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23 Aug 2016

7 Things You Must Know About Paying Off Student Loans

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by Guest Author

Student loans are a fact of life for many (most?) college grads these days. I wish I would have understood the consequences of taking out so many loans before I used student loans to help pay for Spring Break in Vegas. But it was just so easy…

Fast forward to graduation. And student loans switch from easy money to, quite possibly, one of your biggest expenses. It’s tempting to just try very hard not to think about it, and just make your payments like we eat our vegetables, slowly, begrudgingly and with sufficient complaining.

But keeping your head in the sand can lead to some costly mistakes during repayment. And let’s face it, at this point, the last thing you need right now is more costs!

So pay early and often and avoid the following (common) mistakes:

Not Paying At All

I get it. Life happens, nobody is perfect. You might still be looking for a job, or get surprised by some unexpected expenses. Or maybe you just didn’t realize your grace period was over.

Whatever the reason, not paying your student loan bill can have serious consequences. Your credit score can suffer, and if your federal loans go into default, the government could decide to garnish your wages or withhold any tax refunds.

If you are having difficulties paying your loans, contact your lender immediately and work out a different payment plan. Whatever you do, don’t let your payments lapse altogether.

Not Using Auto-Pay

This is an easy one. Often times, signing up for your lenders’ Auto-Pay feature, they will give you a discount on your interest rate. A 0.25% discount on your interest rate might not sound like much, but it could reduce your total loan cost by $1,000 or more!

Paying Toward Future Payments, Not Principal

If you’re working on your Debt Snowball, or just using every extra penny to pay off your student loans, it might be worthwhile to verify how your payments are being applied.

When you send in a payment greater than your balance due, your lender will apply that extra money mostly to fees and interest. The extra payment might even apply to future payments. Either of these options might not be helping you hit your goals any faster. If you really want to pay off your loans quicker, have the extra payment applied directly to the principal (loan balance minus interest).

Next time you make an extra payment, check to see if your lender allows you to select an option for applying the extra towards principal. If not, give them a call.

Dragging Out Your Payment Window

I don’t know many recent college grads that look forward to the $500, or even $1000, monthly student loan payment at the end of their grace period. Some just simply can’t afford it.

A number of repayment plans exist that will extend the term of your student loans from the standard 10-year term to 20- or even, 25-year terms. This will reduce your monthly payment, sure, but the interest costs are enormous.

Consider this example: A $50,000 loan balance at a 6.8% interest rate would have a monthly payment of $575 and would cost just over $19,000 in interest on a 10-year repayment plan.

That same loan extended to a 20-year term would have a monthly payment of $381 but would cost $41,600 in interest! Is it worth the extra $22,600 in cost and an extra 10 years of payments to save $194 a month? I don’t think so.

Find ways to cut expenses in order to make your student loan payments—do whatever you can—before you extend your repayment period.

Paying the Wrong Type of Loans for Public Student Loan Forgiveness

This mistake won’t apply to everyone, but it could be very significant if you are trying to qualify for Public Student Loan Forgiveness. I feel it’s worth an honorable mention, at least.

If you work for a federal, state, local, or tribal government agency, or some non-profit organizations, you might be able to have your federal student loans forgiven after a certain amount of time. The trick is, you have to make 120 qualifying payments toward your loans. Key word being, qualifying.

If you are not making payments on an income-driven repayment plan toward Direct Loans only, you will be in for a rude awakening when your application for Public Student Loan Forgiveness is denied. This is the biggest reason borrowers will not earn forgiveness in the PSLF program.

Check to see if you are on an income-driven repayment plan such as PAYE, REPAYE, ICR, or IBR. Also, make sure your loans are Direct loans. FFEL, Perkins or any other “non-Direct” loan will not count. You can check your loan type in the National Student Loan Data System.

Refinancing Federal Loans into Private Loans

There are many banks that advertise savings on your student loans by offering you a lower interest rate if you refinance with them. While this might be a good idea for your private student loans, it’s generally a mistake to refinance your federal loans into a private loan.

Your federal student loans come with benefits that are typically not offered by private loans. For instance, there are a number of income-driven repayment plans offered for federal loans, not private loans. Private loans might not offer deferment or forbearance options if you were to go back to school or lose your income.

By including federal loans into a private, refinancing loan, you lose many of these protections. Just make sure you have all the information before you make a change.

Keeping Your Cosigner

A cosigner may have been necessary when you took out a private student loan in order to reduce the lender’s risk. If you are paying your student loans without any issue, you may not think twice about the cosigner on your loan.

In the unfortunate event that the cosigner passes away, the student loan could automatically go into default, even if you have been making regular payments. As I mentioned, going into default has serious financial consequences. Since most cosigners are parents and grandparents, it’s not unreasonable to consider the risk of the cosigner dying while you’re paying off your loans.

If you have a cosigner on any of your loans, call your lender and find out how they can be released from the loan. If all else fails, refinancing your private loans can be a last resort.

***

After graduating from Purdue University in 2009, Dan Kellermeyer had a pilot’s license, a degree in Aviation, and more than $100,000 in student loans. Today, Dan is free of consumer debt and is passionate about helping others get out of debt and plan for the future at DepartingThePattern.com.

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