There’s no one-size-fits-all approach when it comes to paying off student loan debt. You need to know what works for your personal situation. What helps one person could actually harm someone else.
Here are five common pieces of advice that don’t always pan out so well for borrowers. Read on to learn what’s wrong with these student loan tips and what you should do instead.
1. Switching to an income-driven repayment plan saves you money
If you have federal student loans, switching to an income-driven repayment plan can help lower your monthly payments. There are four income-driven repayment plans and each caps your monthly payment at 10 to 20 percent of your discretionary income. If you’re struggling to make your current payments, one of these plans could ease the burden.
But switching to an income-driven repayment plan also has downsides. To lower your monthly payments, these plans extend your repayment term to 20 or 25 years. Adding a decade or more to your standard repayment plan means you’ll pay a lot more in interest over the life of your loan.
After you make payments for 20 or 25 years, the remaining balance of your student loans is forgiven. It’s not free money though — the forgiven amount will be treated as taxable income. So even if your debt is forgiven, you could be hit with a hefty tax bill.
So before jumping onto an income-driven repayment plan, assess your financial needs. Perhaps you can increase your income or lower your cost of living to better afford your student loans. Maybe you can qualify for a student loan repayment assistance program.
If you can find a way to stay on the standard 10-year repayment plan, you could save a lot of money in the long run.
2. Refinancing your student loans is always beneficial
You may have heard about all the benefits of refinancing student loans. Depending on your creditworthiness and income, you could refinance for lower monthly payments and a better interest rate. Plus, you’ll simplify your monthly payments so you only have to deal with one loan servicer instead of multiple ones.
But before refinancing, make sure you understand the possible drawbacks. When you refinance with a private lender, you give up federal student loan programs. You’ll no longer have access to income-driven repayment plans or federal loan forgiveness programs, like Public Service Loan Forgiveness (PSLF).
If you’re worried about losing your income or working toward federal loan forgiveness, refinancing could be a mistake. Refinancing has major benefits for some borrowers, but it’s not right for everyone.
3. Consolidation and refinancing are the same
It’s easy to confuse student loan consolidation with student loan refinancing. Both combine multiple loans into one new loan, but the similarities largely end there.
Consolidation refers to taking out a Direct Consolidation Loan from the federal government. You can only consolidate federal student loans such as Stafford, Perkins, and Direct PLUS loans. The Perkins Loan program closed to new borrowers when it expired on Sept. 30.
Your new interest rate will be the average weighted interest rate of your old loans, rounded up to the nearest one-eighth of a percent. That means that consolidating does not lower your interest rate. It can help you by extending your repayment plan and it also helps rehabilitate student loans that have gone into default.
Refinancing, on the other hand, means combining all your private and federal student debt into one new loan with a private lender. It can help lower your interest rate and save you money in the long run. But, as mentioned above, refinancing means you lose access to certain federal loan programs.
People commonly confuse consolidation and refinancing, but the two processes are different. If you’re interested in simplifying your monthly payments, make sure you understand which approach is better for your individual situation.
4. You shouldn’t start paying back your loans right away
When you take out federal student loans, you have six months after you graduate before you have to start paying off student debt. This grace period gives you time to look for a job before your student loan bills come rolling in.
Unfortunately, unsubsidized student loans collect interest during this grace period. In fact, unsubsidized loans collect interest from the day they are disbursed.
So if you wait until the grace period is over, you might spend a long time paying off interest before you even make a dent in the principal. If possible, try to start paying your loans even before the grace period ends.
If you don’t have the means to start, at least review your loan terms and get a repayment plan in place. That way, you’ll be prepared when you have to start paying off student debt.
5. It helps to put your student loans into deferment or forbearance
Deferment and forbearance allow you to pause payments on your student loans. Often, borrowers defer their loans for up to three years when they go to grad school. Similarly, those faced with a short-term emergency, such as the loss of a job, can use forbearance for up to 12 months.
But there are risks with both of these options. If you have unsubsidized loans, your debt will continue to accrue interest. After months or even years, your student loan debt could get out of control. Once the deferment or forbearance period ends, you could be left with a huge bill that’s impossible to handle.
Be cautious about exercising either of these options and calculate exactly how much your student debt will grow if left in deferment or forbearance. Come up with a plan in advance so you’re not left scrambling in the future.
Educate yourself before accepting student loan advice
Before acting on student loan tips, make sure you understand all the benefits and drawbacks. A financial move that works for one person might not be right for you.
The best student loan tips take into account your unique circumstances. Make sure you see the whole picture before taking action on your student loans.
Interested in refinancing student loans?Here are the top 6 lenders of 2018!
|Lender||Variable APR||Eligible Degrees|
|Check out the testimonials and our in-depth reviews!
1 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 3.89% APR (with Auto Pay) to 7.89% APR (with Auto Pay). Variable rate loan rates range from 2.47% APR (with Auto Pay) to 6.97% 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 Month/Day/Year, 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 08/21/18. 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 firstname.lastname@example.org, or call 888-601-2801 for more information on ourstudent loan refinance product.
© 2018 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.
2 Important Disclosures for Laurel Road.
Laurel Road Disclosures
APR stands for “Annual Percentage Rate.” Rates listed include a 0.25% EFT discount, for automatic payments made from a checking or savings account. Interest rates as of 11/8/2018. Rates subject to change.
Variable rate options consist of a range from 3.27% per year to 6.09% per year for a 5-year term, 4.64% per year to 6.14% per year for a 7-year term, 4.69% per year to 6.19% per year for a 10-year term, 4.94% per year to 6.44% per year for a 15-year term, or 5.19% per year to 6.69% per year for a 20-year term, with no origination fees. APR is subject to increase after consummation. The variable interest rate will change on the first day of every month (“Change Date”) if the Current Index changes. The variable interest rates are based on a Current Index, which is the 1-month London Interbank Offered Rate (LIBOR) (currency in US dollars), as published on The Wall Street Journal’s website. The variable interest rates and Annual Percentage Rate (APR) will increase or decrease when the 1-month LIBOR index changes. The variable interest rates are calculated by adding a margin ranging from 0.98% to 3.80% for the 5-year term loan, 2.35% to 3.85% for the 7-year term loan, 2.40% to 3.90% for the 10-year term loan, 2.65% to 4.15% for the 15-year term loan, and 2.90% to 4.40% for the 20-year term loan, respectively, to the 1-month LIBOR index published on the 25th day of each month immediately preceding each “Change Date,” as defined above, rounded to two decimal places, with no origination fees. If the 25th day of the month is not a business day or is a US federal holiday, the reference date will be the most recent date preceding the 25th day of the month that is a business day. The monthly payment for a sample $10,000 loan at a range of 3.27% per year to 6.09% per year for a 5-year term would be from $180.89 to $193.75. The monthly payment for a sample $10,000 loan at a range of 4.64% per year to 6.14% per year for a 7-year term would be from $139.65 to $146.76. The monthly payment for a sample $10,000 loan at a range of 4.69% per year to 6.19% per year for a 10-year term would be from $104.56 to $111.98. The monthly payment for a sample $10,000 loan at a range of 4.94% per year to 6.44% per year for a 15-year term would be from $78.77 to $86.78. The monthly payment for a sample $10,000 loan at a range of 5.19% per year to 6.69% per year for a 20-year term would be from $67.05 to $75.68.
However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the variable rate will decrease by 0.25%, and will increase back up to the regular variable interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.
3 Important Disclosures for SoFi.
4 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.
5 Important Disclosures for CommonBond.
Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown.
All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 2.28% effective October 10, 2018.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|2.47% – 6.99%3||Undergrad & Graduate|
|2.57% – 6.97%1||Undergrad & Graduate|
|2.51% – 8.09%4||Undergrad & Graduate|
|3.02% – 6.44%2||Undergrad & Graduate|
|2.50% – 7.24%5||Undergrad & Graduate|
|2.79% – 8.39%6||Undergrad & Graduate|