Student loans can be a headache no matter how much or little you owe, but the greater your debt, the more oppressive it can feel. If you’re struggling to make payments (or failing to make them), it can be downright depressing. But there are smarter ways to deal with your student loan debt – you may just need a little assistance to figure it out. We’re here to help. Today we look at five student loan repayment mistakes and how you can avoid them to save money now and in the future.
#1 Jumping into forbearance
If your monthly payments are overwhelming, your loan servicer may dangle forbearance as a solution to give you a temporary break from your payments. A period where you don’t have to make payments may sound heaven sent but, in fact, it’s not all it’s cracked up to be. Each month, your required payment is a blend of principal and interest. When you don’t make your payment, even in an allowed forbearance, your interest piles up and capitalizes so that at the end of your forbearance, your debt can be substantially more. Long-term, a forbearance will cost you more money and isn’t the best option.
#2 Not using repayment alternatives
Instead of opting for a forbearance which will pile on more debt, look to an affordable repayment plan like Income Based Repayment or Pay As You Earn. IBR reduces payments to 15% of your adjusted gross income and PAYE to 10%. This will save in the short term by reducing your payment, but there is also a downside to this that you need to know. IBR and PAYE extend your loan term and will result in more interest accruing. They both offer loan forgiveness after 20 years of payments under PAYE and 25 years with IBR. This can result in a tax debt, but if you can’t afford your payments, this is better.
#3 Putting your head in the sand
This is one of the top mistakes we see with student loan debtors that can’t make their payments. If you can’t afford your payment, you don’t send it in. When your loan servicer calls, you hit ignore, and when letters about it arrive, you toss them unopened. That strategy only works for a little while. Your servicer won’t let this go on and may pursue garnishment of your wages, which can be financially disastrous. Forbearance is preferable to head in the sand, but getting a cheaper repayment is better yet. Federal student loans have no date of expiry, so they will eventually come back to bite you. Don’t ignore them.
#4 Taking your loan servicer’s advice as gospel
Your loan servicer isn’t vested in your best interests. Their job is to collect money on debts that are owed. If you tell them you’re struggling to make your payments, they may offer incomplete information, push the alternative that’s preferable to them or suggest the solution that will get you off the phone the quickest. You should take control of your own situation, research alternatives, and then make an informed decision. Our Student Loan Help Center has lots of articles that explain repayment plans, forbearance, deferment and everything you need to know to educate yourself on your debt.
#5 Not prioritizing student loans
You may be able to afford your student loans if you rethink your finances. If you prioritize spending on your social life, wardrobe and unneeded stuff over your loans, the problem is not that you can’t afford your debt, but that you can’t afford the lifestyle you’re trying to live. The best strategy is to cut spending as much as possible and pay your standard payment, plus as much extra as you can toward your principal to fast track them for payoff. This will cut into your cash in the short term, but will get you out of debt faster and reduce your interest paid – this is best for your long-term financial well-being.
Student loans may feel insurmountable, but there is a solution that will work for you. You just need to find it. These tips are a starting point, but the key is to understand your debt, know your options and think about your short-term and long-term financial well-being so you can make the best choices for you. One of the best ways to get informed is to sign up today for Tuition.io’s free student loan tool so you’ll always know how much you owe, how much you’re paying and interest you’re accruing and the impact of different repayment plans or making additional payments.