Here are 5 mistakes you make with your student loans.
Here’s what you need to know.
When it comes to paying off a student loan, it’s more of an art than a science. However, your strategy for repaying student loans may cost you more. Here are 5 mistakes you make with your student loans.
1. You’re Not Paying Student Loans During Student Loan Relief
Currently, you are not required to make federal student loan payments. Since March 2020, federal student loan repayments have been suspended, collectively saving student borrowers $5 billion per month for nearly two years. However, one of the smartest things you can do is pay all you can for your federal student loan payments. In addition to the temporary student loan forbearance, there is no new accrued interest on your federal student loans. Therefore, every dollar you pay on your federal student loans will first reduce your current interest and then directly reduce your student loan principal balance. This is a unique opportunity to pay off student loans without accumulating new interest. Not everyone has extra money to pay student loans now. However, even paying a small amount each month can help.
(Shock poll: student loans will all be cancelled)
2. You’re not making a lump sum payment on your student loans
If you haven’t made a lump sum payment on your student loans, it can cost you money. While federal student loans are on hold, you can still make a lump sum payment to reduce your principal balance. (How Federal Student Loans Will Change This Year). Then, when student loan payments resume, your interest rate will be based on a lower student loan balance, which can save you money. The next time you receive a bonus, gift, or other cash payment, consider making a one-time lump sum payment on your student loans. Contact your student loan officer ahead of time and ask them to apply your total payment to your current month’s payment and your principal balance reduction. Without this written instruction, your student loan officer can only pay your minimum payment due and hold the remaining balance until next month’s student loan payment.
3. You are not enrolled in an income-based repayment plan
If you’re having trouble repaying your student loans, especially federal student loans, you should enroll in an income-driven repayment plan. (Most borrowers will not get student loan forgiveness). An income-based repayment plan will set your monthly student loan payment based on your discretionary income and family size. There are four main income-based repayment plans:
- Income Based Reimbursement (IBR)
- Pay as you earn (PAYE)
- Pay As You Earn Review
- Income Contingent Reimbursement (ICR)
An income-driven repayment plan isn’t for everyone. However, if you are considering forbearing or deferring your federal student loans, it may be financially better to sign up for income-contingent repayment. You can also get student loan forgiveness after 20 or 25 years through income-contingent repayment. (Biden canceled $15 billion in student loans).
4. You forgot to register for automatic payment
What’s the easiest way to save money on your student loans? The answer: sign up for automatic payment. Signing up for autopay can save you 0.25% off your student loan interest rate. With your student loan manager, you can connect your bank account to your student loan account so that monthly payments are automatically deducted.
5. You didn’t refinance your student loans
Student loan refinancing is one of the best ways to save money on your student loans. If you haven’t refinanced your student loans or haven’t refinanced recently, you may be paying too much for your student loans. When you refinance student loans, you can get a lower interest rate, a lower monthly payment, or both. You can also choose a fixed or variable interest rate as well as a repayment period of 5 to 20 years.
This student loan refinance calculator shows how much you can save when you refinance student loans.
For example, suppose you have $100,000 in student loans, an interest rate of 8%, and a repayment term of 10 years. Now suppose you are refinancing student loans at an interest rate of 3% and a repayment term of 10 years. With student loan refinance, you’ll save $248 per month and $29,720 in total over the life of your student loans.
A few points to remember: Refinancing is not for everyone. You will need to be employed or have a signed job offer, a credit score of 650, and a low debt to income ratio. If you need federal benefits like income-contingent repayment or utility loan forgiveness, for example, you shouldn’t refinance your federal student loans because you won’t have access to them after refinancing. The good news is that if you have already refinanced your student loans, you can refinance again with a lower interest rate. There are also no application fees, set-up fees or prepayment penalties.