Shopping around for a loan can save you money in the long run. (iStock)
As the costs of higher education continue to rise, many people rely on student loans to pay for their degrees.
Today, there are 45 million people who owe $1.6 trillion in student loans. Before agreeing to take out a loan that you could be saddled with for years, consumers should do their homework and avoid making mistakes that could cost them — literally.
Here are some of the biggest student loan mistakes borrowers can make.
1. Not shopping around for the best student loan rates
The first rule is to compare rates among the private lenders, Daren Blonski, managing principal of Sonoma Wealth Advisors, explained.
“Never assume the first offer is the best offer,” he said.
Federal student loans are considered the best option because the interest rate is fixed and will not change after you graduate and are repaying it. This helps consumers budget each month and predict how much payments will be. Direct subsidized loans do not accrue interest when you're a student.
2. Not comparing interest rates and repayment options
Students who need additional funds after receiving their federal student loans should look for the best interest rate and repayment options.
Pay attention to fixed versus variable rates, deferment eligibility and your post-college plans, said Kate Winget, senior vice president of Gradifi, the Boston-based employer-based student loan repayment segment of E-Trade Financial Corporate Services.
“Haphazardly picking a student loan can come with its own set of consequences. But the good news is there are new ways for those facing student loans to tackle repayment.
Look for banks and lenders that offer student loans with no application, origination or late fees. Some lenders will offer a discount such as lowering the interest rate by 0.25 percent if consumers enroll in automatic payments. Other lenders will give students an interest rate discount such as 0.35 percent by choosing the interest-only repayment option if they make interest-only payments while they are a student.
3. Borrowing too much
Avoid taking out a loan for more than you need to pay tuition and living expenses.
“The biggest mistake consumers make on taking federal student loan debt is taking too much,” Blonski said. “The system is designed to make it very easy to take on more than you need. Take on only the necessary debt.”
4. Not making interest payments while you’re a student
Even if your lender does not require you to make payments while you are a student, the interest accrues during the entire period. Only federal student loans do not charge interest. Working a part-time job while in school can help provide income, too.
5. Choosing a school beyond your budget
Too many students are willing to overpay for the cost of education. They should look into attending a less expensive community college for a few years.