For millions of people, student loans are simply a fact of life. According to the Federal Reserve Bank of New York
, there are close to 45 million student loans outstanding at any given time and nearly a quarter of these debts are worth over $50,000.
As common as student loan debt is, borrowers tend to be unfamiliar with the rules involved. One recent study has found that one in three Millennials have trouble understanding interest rates
, repayment timelines
, and monthly payments. Poor understanding can lead to mistakes and financial losses.
If you owe money on a student loan, educating yourself on student loans can help you get out of the red. Below we detail six common student loan mistakes, and tips on how to avoid them.
Putting off paying back
With most student loans, you begin to owe interest on them starting the moment that you take them out. By letting the interest accumulate while you’re in school, you can end up owing more than you started with. A lot more.
You can turn this around by beginning to repay your student loan while you're in school
. It doesn't matter how little you pay back each month – even $30 a month is okay. It’s enough to keep the interest from adding to the principal and costing you more and more each passing year. You'll end up saving a great deal on your loan repayments by making even small payments now
Being tardy with payments
When you miss the due date on a student loan payment, the lender assigns you a late fee. If your loan servicer reports to a credit bureau, the credit bureau could assign you a lower credit score. There’s an easy fix for this. Consider signing up for automatic payments to go out each month from your account. You'll win a lower interest rate, as well. This is the most mindless student loan mistake to avoid, out of sight out of mind as they say.
Thinking your student loan repayment is your only priority
When you have a great deal of student debt, it can feel as if repaying it should be your top priority, bar none. However, the truth is that student loans, while important, are no more urgent than contributions to your company's 401(k) plan
or savings for a rainy day. Neglecting to plan for your retirement or for a safety net can turn out to be a terrible mistake that ends up costing you dearly.
Neglecting to report your student loan interest as a tax deduction
Are you paying more than you need to? If you file income less than $85,000 a year as a single person, or less than $170,000 as a married couple filing taxes jointly, you get to take a tax deduction on the interest that you pay on your student loan – up to $2,500 a year. If you neglect to take advantage of this tax deduction, you end up paying more to the IRS each year than you need to.
Neglecting to recertify your income-driven repayment plan
If you have an income-driven repayment plan
for your student loan, the size of your monthly installment is determined by the kind of income that you make. The rules behind this type of repayment plan require that you recertify your income each year.
Unfortunately, one in every two people who have such a repayment plan neglects to perform this recertification each year. The result is that their plan defaults to the standard 10-year repayment mode, which requires them to make payments at much higher levels. It's important to follow the rules if you're to keep the privileges available to you under an income-driven plan.
Not understanding the difference between consolidation and refinancing
When you have multiple student loans and find it hard to manage them, you have two options. You can consolidate or refinance your student loans. There are distinct differences, and advantages, to each.
When you consolidate loans, you get your lender to combine your federal student loans into one loan with an interest rate that is worked out as the average of the interest rates on your individual loans.
When you refinance student loans
you have a new lender take on two or more existing loans, repay them in full for you, and charge you a lower rate of interest than you paid on the separate loans. If a new lender is willing to lend to you at a lower rate of interest
because you have a good credit score, take advantage of it.
Many people inaccurately believe that you can't refinance a federal loan by finding a new private lender for them. Others believe that a lower interest rate is the only consideration to think about when refinancing a federal loan with a private lender. In reality, you need to think about other things as well – such as the loss of the federal loan benefits or the loss of income-driven repayment. It's important to understand what exactly consolidation and refinancing involve, and to arrive at an informed decision.
You also need to consider a potential downside of refinancing with a new private lender – they may require you to agree to a hard credit check. If you make inquiries with multiple lenders to receive interest rate quotes, you will end up with several hard credit checks that add up to a large dent on your credit score. It's important to go with lenders who only perform soft credit checks that don't damage your credit.
The best way to avoid student loan mistakes is to do your research
Borrowing for your college education isn't something you should take lightly. Being smart about managing your debt
requires an ability to research the options available to you, learn about the rules, and make an informed decision. Not only will this research help you find the best option, but you'll find it’s good for your overall financial health as well.