Paying off your student loans can be a frustrating and nerve-wracking affair since student loans are probably the first debt that young people will be taking. In the process of paying off these student loans, there are a lot of mistakes that you can commit and making these mistakes can sometimes end up costing you more than what you actually had to pay.
Hence we bring to you the most common mistakes that people make when trying to pay off their student loans that you should probably avoid in your loan repayment process.
Table of Contents
- Not knowing your loan details
- Opting the wrong repayment plans
- Ignoring your student loans
- Just making the minimum payments
- Spending a lot on your interest amount
- Choosing forbearance or deferment
Not knowing all your loan details properly
It is important on your part to keep track of all the payments you are making towards your student loans. The amount you owe, the interest you owe, your payoff date, your monthly payments- all of them. This way you have more control of your student loans and any financial decision you make will be a conscious one. This will also introduce and give you a good understanding of all the terms in loans. This will also prepare you for all the mortgages and personal loans that you might take in the later part of your life, by giving you a better understanding of all the loans.
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Signing for the wrong repayment plans
Federal student loans have a wide range of repayment plans. New repayment plans were introduced over recent years in order to help out the borrowers. This combination of the old and new plans can cause a bit of confusion among people who are opting for student loan repayment plans or looking to change their student loan repayment plans. The standard federal student loan repayment plan is the ten-year plan. The ten-year plan is also the plan a borrower’s first student loan bill might seem impossible to pay. For federal loan balance that is low, this plan might work out well. But the probability of having a good amount of student loan balance is high and this plan might be an expensive option for these people with high balances. According to a recent federal government study, most people have opted for the wrong repayment plan.
But it is important to know all the plans such as the Income-driven repayment plans and extended repayment plans, of which the former take into consideration of the discretionary income that you will be earning and the later plans are established to reduce your monthly payment amount, for as low as $50.
Ignoring your student loans
You must acknowledge the debt you have. Pretending your student loans do not exist might give you temporary relief, but this always ends up being bad as your interest gets added up, along with late fees and the worst your student loans could go into default!
As mentioned before, there is a wide range of student loan repayment options are available for you to pay your student loans debt, which allows you to not ignore your student loans no matter how low income might be.
These options allow you to still be in the repayment no matter what the amount you earn as these repayment plans acknowledge your income and your financial crisis. Learn more about the different Income-driven repayment plans.
Just making the minimum payments
For high-interest student loan debts, if you are making just the minimum payment, it is good that you are acknowledging your student loans, but the most of the amount of your monthly payment goes to your interest amount and not the principal amount. This won’t decrease the debt that you owe, it will only help in not increasing your interest amount and prevents capitalization of your interest amount with your principal amount.
In order to prevent this, make sure that you pay off as much amount as possible when you have the extra money. There are approaches for you to make sure you pay off your student loans as fast as possible. These approaches are called avalanche and snowball methods and can make your student loans disappear as fast as possible.
Remember, even paying an extra $10 per month can cause a noticeable change in your student loan amount.
Spending a lot on your interest
Sometimes after you have made a lot of payments towards your student loans, the amount you owe does not change much. This is because of the high-interest that your student loans charge. You might have taken this loan at a higher interest rate due to bad credit or not having a cosigner. At this point of time, if you have a good credit score, then you can look at refinancing your student loans, especially if they are private student loans.
This is the point of time you should look at other options such as refinancing your student loans. This allows you to refinance your student loans with another lender at a much less rate of interest. This allows you to sometimes reduce your student loan repayment term as well. Doing this could potentially save you a lot of money over the lifetime of the debt, sometimes even thousands of dollars.
Looking to refinance your student loans. Find the best companies to refinance your student loans with.
Opting for deferment or a forbearance
Like ignoring your student loans, people who opt for deferment or forbearance might have been making a mistake because although you are in deferment or forbearance, the interest on your student loans keeps on accumulating with every passing day. Remember, these are just temporary methods and can affect you in the long run as you will end up paying up a lot more.
Most federal student loan borrowers can enroll in an Income-driven repayment plan without opting for forbearance and deferment. Most of these plans like IBR, PAYE, and REPAYE can have monthly payments of at the very least zero dollars. And enrolling in these plans also makes you eligible for forgiveness programs.
There you go, these are the most common mistakes that borrowers make while paying off their student loan debts. Make sure to not make these same mistakes so you can get rid of your student loans as fast as possible.