If you’re anything like millions of other college students and former college students, you might have student loans, or you might be considering them as a way to help finance your education. Managing your loans can be tricky though, especially if you don’t have a head for finances or compounding interest. It doesn’t help that many students subscribe to a “set it and forget it” policy when it comes to their loans, and they don’t think about them at all while they’re in college—after all, college is for fun, not loan payments and conversations with loan servicers.
That’s a mistake though. Manage your student loans the smart way by not doing the following:
1. Borrowing private loans instead of federal loans: Before you even consider private loans, file the FAFSA and see what you qualify for federally. Federal loans offer better flexibility and protections for students when it comes to repayment and they almost always have lower interest rates (and you want the lowest you can find to keep your payments down). Regardless of how much money you need to take out in student loans, exhaust your federal options before turning to the private sector.
2. Not considering your return on investment: College is expensive. In the 2016–17 school year, the average annual cost of attending a private, nonprofit college was $26,608, but the cost of many schools topped $50,000. Public colleges, however, averaged $8,022 annually. Think about what you’re going to be doing after graduation. For example, if you’re studying to become a teacher, is it more important for you to get a $100,000+ undergraduate degree or to do well in your certification courses? Consider both what you can afford with minimal student loans and your potential salary after graduation. These should both be factors when you make your college list and choose between financial aid packages.
3. Borrowing more than you actually need: Chances are, when you apply for federal financial aid, you’ll qualify for student loans, even if you don’t qualify for federal grants or the Federal Work-Study program. Chances are, too, that you’ll qualify for more loans than you actually need to cover your cost of attendance at an institution. Remember, every dollar that you take out in student loans, whether or not you actually use it for educational expenses, has to be repaid with interest. Take out the minimum amount you need each year to cover your costs after all other forms of aid (grants, scholarships, income from a part-time job, birthday money, etc.) are applied. Your future self will be grateful.
4. Spending on unnecessary expenses: Your student loans are for your education. They’re not for a European vacation. They’re not for a new wardrobe. They’re not for a car payment. Use them only for your education; if you’ve accidentally taken out too much money, make a payment or use it for next year’s tuition. Don’t think of the money as spendable. Instead, let yourself live and splurge with money that you earn from a part-time job or get from your grandmother at the holidays. Loans are for school, period.
5. Not making payments while you’re in school: If you take out subsidized federal loans, the government will pay the interest on those loans while you’re in school, during a grace period after leaving school, and while you’re in deferment. This isn’t the case for unsubsidized federal loans. These begin accruing interest right away—and over four years that amount can really add up. Putting money toward that interest right away will save you hundreds of dollars later on. After interest starts earning interest, which is what will happen if you let unsubsidized loans sit for four years, you’ll end up paying back way more than you originally took out.
6. Paying only the minimum: If you can only afford to pay the minimum each month, that’s okay. If you have any wiggle room, though, pay extra. Even cutting out one Starbucks drink a week and putting an extra $20 toward each loan payment is going to save you money on interest—and remember that interest is essentially what you’re charged for the privilege of borrowing money; you never saw those dollars in your loan checks.
7. Not considering alternative payment plans: Depending on your career and how much money you make after graduation, you may find that you’re having trouble repaying your loans. Talk to your loan servicer about switching repayment plans; there are several options that will extend the life of the loan while decreasing payments to a portion of your income. Income-driven repayment plans may result in loan forgiveness at the conclusion of the repayment period, but you will end up paying more overall as a result of extending your repayment period. Use this repayment calculator to estimate your payments under different repayment plans. Then, make the right choice for your circumstances.
Stay in contact with your loan servicer throughout the life of your loans, especially if you have any questions about payment scheduling or repayment plans. Your servicer can help you understand deferment and forbearance, too, if you find that you’re struggling to make your payments at all.
Be smart about your debt, and you’ll have a much easier time getting rid of it!