The student loan repayment process is rife with complexity and, as you may know, complexity breeds mistakes. The good news is learning how to avoid these mistakes can help you save both time and money. With that said, let’s take a look at four common mistakes made when repaying student loans and how to avoid them.
Late payments negatively affect your credit score, and a low credit score reduces your chances of getting a personal loan or even a credit card in the future – hence, if you’re looking to repay your student loans you should make it a priority to pay them off as early as possible.
One of the best ways to avoid late payments is by setting up an auto-pay service. Auto-pay is a payment feature that automatically bills your account at the start of every new payment cycle thus eliminating the prospect of late payments since you won’t have to make the payments yourself.
Not refinancing student loans
Refinancing your student loans is one of the best ways to ease your student loan payments. For instance, if you were paying a $1,000,000 loan with an 8% interest over the span of 10 years, your monthly payment would be $12,130.
If you refinance your loan at a 3% interest rate, you’ll be saving $2,470 on your student loan payments. However, It’s worth noting that not everybody should refinance a student loan. That’s because if you refinance a loan from a federal institution, a private institution now controls your loan. This switch means that you lose some federal loan privileges like debt forgiveness.
Moreover, to get a refinanced loan you need to meet certain criteria – for instance, you must have a credit score of at least 650, a low debt to income ratio, a good income as well as a few other requirements.
If you’d like to explore your refinancing options, check out SoFi refinance rates for student loans to get a clear picture of how much you can potentially save on your student loans.
Defaulting on loans
Defaulting on your student loan is one of the biggest mistakes to avoid while repaying your student loans as it comes with heavy repercussions. However, despite its damaging effects, a large chunk of people still default on their student loans. In fact, statistics show that one out of 10 Americans default on their student loans.
A default happens if you don’t make your payment within 270 days of its due date. When you default, the government can go through multiple avenues to recover the debt, making it nearly impossible for you to get another loan in the future.
If you by any chance fail to meet up with payments due to unemployment or a career change, you should contact your lender to discuss your options and set-up a custom plan to avoid defaults.
Choosing The Wrong Repayment Plan
Many students try to stretch their payments for as long as possible in a bid to get lower monthly payments. An extended repayment plan directly translates to a reduced monthly payment fee. However, this also means you’ll be paying a higher interest than you normally would.
The best way to choose the right payment plan is by looking at your income and dedicating 10% towards your debt payment, using that figure to determine how much you can pay monthly.
If your income demands it, you can then stretch your payments for as long as would suit your current financial situation.