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.
Interested in refinancing student loans?Here are the top 8 lenders of 2019!
|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 3.20% APR (with Auto Pay) to 6.99% APR (with Auto Pay). Variable rate loan rates range from 1.99% APR (with Auto Pay) to 6.89% 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 December 13, 2019, 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 12/13/2019. 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@example.com, or call 888-601-2801 for more information on our student 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 SoFi.
3 Important Disclosures for Figure.
Figure’s Student Refinance Loan is a private loan. If you refinance federal loans, you forfeit certain flexible repayment options associated with those loans. If you expect to incur financial hardship that would impact your ability to repay, you should consider federal consolidation alternatives.
4 Important Disclosures for Laurel Road.
Laurel Road Disclosures
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. Mortgage lending is not offered in Puerto Rico. All loans are provided by KeyBank National Association.
ANNUAL PERCENTAGE RATE (“APR”)
There are no origination fees or prepayment penalties associated with the loan. Lender may assess a late fee if any part of a payment is not received within 15 days of the payment due date. Any late fee assessed shall not exceed 5% of the late payment or $28, whichever is less. A borrower may be charged $20 for any payment (including a check or an electronic payment) that is returned unpaid due to non-sufficient funds (NSF) or a closed account.
For bachelor’s degrees and higher, up to 100% of outstanding private and federal student loans (minimum $5,000) are eligible for refinancing. If you are refinancing greater than $300,000 in student loan debt, Lender may refinance the loans into 2 or more new loans.
ELIGIBILITY & ELIGIBLE LOANS
Borrower, and Co-signer if applicable, must be a U.S. Citizen or Permanent Resident with a valid I-551 card (which must show a minimum of 10 years between “Resident Since” date and “Card Expires” date or has no expiration date); state that they are of at least borrowing age in the state of residence at the time of application; and meet Lender underwriting criteria (including, for example, employment, debt-to-income, disposable income, and credit history requirements).
Graduates may refinance any unsubsidized or subsidized Federal or private student loan that was used exclusively for qualified higher education expenses (as defined in 26 USC Section 221) at an accredited U.S. undergraduate or graduate school. Any federal loans refinanced with Lender are private loans and do not have the same repayment options that federal loan program offers such as Income Based Repayment or Income Contingent Repayment.
All loans must be in grace or repayment status and cannot be in default. Borrower must have graduated or be enrolled in good standing in the final term preceding graduation from an accredited Title IV U.S. school and must be employed, or have an eligible offer of employment. Parents looking to refinance loans taken out on behalf of a child should refer to https://www.laurelroad.com/refinance-student-loans/refinance-parent-plus-loans/ for applicable terms and conditions.
For Associates Degrees: Only associates degrees earned in one of the following are eligible for refinancing: Cardiovascular Technologist (CVT); Dental Hygiene; Diagnostic Medical Sonography; EMT/Paramedics; Nuclear Technician; Nursing; Occupational Therapy Assistant; Pharmacy Technician; Physical Therapy Assistant; Radiation Therapy; Radiologic/MRI Technologist; Respiratory Therapy; or Surgical Technologist. To refinance an Associates degree, a borrower must also either be currently enrolled and in the final term of an associate degree program at a Title IV eligible school with an offer of employment in the same field in which they will receive an eligible associate degree OR have graduated from a school that is Title IV eligible with an eligible associate and have been employed, for a minimum of 12 months, in the same field of study of the associate degree earned.
The interest rate you are offered will depend on your credit profile, income, and total debt payments as well as your choice of fixed or variable and choice of term. For applicants who are currently medical or dental residents, your rate offer may also vary depending on whether you have secured employment for after residency.
The repayment of any refinanced student loan will commence (1) immediately after disbursement by us, or (2) after any grace or in-school deferment period, existing prior to refinancing and/or consolidation with us, has expired.
POSTPONING OR REDUCING PAYMENTS
After loan disbursement, if a borrower documents a qualifying economic hardship, we may agree in our discretion to allow for full or partial forbearance of payments for one or more 3-month time periods (not to exceed 12 months in the aggregate during the term of your loan), provided that we receive acceptable documentation (including updating documentation) of the nature and expected duration of the borrower’s economic hardship.
We may agree under certain circumstances to allow a borrower to make $100/month payments for a period of time immediately after loan disbursement if the borrower is employed full-time as an intern, resident, or similar postgraduate trainee at the time of loan disbursement. These payments may not be enough to cover all of the interest that accrues on the loan. Unpaid accrued interest will be added to your loan and monthly payments of principal and interest will begin when the post-graduate training program ends.
We may agree under certain circumstances to allow postponement (deferral) of monthly payments of principal and interest for a period of time immediately following loan disbursement (not to exceed 6 months after the borrower’s graduation with an eligible degree), if the borrower is an eligible student in the borrower’s final term at the time of loan disbursement or graduated less than 6 months before loan disbursement, and has accepted an offer of (or has already begun) full-time employment.
If Lender agrees (in its sole discretion) to postpone or reduce any monthly payment(s) for a period of time, interest on the loan will continue to accrue for each day principal is owed. Although the borrower might not be required to make payments during such a period, the borrower may continue to make payments during such a period. Making payments, or paying some of the interest, will reduce the total amount that will be required to be paid over the life of the loan. Interest not paid during any period when Lender has agreed to postpone or reduce any monthly payment will be added to the principal balance through capitalization (compounding) at the end of such a period, one month before the borrower is required to resume making regular monthly payments.
KEYBANK NATIONAL ASSOCIATION RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE.
This information is current as of November 8, 2019 and is subject to change.
5 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.
6 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 1.76% effective November 10, 2019.
7 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 12/07/2019 student loan refinancing rates range from 1.90% to 8.59% Variable APR with AutoPay and 3.49% to 7.75% Fixed APR with AutoPay.
8 Important Disclosures for College Ave.
College Ave Disclosures
College Ave Student Loans products are made available through either Firstrust Bank, member FDIC or M.Y. Safra Bank, FSB, member FDIC. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply.
1College Ave Refi Education loans are not currently available to residents of Maine.
2All rates shown include autopay discount. The 0.25% auto-pay interest rate reduction applies as long as a valid bank account is designated for required monthly payments. Variable rates may increase after consummation.
3$5,000 is the minimum requirement to refinance. The maximum loan amount is $300,000 for those with medical, dental, pharmacy or veterinary doctorate degrees, and $150,000 for all other undergraduate or graduate degrees.
4This informational repayment example uses typical loan terms for a refi borrower with a Full Principal & Interest Repayment and a 10-year repayment term, has a $40,000 loan and a 5.5% Annual Percentage Rate (“APR”): 120 monthly payments of $434.11 while in the repayment period, for a total amount of payments of $52,092.61. Loans will never have a full principal and interest monthly payment of less than $50. Your actual rates and repayment terms may vary.
Information advertised valid as of 12/1/2019. Variable interest rates may increase after consummation.
|1.99% – 6.89%1||Undergrad & Graduate|
|2.31% – 7.36%2||Undergrad & Graduate|
|1.99% – 6.75%3||Undergrad & Graduate|
|1.99% – 6.65%4||Undergrad & Graduate|
|2.43% – 7.60%5||Undergrad & Graduate|
|1.85% – 6.13%6||Undergrad & Graduate|
|1.90% – 8.59%7||Undergrad & Graduate|
|2.74% – 6.25%8||Undergrad & Graduate|