6 Mistakes People Make With Student Loans, According To A CFP
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Student loans can be stressful. Borrowing money for school may seem easy, but repayment plans come with rules and red tape that can be difficult to work with. The recent news of 99% of Public Service Lending Applications (PSLF) being rejected proves how easy it is to go wrong.
If you are considering taking out a student loan or are already trying to pay it off, here are the most common student loan mistakes I see as a financial planner.
1. Take out private loans instead of federal student loans
Choosing the type of loan for your college is one of the most important decisions you will make. When you take out personal loans, you are not eligible for loan waiver. In addition, federal loans offer borrower protection such as income-based repayment options, deferral, and loan relief that private lenders do not give you.
I always tell borrowers to exhaust their federal loan options before turning to personal loans. You can always refinance your federal loan into a personal loan later if you think it is a better option. But you can’t refinance a private loan into a federal loan.
2. Choosing the wrong repayment schedule
If you have federal loans, there are 11 student loan repayment plans to choose from. Which is best for you depends on your financial goals. If you want to pay less interest, the standard 10 year repayment option is best. Refinancing your federal loan into a personal loan can also save you money in interest.
However, if you want a student loan waiver, you must have a qualified earnings-based repayment plan. If you do not participate in the correct program, your loans cannot be waived. Before you decide on a plan, be sure to familiarize yourself with your options.
3. Don’t shop for the best interest rate
Interest is the price you pay for borrowing. Typically, the better your credit rating, the better your interest rate. And the better your interest rate, the less you will pay over the life of the loan.
When borrowing money for school or refinancing existing loans, it is wise to look for the best rate. Every lender will do what is known as a soft credit check. Soft pulls will not show up on your report, so they will not affect your creditworthiness.
Talk to a financial planner today about choosing the right student loan. SmartAsset’s free tool can connect you with a qualified professional »
4. Borrowing too much money
Borrowing too much money is not a problem only for people with student loans. While you shouldn’t borrow more than you have to pay for tuition and books, you shouldn’t pile up credit cards or finance a car purchase while you’re in school.
After all, you have to pay that money back. The more you borrow, the harder it will be to make the payments after you graduate and get a job. Plus, saving for retirement is something that customers struggle with all the time. The more you pay in monthly debt, the less money you have to invest in your retirement savings.
5. Co-sign a loan without understanding the consequences
You shouldn’t think twice about getting a loan for your son or daughter to go to school. However, there are consequences that you may not be aware of when co-signing a loan. Even if your child is responsible, you can repay the full amount if they fail to make the payments. It could also affect your ability to buy a home or get a loan for any reason as it increases your debt-to-income ratio.
If you decide to co-sign a student loan, ask for co-signer approval. Some private lenders remove you as a co-signer if the primary borrower meets certain requirements, such as: B. 12 consecutive on-time payments and a credit check.
6. Do not ask for help from a professional
One of the most heartbreaking things I see as a financial planner is when people put their lives on hold due to student loan debt. More and more borrowers are putting off buying a home, getting married, or starting a family.
Even if you are in good financial shape, it is a good idea to seek help from a professional. A financial planner can review your student loans and help you come up with a plan to pay them off and save for retirement while still allowing you to live a comfortable life.