How to Avoid Student Loan Mistakes

With more than two thirds of undergraduate students leaving college with at least $19,999 in debt, it seems that spending a lifetime paying off student loans is the norm. Luckily, there are many steps students can take to lessen his or her load.

From applying for scholarships, to cutting back on non-essential expenses, to talking to lenders about payment options before graduation rolls around, there are many realistic options for students hoping to avoid student loans. You might be surprised to find that graduating with a small amount of debt—or none at all—is well within your reach.

Take Out As Little As Possible - Explore Other Options
Research Loan Deferment and Forbearance - Ask About Loan Forgiveness - Talk to Lenders
Understand the Dangers of Defaulting on Your Loan - Avoid Defaulting on Your Loan

Take Out As Little As Possible

The easiest way to avoid student loan debt is to take out fewer loans. While the cost of tuition may seem unavoidable, there are a number of areas where many students can save money while still in school, including books (buy used), housing (stay in a cheaper location), transportation (ride a bike or walk), and meals. The less a student takes out in loans the less he or she will have to pay back, which is why it is important that all students realize they should ask for loans that cover the bare minimum it will take to survive in college, and nothing more.

Explore Other Options

Government and private loans are not an undergraduate student's only options when paying for college. Thousands of scholarships and grants offered each year through private organizations go un-awarded due to a lack of applicants, and seeking out lesser-known scholarship options is one of the best ways an undergraduate student can pay for school without going deeper into debt. To find out more about local scholarship options, check with your university's financial aid department or a school counselor, who will be able to find local scholarships that fit your specific strengths.

Research Loan Deferment and Forbearance

Many recent graduates qualify for student loan deferment or forbearance without realizing it, based on current income or other economic hardships. While deferment and forbearance may temporarily suspend or reduce monthly loan payments, it is important to remember that interest will continue to accrue on all loans—unless they are federally subsidized—which is why anyone interested in these options should thoroughly research them to determine whether either will help ease their long term financial situation.

Ask About Loan Forgiveness

Loan forgiveness is when a student's loans are paid off or reduced in exchange for agreeing to work in public service, volunteer for an organization, or perform a number of years of military service. Oftentimes, teachers or physicians may qualify for loan forgiveness by working in undeserved or poorly performing communities for a certain number of years after graduation. To find out more about loan forgiveness, contact your lender or inquire in the human resources department at your current employer.

Talk to Lenders

Whether you are asking to lock in an interest rate or lower your monthly payments, talking to your lender is the quickest way to get an answer to any lingering questions about debt. Oftentimes, those who speak with their lenders can reduce their interest rates or monthly payments by hundreds simply by asking.

Ignoring student debt will not make it go away, which is why it is imperative that anyone who thinks they may be close to defaulting on an education loan call their lender as soon as possible to arrange a new payment plan.

Understand the Dangers of Defaulting on Your Loan

If you do not make a payment on your federal student loan after 270 days, you will enter into default. This is barring that you have not arranged a deferment with your lender or entered forbearance. Defaulting on your student loans can drastically hurt your credit. Provided here is a list of some of the major consequences of taking such an action.

• Up to 15% of your disposable income may be garnished from your wages by the federal government.
• You can be sued for the entire amount owed. Being sued for defaulting on your student loan is different from being sued for other debts because there is no time limit on the lawsuit. You may be sued for an indefinite amount of time. Also, you are liable for the court and attorney fees that accrued during this period.
• Both your federal and state tax returns can be withheld until the debt is paid. This is the most common form of collection. This may be repealed in some cases.
• Federal benefits like Social Security may be withheld. The government can take up to 15% of your total benefits.
• You will be ineligible for any other federal loans or deferment on any other loans you have taken out.
• Your debt may be transferred to a collection agency. If this happens you will be responsible for repaying the debt and the costs of the collection agency's involvement.
• This will appear on your credit report and will go against your credit score.
• You may not be able to join the Armed Forces or renew a professional license.

Obviously, defaulting on a student loan has serious ramifications. It is better to avoid this situation if at all possible.

Avoid Defaulting on Your Loan

• Always know exactly what you're getting into before taking out a student loan. It helps to know the consequences of missing payments and how to prevent that before you even go through with the loan.
• Make a detailed list of all of your loans, including the amount, rates, and contact info for the particular lender. Also, keep meticulous records of all payments.
• Contact your lender in the event of any change. This includes a changing of your contact info, employment status, or your status as a student.
• If you foresee any difficulty making a payment on your loan, contact your lender. Ask them about a deferment or forbearance on your loan. These are both better options compared to default. Another option they may offer is loan consolidation.

Of course the most obvious thing is to make your payments on time, but due to unforeseen changes in your employment status or other circumstances this may not be possible. Remember, it is very important to be honest with your lender so they may help you before you are forced going into default.

After you make 9 out of 10 consecutive payments on time you will no longer be considered in default. On time is defined as making your payment within 15 days of the due date. If you can make 9 out of 10 payments within 20 days of the due date you may eligible for loan rehabilitation. For more information on loan rehabilitation visit the U.S. Department of Education's resource on loan rehabilitation.

Article Resources:

American Student Assistance CNN — Student Loan Debt, How to Get Relief
Federal Student Aid
FinAid.org
MSN Money – 3 Steps to Avoiding the Student Loan Trap
Nolo
The Project On Student Debt