Student loans are a necessity for most high school graduates and adults heading off to college. Federal and private student loan programs are well designed to provide the money students need to complete their education and repay their debt over time after graduation.
But there are some important student loan pitfalls to avoid.
- Waiting to Start Making Payments
It’s tempting to wait a little while after graduation before you start paying back your debt. After all, with Federal student loans you get a six month grace period. Some private loans enable you to defer payments even longer.
Interest on subsidized loans begins to accrue the moment you graduate. Unsubsidized loan interest grows while you are in school. So the sooner you begin to make payments, the sooner you cut down on the total amount you have to pay back.
Consider paying a small amount towards your student loans every month while you are STILL IN SCHOOL. Ask the credit union to show you how much you can save by making small student loan payments while in school.
- Paying Late or Missing Payments
This is a definite no-no. Not only will this hurt your credit score, and affect your ability to get future loans, you could find yourself in real trouble and have your wages garnished and tax refund withheld. At a minimum, you will find that your student loan interest rates may go up and will almost certainly lose any discounts you had earned.
Set up automatic payments with your lender. First off, you’ll never miss a payment! Second, you may get an interest rate reduction! R.I.A. FCU and our student loan partner, LendKey, offer a 0.25% rate reduction when you sign up for recurring monthly payments!
- Dragging Out Your Loan Payoff
Under the standard, graduated, and income-sensitive repayment plans, borrowers can pay off their Federal student loans in 10 years. We recommend the standard plan as you will pay the least interest over time, but it does come with higher monthly payments.
Income-based repayment, however, comes at a very high cost. By stretching the repayment period out from 10 years to 25 years, you reduce your monthly payment but you shell out much more in interest.
Instead, prioritize repaying your student loan debt. First and foremost, prioritize your employer’s 401(k) match program – get your “free” money and start saving for retirement. Then, set up an emergency fund to cover living expenses for at least 3 months if needed. But after that, your priority should be paying off student loan debt. Make payments larger than required to get your debt paid off. Free up your budget so you’re not paying off student loans into your 40s and 50s.
- Borrowing More than You Need
Surprisingly, we hear it all the time. People end up using student loan funds to go on a shopping spree, take a vacation, or cover normal living expenses. That’s not what it’s for. Only borrow what you need to pay for your education costs. Find a part-time job to pay for the pizza and beer, so you don’t end up paying for it over the next 10 years (or longer).
- You Don’t Consolidate or Refinance
Consolidate Federal loans into a federal direct consolidation loan. And refinance private student loans whenever lower interest rates are available. You can also consolidate multiple federal and private student loans into a single loan to possibly lower your monthly payment and reduce the total amount of interest you pay.
Do your homework. You need to be clear on what rates you can get and how long the repayment period is to determine if consolidation or refinancing makes sense for your situation. Contact R.I.A. FCU to go through your refinancing options and find out how much you can save on your specific loans.