Here are 5 mistakes you’re making with your student loans.
Here’s what you need to know.
When it comes to student loan repayment, it’s more of an art than a science. However, your strategy to pay off student loans may be costing you more money. Here are 5 mistakes that you’re making with your student loans.
1. You’re not paying student loans during student loan relief
Right now, you’re not required to make any federal student loan payments. Since March 2020, federal student loan payments have been paused, which collectively has saved student loan borrowers $ 5 billion each month for nearly two years. However, one of the smartest things you can do is pay whatever you can towards your federal student loan payments. In addition to temporary student loan forbearance, there is no new interest accrual on your federal student loans. Therefore, every dollar you pay on your federal student loans first will reduce your current interest and then directly reduce your principal student loan balance. This is a once-in-a-lifetime opportunity to pay off student loans without new interest accruing. 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 get canceled)
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 may be costing you money. While federal student loans are paused, 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 repayments restart, your interest rate will be based off 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 servicer in advance and instruct your servicer to apply your total payment toward your current month’s payment and reduction of your principal balance. Without that written instruction, your student loan servicer may only pay your minimum payment due and hold the remaining balance until next month’s student loan payment.
3. You haven’t enrolled in an income-driven repayment plan
If you are struggling to pay student loans, particularly federal student loans, then you should enroll in an income-driven repayment plan. (Most borrowers won’t get student loan forgiveness). An income-driven repayment plan will set your monthly student loan payment based on your discretionary income and family size. There are four main income-driven repayment plans:
- Income-Based Repayment (IBR)
- Pay As You Earn (PAYE)
- Revised Pay As You Earn (REPAYE)
- Income-Contingent Repayment (ICR)
An income-driven repayment plan is not for everyone. However, if you are considering forbearance or deferment for your federal student loans, it may be better financially to enroll in income-driven repayment. You can also get student loan forgiveness after 20 or 25 years through income-driven repayment. (Biden has canceled $ 15 billion of student loans).
4. You forgot to enroll in autopay
What’s the easiest way to save money on your student loans? The answer: enroll in autopay. Enrolling in autopay can save you 0.25% on your student loan interest rate. With your student loan servicer, you can connect your bank account with your student loan account so that monthly payments are automatically deducted.
5. You didn’t refinance student loans
Student loan refinancing is one of the best ways to save money on your student loans. If you did not refinance your student loans, or haven’t refinanced recently, then you may be overpaying for your student loans. When you refinance student loans, you can get a lower interest rate, lower monthly payment or both. You can also choose a fixed or variable interest rate as well as a 5- to 20-year repayment term.
This student loan refinancing calculator shows how much you can save when you refinance student loans.
For example, let’s assume that you have $ 100,000 of student loans, an 8% interest rate and a 10-year repayment term. Now, let’s assume that you refinance student loans at a 3% interest rate and 10-year repayment term. With student loan refinancing, you would save $ 248 each month and $ 29,720 total over the life of your student loans.
A few things to remember: refinancing isn’t for everyone. You’ll need to be employed or have a signed job offer, a 650 credit score, and a low debt-to-income ratio. If you need federal benefits such as income-driven repayment or public service loan forgiveness, for example, then you shouldn’t refinance your federal student loans because you won’t have access to these after refinancing. The good news is if you have already refinanced your student loans, you can refinance again with a lower interest rate. There are no application fees, origination fees or prepayment penalties either.
Student Loans: Related Reading
5 ways to get student loan forgiveness
Shock Poll: Student loans will all get canceled
Biden has canceled $ 15 billion of student loans
Here’s who won’t get student loan forgiveness