6 Worst Student Loan Mistakes You Can Make

For many borrowers, a loan is the only option for financing higher education. That being said, there are several significant mistakes you can make at every stage of the loan process—before you get the money, while you have it, and after you start paying the money back. These basic student loan mistakes include, but are not limited to, making sure you don’t falsify any information on your application, choosing the wrong repayment plan, and missing loan payments.

1. Falsification of your application

Lying on your student loan application is the first mistake you can make. If you misrepresent anything, such as your income, there is a high chance that you will be caught because some schools review all financial aid applications.

Not only will you lose your credit and incur a fine of up to $20,000, but you could also be charged with fraud and face jail time. You can get a free education while incarcerated, but finding a well-paying job tends to be more difficult if you have a criminal record.

2. Spend money on wants, not needs.

Using your student loan money to pay for an education that will stay with you forever is good debt. Using your student loan money to buy the latest smartphone that will be out of date ten years before you finish paying off your loan is bad debt. A small, casual splurge isn’t likely to set you back much, but mortgaging your future for the fleeting pleasures of today is poor money management.

If you get a higher loan amount than what you really need to survive, save the extra money in a savings account with the highest interest rate you can find and use it to start paying off your loans when you graduate. Alternatively, see if you can use the funds to pay off your loan interest while you’re still in school.

3. Choosing the wrong repayment plan

It is tempting to choose the repayment plan that requires the lowest monthly amount. Income Based Repayment (IBR) or Pay As You Earn (PAYE) plans sound great – who wouldn’t want to have 25 years rather than a decade to pay off their debt? However, these plans will also end up costing you more in the long run. Payment plans with lower monthly payments also have the longest repayment terms, which increases the total amount of interest you’ll pay over the life of the loan.

To help you pay as little interest as possible, you should pay as much as you can afford each month. So how much does it cost? One rule of thumb is that your monthly student loan payment should not exceed 10% of your expected salary. Start by calculating your monthly loan payments (including interest) on a 10-year repayment schedule using your expected salary, which is usually the standard option.

If your loan payments will be more than 10% of your income—which may be difficult to afford on most entry-level salaries—then it’s worth considering a longer, less expensive program. But promise yourself that you will take another look if or when your financial situation improves.

4. Oversight of refinancing

To put it another way, if interest rates were to drop significantly, it would be a mistake to ignore the potential opportunity to refinance your loan. You could be missing out on the opportunity to save hundreds, if not thousands, of dollars on student debt payments. Of course, interest rates and loan terms can vary significantly among lenders. Be sure to compare and crunch the numbers carefully to make sure you’re actually getting a better deal.

However, if you have a federal student loan, keep in mind that when you refinance, you are trading it in for a private loan. This means you are out of the federal loan program and its income-based repayment plans and loan forgiveness options, as well as losing some financial protection.

Even if you can’t refinance the entire loan, it’s not against the law to make an extra payment from time to time or pay more than the minimum amount each month. Even a random bonus can add up, shortening the life of your loan. Just make sure your student loan servicer applies the additional payment or amount to your principal balance, thereby reducing the interest, rather than simply applying it to the next month’s payment.

Some loan servicing companies may also offer a reduced interest rate for signing up for autopay. Be sure to consider all options for reducing your rate.

5. Missing payments

Many students have missed a month’s student loan payment with the intention of doubling their payments the following month. This is a big mistake.

Every missed or late payment is a black mark on your credit report and hurts your credit score, whether you make that payment or not. (For federal student loans, delinquencies of 90 days or more are reported to the three major credit bureaus). This problem can remain on your credit report for years, affecting your ability to take out other loans.

If your monthly payment is more than you can afford, talk to your lender to find a solution before you start missing monthly payments.

6. Non-payment of loan

Failing to make loan payments for more than 270 days will send your loan into default and send your financial life into a tailspin. Don’t shy away from your lender. They will find you, and the fines for non-payment will be very large. Unlike credit card companies, the federal government (the guarantor of most student loans) has the ability to withhold your income tax refund to pay off the loan, as well as any collection costs.

Again, before you get into dire straits, contact your lender or loan servicer. If your problems are caused by an unexpected misfortune, such as being fired, you may be able to negotiate a deferment or forbearance to give yourself some breathing room. But simply not making your monthly payments is the worst mistake you can make with your student loans.

Bottom line

A student loan is often the first large amount of money a young person has to manage. Avoiding harmful money mistakes while funding your college education is critical to graduating with only good debt and as little debt as possible.