When it comes to the largest forms of consumer debt, student loans fall to second place only behind mortgages.
For a lot of people, it can be extremely debilitating to have that kind of debt. Even people who end up with an amazing job feel like they’re floundering. That’s why, while you’re learning about opening your first accounts and you’re learning how to be responsible during your college years you need to learn about student loans.
Student loan interest rates are generally lower than some other debts. But that doesn’t mean they’re going to be inexpensive. They still add up a whole lot and if you don’t keep the interest down as much as possible you’re going to have some big problems later on. So, let’s take a look at the most common student loan mistakes to avoid when it comes to your student loans in order to keep your debt crunch as low as possible.
1. Paying Late
You should absolutely not make any of your payments late. As soon as you’re a single day late your account becomes delinquent. From there, it stays delinquent until you pay the maount that’s considered past due. Of course, it could also stay that way until you go into deferment, forbearance or a separate repayment plan.
Those with a payment that’s over 90 days old (that’s approximately 3 months) could see the loan reported to the major credit bureaus. That’s going to affect your credit score and your ability to get other types of loans and credit. That’s one reason you may want to enroll in an autopay process. Not to mention you can sometimes get discounts if you do this.
2. Ignoring Auto-Pay Options
If you’re able to sign up for auto-pay it’s something you should absolutely do. Auto-pay is going to make it a whole lot easier for you to pay your debt on time. You won’t have to worry about late payments and you may even get a bonus on your interest rate.
Some lenders actually give you up to 0.50% of a discount on interest just because they know that they can get the money every single month. It may not be something you’re totally comfortable with, but it can save you a lot in the long run. Plus, you have the ability to stop the payments at any time.
3. Jumping Into Refinance
If you refinance your student loans you could end up with a huge problem without even realizing it until it’s too late. Sometimes you’ll be able to lower your interest rate or you can lower the amount that you owe, but other times … it turns into a mess.
The biggest problem is that you’re turning your student loan into what’s considered a private loan.
Where the original loan was federal, the new one is now entirely different. You can’t keep a federal loan once you decide to refinance it. There are only ways to turn them into private loans through a private lender. That’s where things start to get dicey.
Federal student loans offer you certain types of protection that you’re likely going to want. You get things like:
- Options for income-based repayment plans
- Loan forgiveness in case of your death
- Forbearance in case of disability or injury
- Loan forgiveness for serving in public service programs
There are often other benefits as well through a federal loan. Knowing what you already have is extremely important before you decide to refinance. The reason why is that most private lenders aren’t going to offer all of these benefits. You need to look closely at the fine print before you decide to go for it.
4. Not Using FAFSA
You may be eligible for different types of student aid that range from the Pell grant to subsidized federal loans. And those can be a great way for you to get more money.
Subsidized federal loans mean that there is no interest while you’re in school. Rather than an unsubsidized loan, which tacks on the interest from the day you take the loan, the subsidized loan has interest paid by the government. Once you graduate you still only owe the amount that you originally took out. Interest doesn’t start until later. You’ll only find out about these loans if you qualify through the FAFSA however, so make sure you fill it out.
5. Falling For a Scam
Unfortunately, there are a whole lot of scams out there and they love to target students. One of the biggest is to help you roll your payments into a single payment. After all, when you have multiple student loans it can seem to make sense to consolidate the loans, refinance or somehow make the payments a little bit easier to make. But if you’re not careful you could get a lender that isn’t on your side.
If you are looking to consolidate your loans make sure you do it through the government or through a free service.
You should never have to pay for the privilege of loan consolidation. If you are paying then it means that someone is trying to scam you. It’s a trick that’s used quite frequently when it comes to student loans.
6. Not Understand The Difference Between The Loan Types
There are actually multiple different types of student loans and it’s important that you understand which one you’re getting. Federal loans will typically have lower interest and they’re actually backed by the power of the federal government. On the other hand, a private loan is backed by your bank, credit union or some other private lender, which leads to higher interest.
- Federal Loans – These loans have fixed interest rates and they tend to be a great option for college students. They’re going to cost you less over the long term but they do have some rules attached. You need to be taking classes at least half-time and then you get to defer payments until you stop attending school or start enrolling in classes for less than half-time.
- Private Loans – Private loans give you all the freedom that you want, because there are no rules about how long you attend school. On the other hand, you’ll generally have variable interest rates and higher interest overall. It’s recommended that you avoid these unless there’s no other option for you.
7. Not shopping Around
Just like everything else that you do you should always shop around to make sure you get the best deals. You’re not going to have much for options when it comes to federal loans. The government isn’t really in the habit of making deals or variable offers. You just get to say yes or no. That’s not the case with private loans though.
Private loans are going to give you the freedom to shop lenders. You want the best rates and the best possible terms, which means you should most definitely be doing this. Don’t skip out on this step.
Of course, you want to keep in mind more than just the rates that are being offered. Look at the things you’re going to need to know further down this path. What kind of bonus features is being offered? Where can you get interest rate reductions or forbearance or deferment in case of hardship? Are you able to make different payment options while you’re in school (such as interest-only payments) and then change the payments when you leave school? Look for flexibility in the repayment process.
After you’ve decided what loans you’re going to get it’s important that you don’t jump in too far. Don’t take more loans than you absolutely need and make sure that you read all of the fine print beforehand.
8. Choosing the Wrong Payment Plan
You’ll have several different options when it comes to the payments that you make on your loan if you have a federal loan anyway. This makes sure that you can pick something that works for you and that won’t stretch you too far if you don’t have a lot of money.
If you stick to the standard plan you’ll have your loans paid off in approximately 10 years or less. This is great if you possibly make it work. Even if you have to sacrifice a little it’s definitely going to be worth it to get those loans paid off quickly and pay less in interest overall.
On the other hand, there are other options to choose from. Extended repayment and income-based repayment can be great because they lower the amount that you owe each month. But you need to pay attention to just how much you’re going to end up paying over the entire life of the loan. You definitely aren’t going to end up ahead in the long run.
Another important aspect is that income-based plans could end up with payments that don’t even take care of the amount of interest that you accrue. That means your loan will actually continue to grow even while you’re making payments.
9. Borrowing Too Much
You’re going to have a lot of money offered to you when it comes to taking out a loan, but that doesn’t mean you should actually take it. You should try to take as little money as you can to make it through college. After all, every bit of the money that you take out is going to have to be paid back in the end.
If you’re not careful about how much you can pay back when it comes a time you could end up in a whole lot of debt even after you graduate. Keeping your debt as low as possible or getting a tuition installment plan can help you with this process.
10. Not Making Extra Payments
If you can pay a bit more than you actually owe every month you’re going to pay off your loans a little bit faster and that’s definitely an important piece of the puzzle. Just make sure that you contact your lender and let them know you want it going directly to the principal. If you don’t, they’re going to apply it to your future payment and you’ll just end up with a smaller amount due the next month and no impact on your principal.
Keep in mind that even a small amount of money over and above what you actually owe is going to make a huge difference. It doesn’t have to be hundreds of dollars. As little as $30 a month can make a huge difference and could get you paying off your student loan much faster than you might think.
11. Skipping Interest Payments In School
Depending on the type of student loan that you take out you could end up with interest accruing even while you’re in school. With a subsidized loan you’re not going to have that, but with an unsubsidized loan, however, it’s going to keep piling up until you’re out of school.
If you can make interest payments while you’re still in school your student loan isn’t going to keep ballooning up and up. You could end up in a big hole if you’re not making these payments because your total student loan is going to be much higher than what you originally took out.
12. Ignoring Tax Deductions
When you pay a federal loan (or even some private loans) you’re going to have the opportunity to deduct the interest payments on your taxes. That means up to $2,500 a year less is going to be owed and that’s definitely money you can (and should) put onto your student loan.
If you make $80,000 a year or $140,000 for married filing jointly you won’t be eligible at all. If you make $65,000 to $80,000 you’ll only be eligible for a portion of this deduction. But no matter what you can g et it’s definitely going to help.
For those who are still in school or who are just getting started in their career that refund can most definitely be a benefit. And if you don’t qualify for that tax deduction you could qualify for an education expense refund of up to the same amount. Just make sure you check into the rules and requirements for each so you know if you qualify for at least one and which will be larger.
13. Not Tracking Your Debt
The final thing is just plain ignoring the student loan itself. Sure, you’ve got a whole lot to get done on any given day. You’re busy and you’re maybe not so organized with everything that you have. But if you don’t pay attention to your student loan you’re going to have a hard time paying it off later.
You need to know how much you owe at all times, especially since you could be taking out new loans each year. You also need to know who you owe that money to. Making a spreadsheet will help you keep track of everything and will keep you in the know about just what you’re really going to be on the hook for.