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Outside of a purchasing a home, an education may be the biggest investment you’ll make in your lifetime. And just like you wouldn’t buy a house with a leaky roof or a cracked foundation, there are also pitfalls to avoid with student loans.
With help from Experts Council member Debra Brooks, we’ve compiled some tips and tricks to support you in navigating the student loan process.
Take entrance counseling seriously
Before a federal student loan can be awarded, the student must complete an entrance counseling session from the U.S. Department of Education. Brooks said students should be prepared to spend 30 to 40 minutes on the session, which details the acceptance process and repayment options.
“It’s a very robust counseling process, she said. “Students need to take it seriously, engage with the information and pay attention to their rights and responsibilities of accepting the loan money.
Know how to budget
Student loans aren’t free money. Brooks said the awards should be used for tuition, fees and books – not the newest smartphone and shoes. She urged students to live within their means.
“I see a lot of students with bad spending habits,” Brooks said. “You have to choose between your wants and your needs. We offer free coffee on our campuses, so is the daily $5 Starbucks really worth it?”
Remember, every dollar given to students by the government must be paid back. Find out how much money you actually need to attend school. There are budgeting tools available online to help map out your monthly finances. Some, like the student loan budget calculator Chase provides, will help plan for out-of-pocket expenses, while others, like Mint, are fully functional budget and expense tracking programs.
Take interest in your interest
On August 9, 2013 President Obama signed into law a bill lowering the interest rate on undergraduate student loans from 6.8 percent to 3.86 percent. According to NBCNews.com, the new law allows the government to establish variable interest rates – based on 10-year Treasury bill rates, plus 2.05 percent – on Stafford loans, but caps the rate at 8.25 percent.
It is vital that students stay informed on their interest rates and understand what it means for them and their financial future. As an example, at a 3.86 percent interest rate, a $50,000 loan repaid over 25 years will accrue $28,020 in interest charges, where the same loan at a 6.8 percent interest rate will accrue more than $54,000 in interest.
Though rates will fluctuate, Brooks noted that Federal Student Loan interest rates are still much lower than most other borrowing options.
“When I was in school, student loan rates were above 8%,” Brooks said. “If you don’t have good, or any, credit, it’s still the best way to borrow money – much better than a 20-plus percent interest rate on some credit cards.”
Take advantage of exit counseling
As Westwood is preparing you for a meaningful career, we also want to help prepare you to fulfill your student loan obligations after school. As graduation approaches, students should be on the lookout for a letter inviting them to take part in an exit counseling workshop. Loan advisors will walk them through the U.S. Department of Education’s exit counseling and help them understand their personal financial situation.
Westwood also works hand-in-hand with Student Loan Solutions, a team of student loan advocates helping students plan for the payback of their student loans. Whether it is helping set up an income-driven repayment program or deferring payments until a later time, the Student Loan Solutions team can look at a student’s individual financial situation and find the best way to move forward.
Pay back the loans
Student loans are easy to get, so individuals who want access to an education can get them. But the money is not a gift. Whether a student finishes school or drops out along the way, the money will need to be paid back to the government.
“Because there are so many different repayment options for student loans, if you don’t pay it back, it’s more detrimental to your credit score than any other line of credit,” Brooks said. “Unlike other lines of credit, student loan records do not go away after seven years –they’ll be there forever.”
Nationwide statistics show more than one of every 10 student loan borrowers is in default – meaning a payment is late by more than 270 days. To avoid letters and phone calls from collectors or garnishment of wages, Brooks suggested students who are unable to pay talk to one of the advocates at Student Loan Solutions.
Ignoring the repayment of your student loans can adversely affect your credit for the rest of your life and make it difficult to land a job or buy a car or home. Just as you’d watch out for the house with a leaky roof or cracked foundation, you can prepare for the future now by taking steps to avoid a difficult financial situation later.
Be sure to read Westwood’s information on student loans as well as our previous post on guidance from the student financial aid department.
Photo credit: Keith Ramsey / Ramberg Media Images