My Biggest Student Loan Regrets
1. Not Considering Price When Selecting a College
Your choice of school has a big impact on how much you pay for college. Two-year schools are your cheapest option, but there's also a significant difference in sticker prices for four-year universities. According to the College Board, the average cost of tuition and fees in 2017-18 was $24,770 higher for a four-year private school than an in-state four-year public school ($34,740 versus $9,970).
"ISU [Illinois State University] was expensive for me, since I had no money saved and my parents didn't have a college fund for me" says Evan Davis, a 2018 graduate of Illinois State University in Normal, Illinois. "So, I mean the most effective thing would have been for me to do community college for the first two years."
But many students like Davis and Paige Kovalcik, also a 2018 graduate from ISU, fail to consider price when deciding on a school. They are then left with student loan problems like payments that take up too much of their budget after graduation. Kovalcik said she simply assumed since ISU is a public school and she'd be attending as an in-state student that it was a responsible option compared to a private university. But, before matriculating, she didn't actually work through how much she would have to borrow and how it would affect her life after graduation. As it turns out, while many private schools have higher price tags than public colleges and universities, they may be able to offer more financial aid than public schools so they may end up being cheaper in the end.
Today, like many other young adults, Kovalcik has little leftover after making her monthly student loan payment. "I went to a college that was too expensive," she says. "Now it's hard to pay back and I am living at home."
2. Not Having a Repayment Plan
In most cases, students aren't required to make student loan payments while in school, and they generally have a six-month grace period after graduation before their first payment is due. It can therefore be easy to develop an "out of sight, out of mind" attitude toward your debt that leads to student loan issues. Instead, create a plan for how you will pay it off.
Davis admits she isn't sure how much her monthly payments will be after her grace period is up or how much she'll be able to afford. She does, however, want to pay down her private student loan with the highest interest rate first. Although the original principal for that loan was about $20,000, it has accrued more than $6,000 in interest because she didn't make payments while she was in school. The longer you go without paying, the more interest accrues and the higher your payment will be, so making even small in-school payments can help lower your overall loan cost.
Melisa Boutin, a 2009 graduate of Drexel University in Philadelphia and founder of YourMoneyWorth, a personal finance blog for millennials, wishes she had made interest payments on her both her federal and private student loans while in school.
"This would have helped me avoid capitalization of all the unpaid interest that accrued while I was in college on my student loan principal, once the loans entered repayment," she says. Capitalization is when the unpaid, outstanding interest is added to the principal loan balance when a borrower postpones payments and paying interest. When this happens, this will increase the loan balance that future interest accrues on, and may increase the monthly payment amount.
3. Taking a Forbearance or Deferment
Sometimes it can become difficult to repay student loans, and you may be eligible for a forbearance or deferment on your federal and private loans if you meet certain requirements. Deferment and forbearance allow students to take a break from student loan payments — but only temporarily. For example, deferments can be taken when you are in school, on active military duty or during a residency and can last years. Forbearances are often shorter and are commonly associated with financial hardship such as an illness or job loss. Most student loans do, however, accrue interest during this time, which is added to the principal loan amount at the end of deferment or forbearance. Therefore, increasing the monthly payment amount and the total cost of the loan.
Carolyn Lenc, who graduated in 2008 from Olivet Nazarene University, in Bourbonnais, Illinois, deferred her private undergraduate loans while attending graduate school so that she could buy a home and pay for her wedding. Looking back, she realizes she could have stuck to a smaller budget for her personal expenses and continued making her student loan payments, instead of deferring and letting the interest capitalize, increasing her payments.
"I regret that it's taking longer to pay back now," she says.
4. Misusing Student Loans
Once your student loan is disbursed and your tuition and fees are paid, there may be some funds left over that the school will disburse to you, which is often referred to as a "student loan refund." This money must be used for education expenses, including books, supplies and basic living expenses. It is not free money, so you should not spend it frivolously on things like eating out, a new wardrobe or Spring Break trips.
Julie Mota, another 2018 graduate of Illinois State University, learned this the hard way. Instead of using the additional funds for school, she admitted she misused the money and spent some of it on entertainment and going out with friends.
"I dipped a little into my student loans for personal expenses," she says. And when it was time to pay for living expenses and books, she had to find another way to come up with the cash. The out-of-pocket money that she relied on came from part-time job earnings and parental support, which she was supposed to put away and use to pay down her loans.
Students may also be tempted to keep more of the refund than they need to pay for college expenses. This leads to higher loan balances, more accrued interest and higher payments. So if you don't need the entire refund, you can return it to keep your cost of borrowing down.
5. Extending Your Repayment Term
Federal student loans have more repayment options than private student loans, which can be beneficial when you are just starting out and not earning much. Some borrowers may choose a longer repayment term to lower their monthly payments, which can help them avoid missing payments or taking a deferment or forbearance, if eligible. While these plans can be helpful options, you will pay back more in interest because you are taking longer to repay your loans.
Like choosing a longer repayment plan, student loan consolidation or refinance can help students short-term by streamlining or reducing their payments, but it can have some drawbacks. When you consolidate or refinance, you may lose some of the benefits attached to the underlying loans. You may also extend your loan term and wind up paying more in interest over the life of the loan.
"After finishing my undergraduate degree, I consolidated my federal student loans to simplify repayment through having one servicer" Boutin says. "Although I did not necessarily want to extend the repayment term, it was extended to 20 years as part of the consolidation process."
So when refinancing or consolidating, pay close attention to the terms of your existing loans, as well as the ones assigned to your new loan. You may be giving up valuable features, such as repayment options only available on federal student loans.
Overcoming Your Regrets
If you've borrowed money for college and are now regretting the way you managed your student loans, take some time to evaluate the situation to see if you can make any improvements. Set realistic goals for paying down your balance, so you can start to build savings at the same time. If things get too overwhelming, you can contact your loan servicer for help.