With graduation over, thousands of new grads are realizing the transition from college to the “real world” can sometimes be a little overwhelming. And sometimes, important details can be overlooked or mistakes made while dealing with student loans after graduation.
Early student loan mistakes can cost you in the long run. It’s important for all graduating college students to learn how to avoid the following six common student loan blunders after graduation. (Note that most of these tips deal with federal student loans, though there are some things to watch out for with private loans too.)
6 common mistakes with student loans after graduation
- Racking up interest during your grace period
- Deferring student loans after graduation
- Consolidating student loans after graduation for the wrong reasons
- Assuming you’re stuck with that monthly payment
- Missing payments
- Paying only the minimum on student loans after graduation
Students with subsidized federal loans are off the hook when it comes to accruing interest during the grace period. Other federal loans, on the other hand, do accrue interest while you’re in school and during the grace period, as well as during forbearance.
It’s true that you don’t have to pay that interest until it’s officially time to start making student loan payments — but that doesn’t mean it’s a good idea to wait.
Keep in mind that interest accrues daily, and if you don’t pay interest on an unsubsidized student loan, it becomes capitalized — that is, added to the principal balance of your loan. That means your balance will not only get bigger, but you’ll essentially pay interest on your unpaid interest.
If you can afford to do so, make payments toward interest (at least) during the grace period so you’re not faced with an even bigger loan and higher payments when it comes time to start repaying your debt.
Federal student loans offer borrowers a generous grace period of six months between graduation and the due date of their first payment. Six months is seen as a sufficient amount of time for new grads to find a job and get their financial ducks in a row.
But six months can go by in a snap, leaving some graduates still unemployed and scrambling to make their first student loan payment. Since deferring payments is one of the perks of federal student loans, it might seem like a no-brainer to apply for a deferment if the grace period doesn’t feel long enough. In fact, unemployment is one of the situations that qualify for a deferment.
However, unsubsidized loans will continue to accrue interest during the deferment period. And although Uncle Sam will pay your interest on subsidized loans during deferment, it’s still not a great idea to defer them past your grace period if you’re having trouble finding work, since there are limits to the amount of time you can defer student loans due to unemployment (generally a total of three years).
Direct Consolidation loans allow student loan borrowers to combine multiple federal education loans into a new, single loan. The main reason to consolidate your federal student loans is to trade in multiple monthly payments for a single, convenient payment to one loan servicer — or to get on an income-driven repayment plan if you have certain types of ineligible loans.
Many graduates, however, mistakenly believe that consolidating their student loans will save them money.
While consolidation can potentially help lower your monthly payment amount (by stretching out the repayment term of the loan), it will not lower your interest rate. The new interest rate is the weighted average of the rates on your old loans, rounded up to the nearest one-eighth of a percentage point.
Plus, if you extend your repayment term, you might end up with lower payments, but you’ll also pay more in interest over time.
When considering loan consolidation, it’s especially important to understand that this is a free service available via your federal loan servicer — anyone offering to do this on your behalf for a fee could be a scam.
The Standard Repayment Plan, which is the default repayment plan for federal student loan borrowers, is the financial equivalent of one-size-fits-most clothing. It assumes the majority of college graduates will be able to land a job that allows them to pay back their loans over a 10-year period.
Just because this plan fits many budgets does not mean it’s definitely right for you. Your repayment plan isn’t written in stone, and you can make monthly payments more affordable if necessary. Specifically, you can apply for any of the following payment plans to lower your payments:
Pay As You Earn (PAYE): The PAYE plan allows your monthly payments to be capped at 10% of your discretionary income, and your payments will never be higher than what they would be through the Standard Repayment Plan. Any unpaid balance will be forgiven after 20 years on the program.
Revised Pay As You Earn (REPAYE): REPAYE is very similar to PAYE, except more borrowers are eligible. While payments are also capped at 10% of discretionary income, there is no limit to how high payments can be, so it’s possible they end up higher than they would be on the Standard Plan if your income increases. Here too, the remaining balance will be forgiven after 20 years (for undergraduates) or 25 years (for grad students).
Income-Based Repayment: The IBR plan caps your monthly payment at 10% or 15% of your discretionary income, depending on when you took out your loans. As with the PAYE plan, you must have a high debt level relative to your income. You outstanding balance is forgiven after 20 or 25 years, also based on when you borrowed the loan.
Income-Contingent Repayment: An ICR plan caps student loan payments at the lesser of two options: 20% of discretionary income, or what the payment would be on a fixed, 12-year payment plan, adjusted according to income.
Graduated Repayment: If you anticipate that your income will increase over the years and you really just need a break right now as you get settled in your career, consider a graduated repayment plan. With these plans, your payments start out low, but increase over time — generally every two years. You can expect payments under this type of plan to be spread out over the course of 10 years, which makes it a good option for new grads in fields with strong future earning potential.
Extended Repayment: Borrowers are allowed to extend their repayment schedule for up to 25 years and make fixed or graduated payments during that time. Just remember that tacking more time onto your repayment timeline means you’ll end up paying more overall for your student loans.
Again, remember that anything which lengthens the term of your loans will cost you more in interest over the long run. To see how much it will cost you, check out our collection of student loan calculators.
Missing a single student loan payment may seem like nothing to worry about. You’re going to make 120 payments over 10 years, so what’s the big deal if you’re late once in awhile?
Unfortunately, a single missed payment can potentially have serious repercussions. First, your loan is considered delinquent the day after your missed due date and it remains delinquent until you make a payment (or receive deferment or forbearance). At that point, you will likely be assessed a late fee by your lender, and you may see a ding on your credit score.
Delinquency also often disqualifies you for any rebates or interest rate reductions that you received on your loans.
After 270 days of delinquency, your federal loan is considered to be in default — an even more serious situation. With private student loans, default can trigger even sooner.
Setting up automatic payments can be one of the smartest ways to avoid missing your monthly student loan payments. If you are worried about your ability to make a particular month’s payment, contact your lender to see about changing your due date or otherwise tweaking your payment amount to avoid delinquency.
Finally, make sure your lender has your current contact information. That way, if anything goes wrong during your repayment period, they can reach out, and you can find a solution together.
While some recent college grads might be living off ramen in their parents’ basements, others are lucky enough to step into lucrative careers straight out of the gate. Those graduates might be tempted to spend their hefty paychecks on a lavish home or new car, but they might be better served by sending more money to their student loan servicers.
Making extra payments not only shortens your repayment period, but as we’ve discussed, it also reduces the amount of money you’ll spend in interest. Because of the power of compounding interest, even a modest increase to your student loan payment — such as $100 per month — can have a huge long-term impact. Here too, you can run the numbers with our student loan prepayment calculator.
Plan for more than a sweet graduation party
Thinking about paying off your student loans after graduation is not nearly as much fun as celebrating your new degree. But taking the time to plan for your student loans can help you avoid the common mistakes that might end up costing you for years to come.
Once you’ve found employment post-graduation, consider setting a budget for yourself that incorporates student loan payments and any other bills. That way, you can enjoy your hard-earned salary while still taking the right steps towards paying off your student debt.
Larissa Runkle contributed to this report.
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1 Important Disclosures for Splash Financial.
Splash Financial Disclosures
Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet applicable underwriting requirements. Not all borrowers receive the lowest rate. Lowest rates are reserved for the highest qualified borrowers. If approved, your actual rate will be within a range of rates and will depend on a variety of factors, including term of loan, a responsible financial history, income and other factors. Refinancing or consolidating private and federal student loans may not be the right decision for everyone. Federal loans carry special benefits not available for loans made through Splash Financial, for example, public service loan forgiveness and economic hardship programs, fee waivers and rebates on the principal, which may not be accessible to you after you refinance. The rates displayed may include a 0.25% autopay discount.
The information you provide to us is an inquiry to determine whether we or our lenders can make a loan offer that meets your needs. If we or any of our lending partners has an available loan offer for you, you will be invited to submit a loan application to the lender for its review. We do not guarantee that you will receive any loan offers or that your loan application will be approved. Offers are subject to credit approval and are available only to U.S. citizens or permanent residents who meet applicable underwriting requirements. Not all borrowers will receive the lowest rates, which are available to the most qualified borrowers. Participating lenders, rates and terms are subject to change at any time without notice.
To check the rates and terms you qualify for, Splash Financial conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, the lender will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.
Splash Financial and our lending partners reserve the right to modify or discontinue products and benefits at any time without notice. To qualify, a borrower must be a U.S. citizen and meet our lending partner’s underwriting requirements. Lowest rates are reserved for the highest qualified borrowers. This information is current as of October 1, 2020.
2 Important Disclosures for Laurel Road.
Laurel Road Disclosures
All credit products are subject to credit approval.
Laurel Road began originating student loans in 2013 and has since helped thousands of professionals with undergraduate and postgraduate degrees consolidate and refinance more than $4 billion in federal and private school loans. Laurel Road also offers a suite of online graduate school loan products and personal loans that help simplify lending through customized technology and personalized service. In April 2019, Laurel Road was acquired by KeyBank, one of the nation’s largest bank-based financial services companies. Laurel Road is a brand of KeyBank National Association offering online lending products in all 50 U.S. states, Washington, D.C., and Puerto Rico. All loans are provided by KeyBank National Association, a nationally chartered bank. Member FDIC. For more information, visit www.laurelroad.com.
As used throughout these Terms & Conditions, the term “Lender” refers to KeyBank National Association and its affiliates, agents, guaranty insurers, investors, assigns, and successors in interest.
Assumptions: Repayment examples above assume a loan amount of $10,000 with repayment beginning immediately following disbursement. Repayment examples do not include the 0.25% AutoPay Discount.
Annual Percentage Rate (“APR”): This term represents the actual cost of financing to the borrower over the life of the loan expressed as a yearly rate.
Interest Rate: A simple annual rate that is applied to an unpaid balance.
Variable Rates: The current index for variable rate loans is derived from the one-month London Interbank Offered Rate (“LIBOR”) and changes in the LIBOR index may cause your monthly payment to increase. Borrowers who take out a term of 5, 7, or 10 years will have a maximum interest rate of 9%, those who take out a 15 or 20-year variable loan will have a maximum interest rate of 10%.
KEYBANK NATIONAL ASSOCIATION RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE.
This information is current as of September 9, 2020. Information and rates are subject to change without notice.
3 Important Disclosures for SoFi.
4 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 2.98% APR (with Auto Pay) to 5.79% APR (with Auto Pay). Variable rate loan rates range from 1.99% APR (with Auto Pay) to 5.64% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of July 31, 2020, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 7/31/2020. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at [email protected], or call 888-601-2801 for more information on our student loan refinance product.
© 2020 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.
5 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
Subject to floor rate and may require the automatic payments be made from a checking or savings account with the lender. The rate reduction will be removed and the rate will be increased by 0.25% upon any cancellation or failed collection attempt of the automatic payment and will be suspended during any period of deferment or forbearance. As a result, during the forbearance or suspension period, and/or if the automatic payment is canceled, any increase will take the form of higher payments. The lowest advertised variable APR is only available for loan terms of 5 years and is reserved for applicants with FICO scores of at least 810.
As of 10/15/2020 student loan refinancing rates range from 1.98% APR to 8.55% Variable APR with AutoPay and 2.99% APR to 8.77% Fixed APR with AutoPay.