We grow up with the expectation of university being a natural “next step” following high school. So natural that most high school students simply sign the documents necessary to take out student loans for the next four, five, or even ten, years of their lives. No questions asked. And then after university, it’s easy to get so focused in your career you don’t even think about your student loans. Aside from paying the minimum each month. It’s easy to get too busy with everything else that comes with adulting and fall for common student loan mistakes.
But what if I told you your student loan mistakes costs you hundreds, if not thousands, of dollars?
When I made my first payment of $4,000 towards my unsubsidized loan, the reality of how quickly “small” interest adds up on large loans finally hit me. Over 25% of my first payment went towards interest. So that was over $1,000 that would never benefit me
It was over $1,000 I would never see.
That’s when I became serious about repaying my student loans. I’m still in repayment, but along the way, I’ve learned a lot about student loans.
If you are trying to qualify for the Federal Public Service Loan Forgiveness Program, or are on an income-based repayment program, you may not benefit from this guide. This guide will benefit those who want to pay off their Federal loans more quickly over time.
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1. Paying only the minimum.
Unless you’re trying to qualify for Public Student Forgiveness, you should not stick to paying the minimum on your student loan debt. You should aim to pay more than the minimum for a number of reasons:
- Paying extra reduces the amount of interest that accrues in the long-term.
- The extra amount prorates to the following month. So if you need to pay less one period, you’re allowed the flexibility.
- You will pay off your debt and become debt-free faster by paying extra every month.
Have you limited yourself to only paying the minimum?
Try adding $50, $100, or even $200 to your next monthly payment. At first, it’s hard to let go of that extra money. But think about it this way: if you stick to paying the minimum now, you’re letting go of hundreds or thousands of dollars that could benefit you in the future.
2. Paying extra on all your debts.
You might think it’s effective to spread your payments across all your debts.
A more effective strategy would be choosing your loan with the highest interest rate and “avalanching” payments towards that debt.
While you won’t see the difference immediately, targeting one loan with the highest interest rate will help you pay off your debts faster.
The bigger your payments are every month means more money paid on your principal balance. By reducing the amount of principal balance, you also reduce the amount of interest that will accrue. This mean you will pay less on interest in the long run!
Sometimes the avalanche method feels dissatisfying. Right now, I am making huge payments towards my loans, but don’t anticipate paying them off for another three years. Just remember, with the avalanche method your debt gets paid off quicker! Plus, more of your money will go towards your principal balance instead of towards interest!
So even though you may feel discouraged after the first few months, just know your debt is getting paid off quicker using this method.
3. Making payments only once a month.
Did you know that Federal loan interest accrues daily?
So if you have a $20,000 loan with a 5% interest rate, you will accrue $2.74 in interest each day!
We’ve all heard about cutting expenses like coffee to increase savings. How about getting rid of your student loan interest instead?!
Instead of making payments once a month, aim to make a payment every time you get paid. Or every time you receive extra income, like for birthdays or Christmas.
The small change of multiple payments will truly save you in the long run.
4. Making payments without an emergency fund.
With all this being said, it’s important to start building an emergency fund. You need to prepare yourself for unexpected expenses including car repairs or medical bills.
It’s time to start adulting and be prepared for these financial emergencies.
It sucks to be indebted to “the Man,” but it will suck even worse if you have to put a big payment you can’t afford on that credit card of yours with 24% APR.
I put a percentage of my paycheck towards my emergency fund every month. If you spend money based on the amount you see in your Checkings account, separate your emergency fund. Open an account with another bank.
I recommend opening a Checkings Account with Charles Schwab. They even pay you 0.13% APY interest on any balance. So you can maintain your emergency fund separate from your regular checkings account, and earn money from it at the same time.
If you need more advice regarding how to get your finances together so you can finally start adulting, check out this post.
5. Repaying with a higher interest rate.
Have you looked at your interest rate lately?
Yes, it’s true that student loan interest rates are considered low. But did you know that refinancing could lower your interest rate?
Refinancing is when a private company pays your federal loans off. So instead of owing money to your federal lender, you owe money to them.
But, how does this benefit you?
- You can get a lower interest rate on your loans
- Lower interest rate means less paid over time
- There is a potential for a lower monthly payment
Refinance your loans with the understanding that you will be paying a minimum rate every month, and ineligible for certain federal programs. Once you refinance your loans, they become private loans. That means you will be ineligible for income-driven repayment plans and federal forgiveness programs!
So only refinance your loans if you can afford to pay a minimum rate every month! Refinancing may not be a good option if you rely on income-driven repayment plans. However, if you have room in your budget, you really should consider refinancing to qualify for the lower interest rate!
If you are seriously considering refinancing your student loans, use LendEDU to compare interest rates from up to 12 respected student loan refinancing companies including Commonbond. Submitting your application to LendEDU does not affect your credit! To start using LendEDU is simple:
- Take three minutes to complete your free application to LendEDU;
- They will perform a soft credit check, which does not affect your credit!
- You can compare interest rates from up to 12 student loan refinancing companies.
Yeah. LendEDU offers a freaking painless process at no cost to you that seriously takes only a few minutes. After you complete your application (which only takes a few minutes), they will let you compare interest rates from up to 12 student loan refinancing companies.
If you can get a lower interest rate, refinance your loans! Future you will thank you.
What are your student loan mistakes?
We all make mistakes. But now that you know these student loan mistakes costing you money, you can change your financial situation accordingly.
Seriously. The changes you make today could save you hundreds, if not thousands, of dollars in the long run.
I feel sooo chained down by my student loans and I look forward to the day I have financial freedom from them.
Related Reading: Student Loans 101: Easy Ways to Become Debt-Free
Oh, and here’s something else to consider: it’s okay to pay the minimum amount on your student loans if you make investments that have a rate of return higher than your daily interest.
You’re still paying interest. But you could be making more money from your investments.
Does the whole idea of investing go over your head? Me too. That’s why I use Betterment. You don’t have to pay a membership fee. Basically, you choose the amount that you want to invest. Their team wisely chooses how to invest your money. Their small fee starts as low as 0.25% APY, so you can find solace in the idea that they’ll be driven to make you money (because that’s what makes them money).
If you have a 5% interest rate on your student loan, but make a 6-10% return on your investments, you’re still coming out ahead.
What’s your student loan story? How have you decided to tackle your debt from university?