Generally speaking those who seek student loans are young in years and inexperienced in finance, and probably a college loan is the first sort of debt they have ever taken on. And what a debt it is too, comprising perhaps more than one loan for each year of college attendance. That tidy sum of money which is handed over when you first attend college is only going to be one of many such loans; it is just the start of future debt. It is best to be aware of a few things before signing on the dotted line for that very first loan.
A college loan is not just for college; it is a loan which could follow you round for the next thirty odd years. It is very important to understand why you need a loan and how you intend to handle it. Do you need it for the right reasons, to get the most out of a college education and enhance your future earning prospects? Or do you need it because you want to have fun with your friends for the next four years, partying, having a fantastic social life, and sliding by on a barely passing grade? If it’s the latter there are much cheaper ways to party. The size of the potential student loan debt should make the student give great consideration to this. Maybe an expensive college education could be too expensive for your own good.
Before signing any loan be aware of all the small print and clauses. The only sensible way to approach a loan is understand it is a short term means to an end. Your first priority should always be to pay it off as quickly as possible. A loan has two main components, the amount you borrow (the principal) and the amount of interest it accrues. There will be a set repayment term at a certain rate of interest, which can give you an idea of how much it will cost you each month in payments to pay off the debt. Any changes you make to extend the repayment terms will add more interest to your debt so you will repay more in total.
However, if you pay more than you need each month, you will pay less interest than the originally estimated amount. It is always wise to prepay as much of the loan as you possibly can with whatever amount you can afford. The more you prepay the debt the quicker it starts to disappear. You can start to do that even whilst attending college if you can make any extra funds through working.
You should also be aware that the moment you miss a payment and go into default it will be recorded on your credit history, reducing the chance of you ever receiving preferential interest rates on any future borrowing such as a mortgage. If the payments are met in a responsible fashion, this will establish you as a good credit risk.
Understand that all your student debt will be considered a liability whilst you retain it, and will reduce your capacity for new borrowing. Never choose to extend a repayment term unless you absolutely have to, as your priority should always be reducing the debt not extending it. The longer you hold a loan, the more chance there is that something could go wrong at some point, making the payments a financial difficulty. Bear in mind that all student debt is non dischargeable, so don’t think you can make yourself bankrupt to relieve yourself of the obligation, as it won’t work.
Before you sign on the dotted line for your student loans do be aware of these things. With so many people needing to take out loans these days for a college education, there is no stigma attached to student debt; but you are certainly going to feel foolish if you are still paying the price thirty years from now. So always remember to prioritise paying off your student loans as quickly as possible, thus saving money over time and establishing the groundwork for a healthy fiscal future.