Student loan debt is a very hot topic. With borrowers owing a combined total of federal student loan debt that is nearing a trillion dollars. One in five adults currently has student loan debt and we don’t see college tuition dropping in the near future.
Repaying your student loans can be daunting, especially if you have over six figures of debt, like many new college graduates.
When it comes to paying back that debt, make sure you AVOID these pieces of bad advice:
- Pay just the minimum payment. WRONG! You might think this is the responsible thing to do, after all, you’re meeting your obligation, right? Don’t forget, you are always accruing interest on the balance you owe. By paying even a little bit over your monthly minimum you can lower the overall cost of your student loans and pay them off earlier than expected. There are no prepayment penalties if you pay your loan off early.
- Don’t apply for student loan forgiveness. WRONG! Currently, there are two options to obtain federal student loan forgiveness, but you need to understand the requirements for each. One option is enrolling in an income-driven repayment plan, after a set number of years if your loans are not paid off, the balance may be forgiven. The other option requires participating in a Public Service or Teacher Loan Forgiveness plan – this entails working in specific public service or teaching positions. Whatever path you choose, make sure you understand the requirements for each.
- Don’t make any extra payments. WRONG! If you have extra money at the end of a month, consider making an extra payment on your student loans. Similar to #1 above, putting extra money down on your loan’s principal can reduce the amount of interest owed and help you pay off your loan earlier. Make sure your loan servicer knows that any extra payment will go towards the principal and not just an early payment of your next installment.
- Never use bonuses or lump sums to pay down loan debt. WRONG! Yes, everyone wants to use a windfall or bonus to take a vacation or buy something fun but putting a lump sum down on your student loan debt could save you thousands of dollars in interest and shave months to even years of your installment plan. Every dollar counts.
- Don’t refinance. WRONG! One of the best ways to save money on student loan debt is to refinance to a lower interest rate. Each lender will have different requirements and criteria. Refinancing your private loans is usually a great idea if you can get a lower interest rate, however federal loans have their own rules. You can learn more about refinancing your loans in a previous blog we wrote: CLICK HERE. With federal loans, you’ll want to consider the interest rate, but also if it disqualifies you from an income-based repayment or loan forgiveness.
If you are frustrated with student loan repayment, you aren’t alone. Avoid the often spouted bad advice when possible, take advantage of paying extra on the loan principal when you can. For individual advice on your personal finances, it’s always best to consult a financial professional.
Washington Branch Manager, Assistant Vice President