Don't Make These College-Loan Mistakes

It's the time of year when many high school seniors are finalizing their college plans for next fall. Unfortunately for those who plan to take out loans, it's also a time when they are at risk of making a costly financial mistake, one that could stay with them long after they receive their diplomas.

These days, about seven in 10 graduating college seniors leave school with student-loan debt, with the average balance around $30,000. But that's just the average; some owe double or triple that amount and will spend the next few decades struggling to pay it off. Student debt nationwide is estimated at $1.2 trillion, and a study by The Institute for College Access & Success found that 650,000 students who began payments on their federal loans in 2011 had defaulted within two years.

Given how common borrowing to pay for college has become, it's not hard to find someone--whether a student or parent--with a cautionary tale to share about the process. Last week, we opened up our Personal Finance discussion board to those willing to share their own college-loan lessons. Hopefully, their stories can help you or someone you know avoid making the same mistakes. You can read the full discussion here, and excerpts are below.

'Make Sure You Fully Understand' One overarching theme of readers' comments was regret that they hadn't better understood the terms of their loans. The distinction between subsidized and unsubsidized loans was one area, in particular, that readers said had confused them.

"When you take out unsubsidized loans, start paying them back when you have any money to put toward them," advised roacher. "Unsubsidized loans accrue interest from day one, unlike subsidized loans, which do not start accruing interest until six months after leaving school. Our income/assets prevented my daughter from getting more than the minimum loan amounts, but we took out the loans anyway in her name so she would have about a 20% stake in her college finances. It was only about $7,900 per year for three years at roughly 6.5%. The interest added about an extra $1,500 to the overall loan when she started paying it back and she wasn't happy about it."

Mckinm offered advice about prioritizing student-loan payments.

"Instead of just sending the loan provider a check every month, drill down into the loan payment options and always pay as much as you can on the highest-interest loans (assuming you take out loans across multiple years), then the unsubsidized loans, then the subsidized loans," mckinm wrote.

Student-loan consolidation was another area of confusion. Federal student loans can be consolidated at a rate that is a weighted average of all the included loans while private student-loan consolidations may result in an overall reduction in the interest rate. (For more on student-loan consolidation, see this article.) For one reader, consolidating private student loans didn't work out as well as it could have.

"My biggest error was consolidating my loans at what seemed like a good rate at the time (7.75%) 12 years ago," wrote nunnfund. "I didn't know you could only consolidate once! I recently took out a personal loan at 4.99% to pay off my Sallie Mae obligation."

'I Wish I Would Have Been on Top of This Debt More' For incoming college freshmen, navigating the financial-aid system can be daunting. BarryH, said he wished he'd understood the financial-aid package he received from his college so that he could have better assessed how it worked for him.

"I knew I was 'poor' and here I was being told I could get an education anyway!" he recalled. "There were several line items ... supposedly corresponding to itemized college costs, each assigned a dollar value that was being covered by my financial aid. ... In retrospect, some of the line items (books, for example) were paid for by me out-of-pocket even though they had been accounted for in the financial-aid package. ... In short, I'm sure there was a lot of fluff in my financial-aid line items, explaining where the money was going. I also suspect that I did not quite have to take out as large a loan as I did. ... But I was 17, my father had died when I was 10, mom had been a 1980s housewife, no one was savvy. ... Lesson learned. Always make sure you fully understand everything that applies to you. If you don't, have it explained."

Some readers told stories of not paying close enough attention to their borrowing while in school. Flipp44 said he or she has been out of college for about three years after attending a state university and racking up about $27,000 in loans, including those owed by his or her parents.

"The biggest mistake I made in college was not being aware of my student-loan amount," the commenter wrote. "I had no clue what amount I was going to owe until I graduated. I wish I would have been on top of this debt more and then could have taken action by paying off some throughout college. I had a part-time job while in school and could have dedicated some of that money to pay down my loans."

In fact, several readers who said they'd graduated many years ago said they'd managed to avoid or minimize borrowing by working their way through college.

Flipp44 and others also recommended that students consider starting out at community college and later transferring to a four-year school as a way of keeping tuition costs--and borrowing--under control.

"My son decided to enter a private university after two semesters of community college," wrote smaharba69. "To do it all over again, I would have had him complete community college and save a ton of tuition. Second, he borrowed at a ridiculously high rate through Sallie Mae. He was over 25 when he returned to school; he could have qualified for a lot more financial aid; he was living at or below [the] poverty line."

'It Felt Great to Get Rid of the Debt' Even readers whose college-loan experiences turned out reasonably well said they regretted not doing something differently.

Rfalcon wrote, "We filtered most of our son's payments through a home-equity line [of credit] that charged on average 2.25% and offered some tax breaks as opposed to taking out loans that were closer to 9%. Toward the end of his college, we had him take out a $7,500 college loan, then paid it off quickly to help establish some credit [history] for him. Doing it over again, I may have had him take out more loans over the years to help establish a better credit history. The higher interest rate wouldn't have made a big difference as we generally paid off the loan during the quarter, then generated a new one."

Reader DennisR even wondered if he paid off his student loan too quickly.

"My loan rate was just under 4%," he said. "I chose to pay off my student loan within two years of graduating from post-graduate school. It felt great to get rid of the debt! But I certainly could have made a lot better return over the years than the 4% I saved."

Fortunately for those who are currently wading through financial-aid offers, there is still time to make sure they don't repeat some of the mistakes described by our readers. It's free advice that may actually be worth something.

Some comments have been edited for clarity and brevity.