How you handle your finances while you’re in college and graduate school can have repercussions for years after you graduate. Every time you go over your limit on a credit card, apply for a new credit card, or miss a payment—whether it’s on your card, on your car, or on your student loan—it can count against your credit score. And a credit score can drop a lot faster than it’ll go back up: It can take years to repair damaged credit and a low credit score. Bad credit can keep you from being approved for a car or home loan, it can make a landlord choose not to rent to you, and it can even affect whether a potential employer decides whether or not to hire you.
To help you keep your credit intact and avoid the pitfalls of unmanageable debt, NextStudent, a leading Phoenix-based education funding company, offers these six tips on how to be a smart and responsible borrower.
1. Plan ahead.
The first thing you should do at the start of each semester is put together a written budget. Add up all your expenses: That means the big things like tuition, room and board (or rent and utilities), books, airfare home on holidays, as well as day-to-day living expenses like meals, groceries and gas. Don’t forget to add in a hundred dollars or so for occasional “fun” spending, like a night at the movies or a few iTunes downloads.
If you have a part-time or work-study job, apply your income, as well as any scholarship money or grants you’ve received, toward your expenses. Whatever expenses are left over are what you’ll need to cover each month.
If you qualify for federal student loans, borrow only as much as you need to pay your school-related costs (which include a reasonable allowance for living expenses and transportation to and from school) that aren’t covered by any scholarships or work-study money.
2. Don’t think of credit cards as money.
Just because you have the credit to buy it doesn’t mean you can afford it. On the one hand, it’s a good idea to open one or two credit cards while you’re in college in order to build a credit history that you’ll need later on to qualify for a mortgage or certain other types of loans. But the plastic can backfire on you if you just start racking up the charges without considering how you’re going to pay it all back. And remember that every time you apply for a credit card, it affects your credit score. Don’t apply for five or six cards at once, or it could reflect negatively on your credit report.
Use your credit cards for emergencies only, or for small regular purchases like gas, when you don’t have $40 in cash on you. When you do make those small purchases, make sure you pay off your card balance in full each month so you don’t incur any interest, which can add hundreds of dollars to the purchase price of anything you charge to your card. Carrying a credit card balance that’s more than half your credit limit can also affect your credit score, so one of the last things you want to do is max out your cards.
Here’s a basic rule: Don’t spend more than you have. It sounds like a no-brainer, but this is how people get in over their heads, with tens of thousands of dollars in credit card debt that they have no idea how they’re going to pay back.
If it’s not in your budget and you can’t pay for it with your fun money, don’t buy it. If you’re looking for a pricier one-time purchase that goes outside your monthly entertainment budget, like the new iPod or a digital camera, save a few months’ fun money to make it happen. Resist the urge to run out and put it on the card.
Credit cards aren’t like your student loans; cards are a lot less forgiving. You can’t put off making payments just because you’re still in school or because you don’t have a job. And if you get in over your head and have trouble making your monthly payments, a credit card doesn’t come with deferment or forbearance options, the way your federal student loans do, that allow you to temporarily postpone making payments until you can get back on your financial feet.
3. Be informed about your financial aid options.
Look to scholarships and grants first to cover your college costs. Since scholarships and grants don’t have to be paid back, they’re essentially free money to put toward the cost of your education.
After scholarships and grants, look into your federal student loan options, which offer low-cost, low-interest loans to eligible undergraduate and graduate students, as well as to qualifying parents of dependent undergraduates. Federal Perkins Loans, Stafford Loans, PLUS Loans for parents, and Grad PLUS Loans for graduate students offer low, fixed interest rates, no application fees, and no prepayment penalties. As a student, you also have the option to postpone making payments until you’ve left school or dropped below half-time enrollment.
If, even after you’ve taken full advantage of your federal financing options, you’re still falling short on your education-related expenses, private loans could make up the difference. NextStudent Private Student Loans are available year-round, so you can apply at any time throughout the year, and they offer generous borrowing limits that cover up to the full cost of your attendance, less any other financial aid you’ve received.* Federal student loans typically offer more attractive terms than private student loans, so always make sure you’ve used your federal loan options before you turn to private student loans.
4. Ask questions.
Regardless of the type(s) of loans you’re considering, make sure, before you apply, that you ask questions that will give you the information you need to decide which loans will be best for you:
* What are the eligibility requirements? What criteria do you need to meet to qualify? Will you need a co-signer?
* What’s the interest rate? Is it a fixed rate that won’t change? Or is it a variable rate that can fluctuate monthly or quarterly and change your monthly payment amount?
* Are there any application fees, origination fees, guarantee fees, administrative fees or processing fees?
* Can you defer making payments while you’re still in school at least half-time?
* What are your deferment and forbearance options once you’ve left school? Do you have ways to postpone making payments without affecting your credit if you lose your job or run into financial difficulties?
* How long do you have to repay? What kinds of repayment plans and options are available?
5. Never be afraid to communicate with your lender.
Even when college students act responsibly and watch their spending, with college costs on the rise, some students graduate with a mountain of student loan debt and can end up struggling to make their payments, especially when they’re still looking for a job or at a first job with a starter salary. If you ever find yourself in this situation, it is absolutely critical that you communicate your situation with your lender or servicer so you can make the appropriate arrangements that will protect your credit score.
Federal student loans offer extended, income-sensitive and graduated repayment plans that could lower your monthly payment and help make repayment more affordable. You also have deferment and forbearance options in case you need to temporarily postpone making payments altogether. If you have private student loans that don’t carry the standard federal forbearance benefits, you may still be able to work out a workable payment plan with your lender.
The main thing is to contact your lender. Most lenders will want to work with you; they want to be repaid as much as you want to keep your credit intact. Don’t just stop making payments, waiting for your situation to get better. Each time you miss a payment, it can drop your credit score.
And after enough missed consecutive payments, your student loans could go into default. Besides the negative effect it’ll have on your credit report, having a defaulted student loan could keep you from being able to take out most other kinds of loans, whether you’re looking to finance a new car, a house or another semester at school. If you default on a federal student loan, the government can even decide to garnish your wages, automatically taking money each month out of your paycheck.
6. Consolidate.
A simple solution that could also help lower your monthly student loan payments is student loan consolidation. Once you’ve left school or dropped below half-time enrollment, a Federal Consolidation Loan allows you to bundle all your eligible federal student loans into one easy-to-manage loan with a fixed interest rate. By consolidating your student loans, you could cut your payments nearly in half and replace multiple monthly bills, due dates and payments with a single loan and one convenient monthly payment. You could also get up to 20 more years to repay.
With no credit check, no fees and no cost to apply, a student consolidation loan is one of the smartest moves a responsible student loan borrower can make.
NextStudent believes that getting an education is the best investment you can make, and we’re dedicated to helping you pursue your education dreams by making college funding simple. Learn more about Student Loans, Private Student Loans and Student Loan Consolidation.
*Undergraduate and graduate borrowers may borrow annually up to the lesser of the cost of attendance or $30,000 ($40,000 for certain schools where it has been determined that the annual cost of attendance exceeds $30,000), and up to an aggregate maximum amount of $130,000. Borrowers in continuing education and K–12 loan programs may borrow annually up to $30,000, and up to the aggregate maximum amount of $130,000.
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