Kelly Robertson
So you took a student loan, or more of them, and now you’re struggling to pay it/them back. It is what it is… you have to be careful when selecting the terms that work for you. In particular, you need to avoid mistakes people make when agreeing to terms that end up costing an arm and a leg.
Four of the most common mistakes are outlined below. Learn from other people’s experiences so you don’t repeat them. Here they are:
Mistake #1: Lack of understanding
In other words, you should know your options.
You see, basically, there are two types of student loans: federal and private. The former are issued by the government, and the latter are funded by banks and other financial institutions.
Federal loans have a number of repayment options:
- Standard repayment – ten-year term with fixed monthly payments.
- Extended repayment – for bigger loans, the term can be 12 to 30 years.
- Graduated repayment – payments (at least equal to the interest) increase every two years for a 12- to 30-year term, depending on the debt amount. Could be useful for those who will earn a big salary.
- Income-contingent repayment – available to borrowers of low-interest, need-based Direct Loans. Payments are based on annual income, family size, and total debt, so you’ll potentially pay less per month. Debt forgiveness is an option if you’re still paying off loans after 25 years, though.
- Income-sensitive repayment – for a 10-year term, payments are based on a percentage of your gross salary.
- Income-based repayment – similar to the previous point, this loan type allows borrowers to reduce their payments to 15% of their discretionary income. Additionally, this loan can be forgiven after 25 years of payments.
In addition, the government also offers the Public Service Loan Forgiveness program that allows eligible nonprofit and government employees to have their student loans forgiven after 10 years of payments.
Private loans are more straightforward, and it’s up to you to negotiate the terms that work for you. And if, after some time, you have problems making regular monthly payments, you can always refinance them — thought that option is also available for loans issued by the government.
Mistake #2: Not considering your future income potential
Those graduating from Ivy League business schools and engineers are always in demand, and they easily end-up with a six-figure income. This will naturally help them pay off their debts faster than other folks — those studying subjects that are not deemed “hot” on the market.
Whichever university you have attended, determine the highest monthly payment you can afford. Various experts recommend that your monthly debt should not exceed 10% of your earnings before taxes.
Once you have selected the refinancing option that works for you, consider making one extra payment each year to save on interest payments. And try to make bigger and bigger payment every consecutive year. This is where those with highly sought for skills have a big advantage — they will be able to get out of debt faster.
Mistake #3: Focusing all your efforts on student loan repayment
While we applaud everyone who wants to get out of debt, we can’t say it is best to focus all your energy on a single financial goal. This is what refinancing is all about — so you can free a portion of your income and invest in other things, as well.
For instance, if your employer is offering to match your 401(k) contributions, you should take that by all means. Your retirement is equally important as “going debt free” with your student loan(s). These are free dollars your employer is willing to put into your fund for the days when you won’t be able to earn your salary.
Another example is not creating an emergency fund due to your efforts to repay student loans first. On and on we repeat that having an emergency fund is not an option — it is a must. Among other things, an emergency fund acts like a buffer between an urgent need and getting into more debt.
So yes, you should work towards repaying your student loan as soon as possible, but you should have other financial goals, as well.
Mistake #4: Not making the right choices
Taking your time to select the right “kind” of student loan refinancing terms can get you a long way. Otherwise, you may end-up struggling to make regular monthly payments, which could then prompt you to use credit credits for many expenses hence increasing your overall debt. What you should select is a kind of refinancing that doesn’t take too much of your monthly income. That way, you will be able to also have other financial goals while (relatively) comfortably repaying your student loans.
A good company can consolidate your private or federal student debt into a single loan with lower monthly payments and, potentially, a better interest rate.
What to do next?
We have all made mistakes, but when it comes to student loans — we can actually fix them with refinancing. Yes, that’s getting a new loan, and yes it could make your overall debt higher. Or not, based on your original student loan’s terms. You should ask to find out.
We strongly recommend to check out SoFi to refinance your student loans — see what they can offer for you and only if you like what you see, go for it. Or look elsewhere, though we tend to think you’ll return to them due to the high-quality service they are known for.
Click here to learn more about SoFi and get the best rate to refinance your student loans.
And do let us know if there is some other mistake we should add to this article. Thanks.
