation. Too many students simply make the mistake of ignoring their loans until college days are completed, but private student loans are an expensive method of borrowing. Additionally paying the interest whilst in college will help to establish credit which in turn could then result in a lower rate if private student loans are consolidated upon graduation. Every unnecessary dollar spent on interest payments is a dollar wasted.
A common mistake is borrowing too much. Students should consider the repayments before applying for loans and realistically assess how likely it is that upon graduation a career will be found that offers a salary equal to coping with both living expenses and student loan repayments. If a career plan has not been mapped out, give advance consideration to options such as entering the public sector in order to qualify for student loan forgiveness. The most crucial point to consider is if the chosen degree course is actually worth the outlay.
Students should also ask themselves how committed they are to pursuing a college degree. There is a high level of college drop out rates, yet student loans must still be repaid. One of the major causes of dropping out of college is financial pressure. This can be exacerbated by failing to understand finances, which reiterates the value of paying attention to the subject prior to taking on loans or other forms of credit for college.
Knowledge is power and students should not only see college as an opportunity to gain knowledge, but to become knowledgeable about personal finances. Taking the time to understand how loans work and the obligations they entail will enable students to take more powerful control of their finances. A failure to do so can lead to mistakes which one can live to rue and which can cause financial havoc in the future.