Top 10 Student Loan Mistakes

Student loans are among the largest debts individuals incur—after only mortgages on their homes. Due to their size, even tiny missteps can have dire financial consequences. Alas, numerous students and parents make mistakes when handling student loans, and those errors cost them thousands of extra dollars and years of aggravation.

To assist you in avoiding these issues, here are the top student loan errors—and how to avoid them.

1. Borrowing More Than You Need

Just because you qualify for a large loan from a lender doesn’t mean you have to borrow it all. Too many students view their financial aid “refund” as money they don’t have to pay back, but it’s not—it’s borrowed money that you’ll have to repay with interest. For each $1 you borrow, you’ll probably be paying back about $2 when the loan is completely paid.

If your student loan is significantly larger than your potential future earnings, it may take years to repay. Rather than taking out the largest possible loan, borrow only what you need for tuition and vital expenses. Consider other means of financing, such as scholarships, grants, part-time work, or tuition payment plans.

2. Not Shopping Around for the Best Loan

Different lenders offer different interest rates and fees. Just because a bank or loan company advertises a low rate doesn’t mean you’ll qualify for it—most people don’t get the best rates.

Before selecting a loan, shop around among several lenders, including federal student loans (which typically offer more favorable terms). Look at the true interest rate and charges, not the advertised rates. A small rate differential can save you thousands in the long term.

3. Cosigning Without Knowing the Risks

If you’re asked to cosign a student loan, be cautious. A cosigner is not just a reference—she or he is legally on the hook for the debt along with the borrower. If the student doesn’t make payments, both credit scores suffer.

Even if the lender has a “cosigner release” program (in which the cosigner may be released later), fewer than 1% of borrowers actually get it. So you might find yourself having to pay off the loan if the student is unable to. Cosign only if you’re willing and able to make the payments yourself.

4. Borrowing Student Loans for Non-Essential Expenses

Student loans are meant for education costs—tuition, course materials, and essential living expenses—not for vacations, shopping, or other frivolities. Borrowing for education is an investment in your future, but borrowing for pleasure will simply leave you deep in unnecessary debt.

If you don’t need the funds for school, don’t borrow them as a loan. The short-term convenience isn’t worth the long-term financial stress.

5. Avoiding Federal Loans for Private Ones

Federal student loans are nearly always a better value than loans from private sources. They have lower interest rates, more flexible repayment terms, and protections such as deferment, forbearance, and even loan forgiveness in some instances.

Private loans, however, have more restrictive conditions. Their forbearance durations are less (typically only one year, in contrast to three years for federal loans), and most don’t provide death or disability discharges. And private loans lack income-driven repayment plans. Always exhaust federal loans before resorting to private ones.

6. Missing Out on Easy Savings

Some lenders also provide a little interest rate reduction if you enroll in automatic payments. In addition to avoiding late charges, it saves you money in the long run.

And don’t forget about the student loan interest tax deduction, which allows you to subtract up to $2,500 in interest paid from your taxable income. It’s a simple way to pocket some extra money at tax time.

7. Choosing the Wrong Repayment Plan

When it’s time to repay, many students pick the plan with the lowest monthly payment—but that’s not always the smartest choice. Lower payments mean a longer repayment term, which means you’ll pay way more in interest over time.

Rather than defaulting to the lowest payment, choose the largest one you can afford. You’ll pay off the loan sooner and save money in the long term.

8. Putting Off Payments When You Don’t Have To

Deferment and forbearance can be a blessing if you’re having financial trouble, but if you’re able to make payments, you should. Interest continues to accrue during these suspensions, causing your debt to become even larger.

Use deferment or forbearance only as a last resort—otherwise, you’ll just dig yourself into an even deeper hole.

9. Forgetting to Update Your Contact Info

Even if you don’t receive a bill, your payments are due. If you change addresses or phone numbers, it’s your duty to inform the lender.

Late payments can result in late fees (as much as 6% of the payment) and even default, which has severe penalties such as wage garnishment, tax refund seizures, and collections charges up to 20%.

10. Refinancing Without Verifying the Math

Refinancing will reduce your monthly payment by extending your loan term—but with that comes paying more interest over the lifetime of the loan. In some cases, refinancing can actually increase your average interest rate.

If you have several loans, a better plan is to pay the highest-interest loans first rather than refinancing them all together.

Last Tip: Never Pay for Free Services
You never need to pay a fee to switch your repayment plan, reduce payments, request loan forgiveness, or combine loans. All of these can be handled for free by your lender or the government. If a company attempts to charge you for these services, leave them—this is a scam.

The Bottom Line

Student loans can be a helpful tool, but they can also become a financial burden if not managed carefully. By avoiding these common mistakes, you’ll save money, reduce stress, and keep your finances in good shape long after graduation.