Student loans are a fact of life for many (most?) college grads these days and, unfortunately, student loan mistakes are easy to make. I wish I would have understood the consequences of taking out so many student loans before I used financial aid to help pay for Spring Break in Vegas. It was just so easy at the time…
Fast forward to graduation. My student loans did a 180° turn from easy money to one of my biggest money challenges. For anyone with student loan debt, it’s tempting to just try very hard not to think about it or make the bare-minimum 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, the last thing you need right now is more bills and money stress!
A word to the wise—make those payments early and often and avoid the following (common) mistakes when paying back your loans:
Mistake #1: Not Making Loan Payments At All
I get it. Life happens. You might still be looking for a job, or get a surprise visit from some unexpected expenses. Or maybe you just didn’t realize your grace period was over while you were busy tackling other personal finance goals. But that debt is still accruin’.
(And OK, we get it—this mistake might not hit quite the same while Federal student loans are paused, but if and when they do pick back up, don’t make this mistake!)
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 tax refunds.
If you are having a difficult time paying off your loans, contact your student loan servicer immediately to explore different repayment terms or an income-based repayment plan. Whatever you do, don’t let your payments lapse altogether.
Mistake #2: Not Using Auto-Pay to Save On Interest
Here’s an easy student loan mistake to avoid. Oftentimes, if you sign 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!
Psst… Intrigued by that eye-opening math bomb? Use YNAB’s Loan Planner to experiment with your payment amounts and frequency to see how much you could save on interest over time.
Mistake #3: Paying Toward Future Payments, Not the Principal Balance
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 funds might even apply to future payments. Either of these options might not be helping you reach your money goals any faster.
If you really want to pay off your loans quicker, jot this down: Next time you make an extra payment, check to see if your student loan servicer gives you the option to apply extra payments entirely toward the principal. If not, give them a call.
Mistake #4: Extending Your Loan Repayment Window
I don’t know many recent college grads who look forward to making hefty monthly student loan payments at the end of their grace period. Some just simply can’t afford it, and it becomes as stressful as other pesky debt, like credit cards and mortgages.
A number of loan repayment options 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.
Dragging out the repayment timeline is one of the main reasons loans start to feel insurmountable. 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? Sigh.
Do whatever you can to cut expenses and find more money in your budget to make your student loan payments before extending your repayment period.
Mistake #5: 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. 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 student 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. Use this help tool to see if you qualify! Also, make sure your loans are Direct loans. Be aware that FFEL, Perkins, or any other “non-Direct” loan will not count toward this kind of loan forgiveness.
Mistake #6: Refinancing Federal Loans Into Private Loans
There are many banks that advertise saving on and simplifying your student loans by offering you a lower interest rate if you refinance with them. While this sounds enticing and 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 using a private student loan refinance company for your federal loans, you lose many of these protections. Just make sure to get your Sherlock on and collect all the information about possible implications before you make a change.
Mistake #7: Keeping Your Cosigner
Having 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 fact that the cosigner is still on your loan, and therefore shares in the debt payoff responsibility. It may be time to let them off the hook for your sake and theirs.
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. Going into default has serious financial consequences. Since most cosigners are parents and grandparents, it’s not unreasonable to consider the risk of keeping them as cosigners 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.
Take your student loans from insurmountable to totally surmountable!
Want to find more money to pay off your student loan debt? Learn more about how to set up your budget to double as a student loan planner and see how YNAB’s Loan Planner tool can help you save time and interest on your repayment. If you don’t have a budget yet, sign up for a free 34-day trial!