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As student loans have gained popularity over the years, the dangers of loan defaults and missed payments have also become more well-known, as have the possibilities of student loan debt potentially impacting your credit history. Failing to meet loan payments once you are out of school may lead to additional penalty fees or other attempts to collect the debt.
Consider the following ways that may help establish a more positive relationship with your loans and avoid allowing them to wreak havoc on your post-grad finances.
1. Understand your future payment responsibility
The average college graduate in 2015 finished school with just over $35,000 in student loan debt. If this is your first experience with loans or the impact they may have on your credit, it may be difficult to understand the implications of borrowing this much money.
“What helps is knowing how much a loan will cost you per month,” says John Wasik, author of Student Debt is Immoral.
If you already know which school you’ll be attending, you can easily break down the costs in advance. If you haven’t made a decision on a school, a good place to start is by using the known costs of the top schools you are considering. Using this estimated number and one of the many online student loan calculator s available, you can work out some preliminary math to calculate the interest you might accrue on any loans and how long it might take to pay them back using different strategies.
Compare how these monthly payments align with your intended career and lifestyle prospects, but be realistic about those comparisons. According to Wasik, if the numbers show that you’ll struggle to make payments once you graduate, you may want to reconsider your college options or take another look at available payment plans instead of resigning yourself to accepting the debt.
2. Know your deadlines and the terms of your student loans
Once you understand the reality of the costs involved with student loans, you can take steps to help make them work within your personal financial situation.
Consider applying for as many scholarships as you can, even if you don’t expect to receive the majority of them. If you are entering college in the fall and haven’t yet filled out your Free Application for Federal Student Aid (FAFSA), you will want to do so as soon as possible. Your FAFSA results determine your eligibility for grants and student loans from the federal government.
“Don’t assume that you won’t qualify for aid,” Wasik says, adding that it’s important to submit those applications before their specified deadlines.
Keep in mind, however, that not all student loans are created equal. There are two different types of student loans, federal loans and private loans. As their names might suggest, federal loans are funded by the federal government where private loans are funded via a private lender such as a bank, credit union, or university. While the exact terms and conditions will vary from loan to loan, in general, federal loans offer individuals lower interest rates in exchange for higher payments over a 10-year repayment period. Private loans require lower payments with higher interest rates each month, but their repayment period lasts much longer, somewhere around 20-25 years.
Federal loans may come with the added benefit of post-graduation grace periods. A grace period is a set amount of time following graduation where graduates can delay repaying their student loan debt as they work to get their footing in new careers. Private student loans, on the other hand, begin collecting payments while individuals are still in school. Also consider that interest works differently for different loans. Depending on the type of your loan, the money you borrow might be accruing interest while you are in school and not just when your repayment period begins.
Understanding the specifics of your student loans can help you gain a better insight into what your future payments might be like month to month, when your first payment would be due, and how much you may owe with interest—and don’t forget to learn about your options if you eventually have trouble making payments.
Student loan consolidation and forgiveness plans sound great but they may not be right for everyone, nor will necessarily be eligible for them and there are many qualifications for these options. The less educated you are about repaying your loans, the harder it may be to pay them off.
“Unless you understand what you’re getting into, it’s very difficult to get yourself out of it,” Wasik says.
3. Commit to using loan money wisely
Once you have an understanding for how much money you might borrow and what this will mean for your future payment responsibilities, commit to making this process as easy for yourself as possible.
According to Wasik, if you’re borrowing money for tuition, “definitely don’t use it on lifestyle stuff.” Your loan might seem like free money at first, but your initial interest calculations should demonstrate how important it is to spend wisely. Consider a part-time job to cover expenses unrelated to your education and try to remember that a loan is money borrowed, not given, and will be owed again after graduation.
You might even want to research future employers who offer student loan assistance.
“Some modern employers understand the strain of making student loan payments and have programs to assist you in paying them off”, says Kristin Hardy, vice president of strategic solutions, Education Vertical, at Equifax.
Most importantly, use this time before you have taken on loans to evaluate how they may impact your future self, and remain dedicated to making their impact as positive as possible.
“The more planning you do, the better off you’re going to be,” says Wasik. “If you go into it blindly, it’s not going to work out as well as you hope.”
The information contained in this blog post is designed to generally educate and inform visitors to the Equifax Finance Blog. The blog posts do not give, and should not be assumed to provide, personalized tax, investment, real estate, legal, retirement, credit, personal financial, or other professional advice. Before making any financial decision, you should always consult with the appropriate professionals who can explain your options, rights, and legal responsibilities, and advise you on any tax, legal, credit, or business implications that may result from those decisions. The views and opinions expressed by the authors of blog posts are their own views and may not be the views or opinions of Equifax, Inc. and/or its affiliates.
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