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I share a lot of financial highlights on my instagram page, but I think it's equally important to share my financial mistakes.
For me, most of my “financial mistakes” have come from how I've dealt with my student loans, so I wanted to share a few of the big ones here.
1. Taking out too Much
When I went to law school I took out student loans for the first time, ever. Before I started my 1L year I knew I would have to take out loans to pay for school but I really wasn’t sure how they worked, or how much I would need to borrow.
Instead of doing my due- diligence and figuring out exactly what I needed for tuition, books, and to live, I simply took out as much as I could and I did this for six semesters in a row.
I didn't concern myself with the amount I was taking out, or if I actually needed to take out as much as I did; every semester I signed the papers I needed to sign and that was it.
At the time I, like many students, was so worried about running out of money that I thought that maxing out my student loans was the best way to ensure that this never happened.
Looking back, there’s a few things I really wish I would have done differently.
First, I wish I had been more diligent about looking for scholarships before I started school. In all honesty I didn’t look, or apply, for any scholarships before going to law school even though my grades and LSAT score could have probably landed me some.
If you’re paying for college on your own I definitely recommend looking into scholarships as it’s one of the most effective ways to reduce the cost of your education and, depending on the scholarship, it's a great thing to add to your resume when you’re applying for an internship, or your first job out of school.
Second, while I did attend a state school, I attended as an out-of-state student. Based on the requirements of the state where I went to school I could have applied for residency after my first year, which means I would have been eligible for in-state tuition during the 2L and 3L year.
I have yet to do the math on how much changing my residency could have saved me but this is easily one of my biggest, and most costly, mistakes.
And while it’s embarrassing to admit, I’m sharing in the hopes that I can save, even just one of you, from doing the same.
My advice? If you’re considering attending a state school as an out-out-state student I definitely recommend checking out residency requirements and what’s required for you to be eligible for in-satate tuition BEFORE selecting a school.
Once you’re eligible to become a resident of the state where you’re attending school, don’t sleep on the opportunity to get in-state tuition--it could save you A LOT!
2. Not Making Payments during my Grace Period
If you don't know what a grace period is it's the time between when you graduate and when your loans go into repayment. For most loans, the grace period is 6 months from the time you graduate.
While you’re not required to make payments during your grace period you can and, depending on the kind of loans you have, should make payments during this time if you’re able to.
Since all of my student loans were unsubsidized, meaning they accrued interest while I was in school, I had a ton of unpaid interest on my loans when I graduated.
At the end of my grace period all that unpaid interest ended up capitalizing, meaning it was added to my principal balance, which in turn caused my student loans to accrue more interest daily.
If I had taken advantage of my grade period and made payments during that time I could have significantly reduced the amount of interest I ended up paying over the life of my loans.
If you’re not sure what the potential effect of capitalization might be, or don’t know what your daily interest is check out my Loan Interest Worksheet
3. Opting into Income-Based Repayments when I didn’t need them
Like many others, I was shocked when I received my first student loan bill. I remember thinking to myself "I can't possibly pay that every month" ....spoiler alert, I could have, but I really didn’t want to.
For the first time in my life I was making “real money” and I didn’t want to watch all that cash leave my bank account every month. So instead of sitting down, trying to budget, and making those payments work--I opted into an income-based repayment plan, when I didn’t need to.
While income-based repayment plans can be great if you’re struggling to make payments or you’re pursuing some form of student loan forgiveness , the payments I was making on IBR weren't even covering my monthly interest. So, while I was paying, and paying, and paying every single month I wasn't making ANY progress on paying down my debt.
In 2018, I paid over 5k towards my student loans and not a single payment went towards reducing my principal balance.
Had I had a better understanding of how my student loans worked I probably would have picked a term-based plan to ensure that my monthly payments were covering my monthly interest and I would have looked into refinancing so that I could have reduced my interest early on.
If you’re just about to enter repayment, or you’re trying to get a better handle on your loans you can find tons of information on payment plans at studentloans.gov or on your private lender’s website.
4. Not Knowing my Daily/Monthly Interest
Did you know student loans accrue interest EVERY, SINGLE, DAY?!
Until I actually started trying to pay off my loans I had NO idea. At one point my loans were accruing more interest every month than I was paying for rent.
When I realized this I was completely shocked, but seeing the amount of interest I was accruing also really motivated me to get my loans paid off. Every time I made a payment, I would recalculate my daily/monthly interest and seeing the amount drop with each payment really kept me going.
Want to figure out your daily + monthly interest?
Here’s the formula:
Annual interest rate ÷ 365 x outstanding principal = daily interest amount
Daily interest x number of days in billing cycle = monthly interest amount
Ex. Let’s say you have an outstanding balance of $12,000 with an annual interest rate of 4% :
.04 ÷ 365 = 0.00010958904
0.00010958904 x $12,000 = $ 1.32 (daily interest)
Then you take the number of days in your billing cycle, let’s assume it’s 30 days, and multiply it by your daily interest amount:
$1.32 x 30 = $39.45 (monthly interest)
If you’re looking at this math and thinking wow--no thanks, or you simply don’t want to go through the trouble of re-calculating this number as you make payments my Student Loan Interest Worksheet will do all the work for you.
5. Not Understanding Interest Capitalization
When I first started seriously tackling my student loans I started by going through all my statements. Seeing the massive number for the first time was jarring, but also confusing, because despite making payments for 2 years my balance had ballooned.
That’s when I learned about interest capitalization. Interest capitalization, as I mentioned earlier, is when your unpaid interest gets added to your principal balance --which, in turn, causes them to accrue even more interest.
To put it plainly, interest capitalization SUCKS. However, understanding how and when interest capitalization occurs can help you minimize the amount of interest you’ll pay over the life of your student loans.
Unlike credit card interest which compounds daily (i.e your interest is added to your principal balance at the end of every day) student loan interest accrues daily but it’s not added to your principal unless an event happens that triggers capitalization.
So what events trigger interest capitalization?
Here are the big ones:
- The end of your grace period
- When you refinance
- When you consolidate
- At the end of forbearance
- When you change payment plans, or fail to recertify on an income-based repayment plan
- When payments resume after defaulting
**There are some special circumstances, but I’m not going to dig into those here. If you ever you have specific questions about your interest capitalizing please contact your student loan servicer directly**
Ok, so what can you do? If you can, do your best to pay off the interest on unsubsidized federal loans before the end of your grace period, before you refinance or consolidate, or before other deferment periods end. Even if you can’t pay it all off, paying off some interest before it capitalizes will save you money in the long run.
6. Not having a Pay-Off Plan
When I graduated and saw my loan balance for the first time, I just assumed that I'd be paying off my student loans forever. I never sat down and tried to figure out how I could pay them off, or what I would need to do to be able to do so. I just set up auto-payments and tried to forget about them.
If you’ve got student loans to tackle, start by figuring out what you owe, research payment plans, and come up with a payment strategy. It may not be easy, but student loans don’t have to rule your life--you just need a plan.
Also, if you’ve made a lot of mistakes, like I have, there’s still time to turn things around and get yourself on track. Despite all the mistakes I’ve made I’ve still been able to make a ton of progress --which you can read more about in this article that I wrote for CNBC.
Hopefully some of you found this helpful, but if you’d like to learn more about my student loan journey feel free to reach out to me on instagram!