Becoming a Smart Consumer: Student Loan Insight

Student with Piggy BankUnless you’re fortunate enough to earn a scholarship or grant, typically those pursuing a higher education are forced to take out loans in order to fund their schooling. And while loans are the norm, they’re also the reason why so many college graduates are in severe debt immediately following their graduation ceremony. In fact, according to the most recent statistics, the graduating class of 2011 is the most indebted class ever, averaging about $22,900 in debt — a staggering 47% increase from 11 years ago. The high number can be attributed to many different factors, including borrowing too much money, attending a school way-out-of budget, acquiring a low paying job after college, or worse — not getting employed at all. Whatever the case, you should always aim to be a smart consumer when it comes to your school loans; this includes being well-informed about your loan even in the preliminary stages, understanding the terms of your promissory note, making loan payments on time, and keeping your lenders updated with all off your personal information. This is exceptionally important because even the tiniest slip up can follow you long-after graduation. This resource is provided to help student borrowers develop some insight into how loans work and to explain what one should do to avoid getting into even deeper debt.

Understand the Terms of your Promissory Note

In a nutshell, a promissory note (sometimes referred to as a note payable in accounting) is the contract a borrower must sign stating that he or she “promises” to pay back the amount of money the lender distributes. This contract is a written agreement not only between a borrower and lender, but with the school you are attending as well. Regardless of whether it is a private or federal loan, the promissory note will blatantly state the terms and conditions that the borrower must abide by, including the amount of money you owe (with interest rate and fees); how long you have to repay the loan back; grace periods (if any exist); and the penalties that may occur if a payment is late.

Since the promissory note is indeed a legal document, by no means should one just quickly gloss over it and sign it. Make sure that you truly understand what is expected of you and what may be subject to change. If something is not clear or there is an error on the promissory note, do not sign it until the issue is resolved. Most lenders allow students to sign promissory notes electronically to speed up the process, but you should not be afraid to print it out to check for errors or request a hard-copy. To get a better idea of what a promissory note looks like, click here.

Make Loan Payments on Time

In addition, it’s extremely important that you make your monthly loan payments on time. If you do not, you can risk falling into the loan default stage. Here, lenders will report you to collection agencies and may sue you. Granted if you are late on a single payment lenders will attempt several times to collect the payment before marking your case as a loan default. But if you do not come up with the proper payment after several warnings your credit score will be tainted. It might not seem like a big deal now, but your credit score affects all major purchases that you make as you get older, including purchasing a car and a home. It will also affect whether you are found eligible to receive any additional loans (something you may want to do if you decide to return to graduate school) or may determine your credit card spending limit. According to various news sources, a bad credit score can even affect your job prospects — a bad credit report is seen as more favorable than a criminal record, but can still hinder your chances of employment. Thus in the end timely payments will help you become more financially stable in the future. If you are unsure what your credit score is, there are three credit bureaus that provide free credit reports.

However, if you are just careless about paying bills on time because you are forgetful, if the option is available it’s probably best if your monthly payments are automatically deducted from your bank account. This way you are certain that the proper amount will be paid each month and you will not have to risk the consequences of late penalties. This option may even save you more money in the end. Various private and federal lenders will give borrowers as much as a 0.25% reduction in interest rates for those who choose to do automatic withdrawal.

If you miss your payments because you simply do not have the funds to pay your monthly loan, then you need to explore all of your options — you can’t just let the unpaid bills stack up. This is the easiest way to go into loan default and ruin your credit score. Some options may include applying for a loan deferment or looking into loan forbearance (although forbearance will result in an overall higher loan cost in the end). Other options include loan cancellation, changing your monthly payment plan to a smaller amount, or consolidating your loans.

Keep Lenders Updated

Lastly, it’s highly important that you always keep your lenders updated with all of your information, this includes but it is not limited to your permanent address, your parent’s address (or cosigner’s address), phone number, your marital status, social security number and your enrollment status. While lenders are usually organized, sometimes accidents do happen — for example the system may incorrectly state that you owe a monthly payment. If the lender cannot contact you to resolve the issue because you failed to update your address or name change, for example, you may quickly find yourself in the loan default stage. But updating your information isn’t important just so that lenders can notify you with bad news. Sometimes lenders will present special offers to those that have a good credit history and who have made timely payments for several consecutive months.

No matter if your loan is small or large it’s crucial that you are involved from the very beginning and pay close attention to all of the details from the start. Read your loan letters, those that are delivered both via standard mail and electronically, and make sure that you make as many responsible choices as you can until your loan debt is paid off; this includes living within your means and saving money. You might have to penny pinch and sacrifice to make all of your payments, but it will definitely be worth it in the long run.