4 Pitfalls to Avoid when Paying for College

Borrowing money for college.

College is an exciting time, but understanding how to pay for school can be confusing—especially for those who haven’t previously gone through the process. Knowing the basics and avoiding a few common pitfalls can help ensure that paying for college doesn’t cost you more than it should.

Below are four mistakes students commonly make when paying for college.

[Remember, scholarships don’t have to be payed back. Search ScholarshipAdvisor to find yours.]

Mistake #1: Not understanding the differences between the types of financial aid and student loans

There are several sources of money available to help students pay for college. Scholarships and grants are free money that come from the federal government, your state, your college, and/or private organizations. Scholarships are typically merit-based and grants are often need-based.

Work-study allows students with financial need to work part-time to earn money to help pay educational expenses. Check with your school to see if it participates in the Federal Work-Study Program.

Federal student loans are made by the U.S. Department of Education, while private student loans are made by banks, credit unions and financial institutions. Since loans must be repaid, you should think carefully before you borrow.

Tip: In order to receive federal financial aid, every family must first complete the Free Application for Federal Student Aid (FAFSA). Be sure to complete the FAFSA prior to the deadline.

Mistake #2: Accepting the full amount of loans offered, instead of only what is needed.

After you have been accepted to college, you will receive a Financial Aid Award letter. Your award letter contains the financial aid your school is offering you, as well as eligible aid from federal and state sources, including federal student loans.

While it may be easy to simply accept the full amount of federal loans offered, you are not required to. Do the math and determine how much you’ll really need to borrow, as every penny you borrow now must be paid back with interest.

Tip: Most federal student loans have fees that are deducted from the funds sent to your school, so take this into consideration when determining how much you will need to borrow.

Mistake #3: Not understanding how fixed and variable interest rates affect loan payments.

When you take out a loan with a fixed interest rate, the rate is set by the lender at the time the loan is made and does not change. However, with a variable interest rate loan, the rate can fluctuate since it is made up of a fixed interest rate spread and a variable interest rate index. While the interest rate spread does not change, the interest rate index can go up or down over time, causing the rate on your loan to go up or down.

If you have chosen a fixed interest rate with a standard repayment plan, once you enter your repayment period your monthly principal and interest payments will remain constant for the length of your repayment term. In contrast, if you chose a variable interest rate loan and the interest rate index changes, your monthly principal and interest payments will go up or down depending on which way rates moved.

Tip: Most variable interest rate student loans use an interest rate index that fluctuates. Before taking out a variable rate loan, understand the rate index and how much it has varied over time to get a feel for how much rates might increase or decrease during your repayment term.

Mistake #4: Deferring principal and interest payments while in school. 

When taking out a student loan, you will often have a choice of payment options while you are in school, including making full principal and interest payments, interest-only payments, a partial payment, or deferring all payments.

Deferring your principal and interest payments while in school may seem like a good choice, but it could end up costing you more. This can occur if you are responsible for paying the interest while you are in school, because your loan is accruing interest that will be added to your principal balance before you enter repayment.

For example, if you took out a $10,000 loan as a freshman, with a fixed interest rate of 7 percent and a 10-year standard repayment term, deferring your payments for four years could end up costing you almost $3,800 more in total payments than if you made your principal and interest payments while in school.

Tip: If you cannot afford to make full principal and interest payments while you are in school, even a $25 monthly partial payment could save you hundreds of dollars in total payments.

By doing your research and understanding some basics of student financial aid, you can get a head start on your financial success after college.

college financial aid mistakes to avoidDean Wildman is the Director of U-fi Student Loans and is an expert in many aspects of education finance. A graduate of the University of Maryland’s Robert H. Smith School of Business, Dean has worked in various education loan marketing, finance and operational capacities for over 20 years.

 

Tags: ,