In June of 2010, total student loan debt outstanding exceeded total credit card debt outstanding for the first time ever. Total student loan debt is increasing at a rate of about $2,853.88 per second. For some students, that's about the cost of a year's worth of books. For others, it's the cost of their spring break jaunt to Fort Lauderdale.
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If you're frugally minded, the idea of using student loan funds to pay for vacations, new dorm furniture and boozy weekends at the campus bar is outrageous. But that's just a few of the mistakes students are making when it comes to their student loans. Here are six major faux pas to avoid if you are taking out student loans.
- Falsifying Your Application
Lying on your student loan application is the first misstep you can make. Get caught (and there's a high possibility you'll be busted, as some schools audit all financial aid applications) and you'll not only lose your loan and incur fines, but you may be charged with fraud and be sentenced to prison - where you'll receive your education for free, but likely not the prestigious degree you were hoping for. (Before you even apply, read this: 6 Things To Know Before Taking Out A Student Loan.)
- Spending Loan Money on Wants, Not Needs
If you're spending your loan money on bar tabs at the campus pub, you either don't understand how to differentiate between needs and wants, or you just don't want to make those tough decisions. Either way, using your future to pay for the fleeting pleasures of today is poor money management. Forgo the shiny new Ikea furniture and lounge on thrift store castaways. Buy groceries, not takeout; budget for books, not booze.
Using loan money to pay for an education that will be with you forever is good debt. Using loan money to buy the latest laptop or MP3 player that will be obsolete a decade before you're done paying for it is very bad debt.
- Spending Every Loan Dollar You Get
If you receive a higher loan amount than what you actually need to survive, you might be tempted to spend until it's all gone on nothing of substance. If you earn more money than expected at your part-time job, or have a decrease in your living expenses, you may be required to submit an adjustment to your student loan. If not, save the excess cash in a high interest savings account and use it to begin paying back your loans when you graduate. (Find out how recent changes will affect your loan in 5 Surprise Changes To The Student Loan Program.)
- Taking On Too Much Debt
You're confident you'll land a high-paying job when you graduate, but what if you don't? Some experts suggest that your monthly student loan payment should be no more than 10% of your expected salary. Calculate your monthly loan payments based on a 10-year repayment schedule, including interest, then find out the average starting salary for your career choice. If your loan payments will be higher than 10%, look at reducing the amount you borrow, either through producing more income or switching to a less expensive program.
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- Missing Payments
Many a student has bounced a payment with the idea of paying double the next month. That's a big no-no when it comes to your credit score. Every missed payment is a black mark on your credit report, whether you caught up that payment or not. If your repayment schedule is more than you can handle, talk to your lender to find a solution before you start bouncing payments.
- Defaulting on Your Loan
Failing to make payment on your loan for more than 270 days will send your loan into default, and your financial life into a tailspin. Don't dodge your lender - they will find you, and the penalties are steep. The federal government, the loan guarantor on most student loans, has the ability to keep your income tax refund or garnish your wages to pay back the loan, plus any collection costs.
The Bottom Line
A student loan is often the first large sum of money a young adult must manage themselves. Avoiding common money mistakes when it comes to financing your college education is crucial to graduating with only good debt, and as little of it as possible.
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