4 costly mistakes borrowers make when paying off student loans
MarketWatch has promoted these products and services because we believe readers will find them useful. This content is independent of the MarketWatch newsroom and we may receive a commission if you purchase products through the links in this article.
Paying off student loans can be painful – and if you’re not careful, some student loan mistakes could come back to haunt you. That’s why it’s important to avoid any missteps that could cost you dearly. Here are four common student loan mistakes you should avoid.
It can be easy to get into the habit of paying only the minimum amount owed on your student loans. While it’s okay to make minimum payments if that’s all you can afford, it’s generally a good idea to pay more if you can afford it.
Whether you’re paying a little more than the minimum each month or even making bi-weekly payments, paying extra on your loans could lower your overall interest costs. It might even help you pay off your loans faster.
For example, suppose you have a student loan of $ 25,000 with an APR of 6% and a repayment term of 10 years. If you stick to the minimum monthly payment of $ 278, you will end up paying $ 8,306 in interest over the life of the loan. However, if you made a payment of $ 278 twice a month – $ 556 in total – you could pay off the loan in just over four years and save $ 4,914 in total interest.
You can use Credible’s Student Loan Repayment Calculator to see how increasing your payments might affect your repayment date.
2. Don’t refinance your student loans in certain situations
If you refinance your student loans, your old loans are paid off by a new loan with a new interest rate and a new term. Depending on your credit, you may qualify for a lower interest rate, which could save you money over the life of your loan and even help you pay off your loans faster.
While you can choose to extend your repayment term through refinancing for a lower monthly payment, it can be costly. It can help take the pressure off your budget each month, but having a longer term means you’ll pay more interest over time.
How Can Refinancing Help Save You Money? Suppose you had a $ 25,000 student loan with an APR of 7% and a repayment term of 10 years. If you kept that original loan, you would pay $ 9,833 in interest over time. But if you refinanced with a new loan with 5% APR and a 10-year term, you would save $ 3,013 in total interest charges.
Keep in mind that you can refinance federal and private student loans. However, refinancing federal student loans will cost you your federal protections – including benefits under the CARES Act, which suspended federal student loan payments and accrued interest until at least September 30, 2021 due to the COVID-19 pandemic. As such, it might be wise to wait to refinance federal student loans while focusing on private student loans for the time being.
If you do decide to refinance your student loans, be sure to compare as many lenders as possible to find the loan that’s right for you. Credible makes it easy for you – you can see your prequalified rates from our partner lenders below in two minutes.
3. Do not use a co-signer when refinancing
You will generally need good to excellent credit to potentially qualify for refinancing. If you’re struggling to get approved, consider applying with a co-signer. Even if you don’t need a co-signer to qualify, having one could earn you a lower interest rate than you would get on your own, which can help you save money. money on interest charges over time.
For example, suppose you want to refinance a $ 25,000 student loan. If you applied on your own and were approved for a 10% APR on a 10-year loan, you would pay $ 14,645 in interest over time. But if you applied with a co-signer and were able to get a 7% APR instead, you could save $ 4,812 in interest charges.
Keep in mind that if you have a co-signer, you may be able to release them from the loan in the future, although you will usually need to be creditworthy on your own to do so.
Many student loan lenders offer co-signer release, which allows you to request the withdrawal of your co-signer after making consecutive and on-time payments for a certain period of time. Or you can refinance again, which will release your co-signer when your old loan is paid off.
4. Don’t compare rates when refinancing
Before you refinance, it is essential to compare the rates of as many student loan refinancing companies as possible to find a rate that is right for you. If you skip this step and simply apply to the first lender you qualify for, you could be missing out on low interest rates as well as benefits like:
Longer or more advantageous repayment terms
Autopay or loyalty discounts
Little or no cost
Flexible repayment dates
Credible makes it easy to compare student loan refinance lenders. After filling out just one form, you can see your prequalified rates from our partner lenders below in just two minutes.
When to refinance?
While refinancing can sometimes be a good choice, it isn’t for everyone. Here are some situations where refinancing might be a good idea:
- You want to lower your interest rate. Depending on your credit, you may benefit from a lower interest rate through refinancing. This could help you save money on interest and maybe even pay off your loans faster. You can use Credible’s student loan refinance calculator to see how much you could save by refinancing.
- You need to reduce your monthly payments. Opting for a longer repayment term through refinancing can reduce your monthly payment and make it easier to manage. Remember that if you go for a longer term, you will pay more interest over the term of your loan.
- You want easy payment. Having several different student loans with varying interest rates and maturity dates can make it harder to pay off your loans. If you refinance, your student loans will be consolidated into one loan with one payment to manage.
Here are a few scenarios in which you may want to skip refinancing:
- You have federal student loans. If you refinance federal student loans, you will lose your federal benefits and protections, such as access to income-based repayment plans and student loan cancellation programs.
- You can qualify for a loan discount. Several federal programs offer student loan discounts to certain borrowers. For example, if you have Federal Student Loans and work for a government or nonprofit organization for 10 years while making eligible student loan payments, you may be eligible for Public Service Loan forgiveness. . If you can qualify for a loan forgiveness, refinancing is probably a bad idea.
- You have bad credit. If you have poor or fair credit, you might not qualify for a lower interest rate or better terms than you already have. In this case, it may be best to spend time improving your credit before applying for refinancing in the future.
Coronavirus and student loan refinancing
Due to the COVID-19 pandemic, payments and interest on federal student loans have been suspended by the CARES law until September 30, 2021. If you have federal student loans, you have probably already been enrolled in this forbearance. administrative. While you can always refinance federal student loans, it’s probably best to wait until the relief period ends.
Keep in mind that private student loans are not eligible for these benefits. However, many private lenders offer various forms of assistance to borrowers who have been affected by COVID-19. If you’re struggling to repay your private student loans due to the pandemic, be sure to contact your lender to see if any hardship assistance options are available to you.
How Often Can You Refinance Your Student Loans?
There is no limit to how often you can refinance your student loans. For example, you might want to refinance your loans if you:
You want to release a co-signer
Improve your credit and get a better interest rate
You want to change your repayment period
If you decide to refinance your student loans, be sure to consider as many lenders as possible to find the loan that’s right for you. Credible makes it easy for you: you can compare your prequalified rates with our partner lenders in two minutes.
About the Author: Dori Zinn has been a resident personal finance expert for nearly a decade. Contributor to Credible, her writings have appeared in Wirecutter, Quartz, Bankrate, Credit Karma, Huffington Post, etc. She previously worked as a writer for Student Loan Hero.