Unfortunately, far too many students do not know how to avoid student debt. Debt that students take on when they’re young will have a significant impact on the rest of their lives. Debt can take years to pay off, collecting interest along the way. Because of this, avoiding student debt is critical.
Money put toward debt and interest is money that is not saved or put toward retirement. Additionally, creditors look at the big picture when evaluating your ability to take out loans later in life, such as a home or car loan. College students often fail to realize that when they collect a debt, they end up harming their future in a big way. Students should consider these tips to learn how to avoid student debt.
Ways to Avoid Student Loan Debt
Students would benefit most if they learned how to avoid student loan debt. While student loans are often necessary to receive an education, practicing financial responsibility can help prevent debt. Consider these ways to avoid student loan debt.
Only Take Out a Loan When Necessary
Student loans often carry hefty, if not absurd, interest rates. A loan should only be considered as a last resort. Before applying for a loan, be sure you have applied for all federal aid for which you are eligible. Also, spend ample time researching and applying for scholarships. Applications may take a while, but they’ll pale in comparison to how much you’ll have to work to pay off debt if you take out a loan.
If financial aid and scholarships still leave you in search of money, consider working through college. You’d be better served taking an extra few semesters to graduate if it means you can work a well-paying job while studying, as opposed to graduating early or on-time, but in debt. Many colleges offer career centers and job boards that can help you find employment.
Commute to School
Attending school in your home state can prove beneficial for a number of reasons. One, in-state tuition at public institutions is always cheaper than out-of-state tuition. Secondly, you can commute to classes instead of living on, or near, campus. Living at your school can increase your expenses by thousands of dollars. Gas is significantly cheaper than rent and utilities.
Similarly, it may be in your best financial interest to attend a community college before attending a four-year university. Most of your credits will transfer to your new school. And, your undergraduate degree is based on where you finish, not where you start. No matter where you spend the first two years of your studies, your diploma will still read that you graduated from a four-year institution.
Go to School with Money Saved
One of the best ways to avoid student loan debt is by pushing your studies off by a year or two. Instead of going to college right out of high school with barely any money to your name, consider taking a year or two to work and save money before continuing your studies. In the grand scheme of your career, the extra year or two won’t make a difference.
But, if you work hard during your gap year and save money, you’ll be in a much better position, likely avoiding student debt. Knowing that you have a savings account or rainy-day fund can help you avoid having to take out a loan. Furthermore, you can work during the summer to replenish your savings account to help you through the next semester.
Steer Clear of Private Loans
If you must take out a student loan, try only to borrow from the federal student loan program. This program makes it much easier to pay money, and you could eventually be eligible for loan forgiveness. Private loans are not as flexible. It can be very difficult to escape the debt brought upon by private student loans.
You can borrow no more than $12,500 from the federal direct loan program. Exhaust your other options so that this is your last resort, not your first resort.
Avoid Credit Card Debt
Many college students are not fiscally responsible, which can cause them to rack up credit card debt quickly. Others may find themselves in the predicament where taking on credit card debt is necessary to have a successful college experience. Books, supplies, and food are all necessary but can quickly add up. Purchasing on credit, especially when young, may seem like a painless way to do so.
Student credit card debt was once such an epidemic that, a few years ago, significant measures were put in place to protect against it.
Credit CARD Act
During his time in office, President Barack Obama signed the Credit Card Accountability, Responsibility, and Disclosure Act into law. The law has now been in effect for eight years.
The Credit CARD Act helped students avoid credit card debt by permitting them from obtaining a credit card without a co-signer. Individuals under the age of 21 either need a co-signer or need to provide proof of independent means of income in order to be approved for a credit card.
At the time the law went into place, a study from Sallie Mae indicated that the average balance on the credit cards of college students was $3,173. Additionally, over 80% of those surveyed carried a balance on their card at the end of each month.
Additionally, credit card companies were forced to change their marketing campaigns, as they were no longer permitted to market to college students aggressively. This changed how they marketed on campuses across the country. Ultimately, Obama’s Credit CARD act proved to be successful. College student credit card debt declined to $499 in 2013.
Studies from 2013 also showed that over three-quarters of college students are now using debit cards instead of credit cards. However, it has not stopped students from obtaining credit cards. Thanks to options such as balance transfer cards and retail credit cards, it’s still difficult for students to avoid credit card debt. Until they learn how to avoid student debt, credit cards will always be a danger to students.
Advice and Tips to Avoid Credit Card Debt
Credit card debt stacked on top of student loan debt will make it very difficult for graduates to land on their feet as a young adult. If you’re looking to avoid credit card debt, consider using some of the tips below.
Don’t Open Too Many Cards
If a college student is able to open a credit card, they will then find ways to open more cards to spread their balance out. This is a huge mistake for someone using a credit card for the first time. They should select one card and practice good habits that will help them build their credit.
Focus on the Necessities
Students may come across a card that has tremendous rewards benefits, such as 10,000 airline miles or a $150 cash bonus. However, many of these rewards offers come with the stipulation that users must spend a few thousand dollars in the first quarter of owning a credit card.
Those not familiar with credit cards may be blinded by the attractive offer, and quickly put themselves in debt to get there. The interest paid on an unaffordable balance will often end up being larger than the rewards offer itself. Rewards cards will always exist, and offers are often cyclical. And, those with higher credit scores have access to higher rewards. Building your credit now will pay dividends in the long run.
Instead, focus on the card’s annual percentage rate. Many cards waive the APR for the first year, which provides a buffer for students who are not familiar with buying on credit. If you’d like rewards of some sort, there are cards with low cash back options for those with average credit.
Once a student opens a credit card, they likely use the handy piece of plastic for nearly all of their purchases. Their purchases can get away from them, and they quickly lose track of how much they’ve spent. Before they know it, they have a racked up a bill that they are unable to pay and, as a result, begin accumulating debt.
Tracking each purchase will help students have a better understanding of where their money is going while allowing them to track their credit card balance diligently. This can be done individually in an Excel spreadsheet, or with the help of a program like Mint. Mint can also help remind students when their credit card bill is due.
Not paying a bill on time is the quickest way college students can cripple their credit score. Students can set a calendar reminder to help them with their bills.
Don’t Spend Money You Don’t Have
Many first-time credit card users fall into the trap of thinking that these cards provide “free money.” This, of course, is not the case. College students should not spend money that they don’t have. A good way to help with this is to pay a credit card off each week, as opposed to at the end of the billing cycle.
If students pay their bill each month, there will be no need to panic about paying off a large balance. Making on-time payments is the quickest, most controllable way to build credit.