6 Common Student Loan Mistakes New Grads Make

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With graduation season in full swing, thousands of new grads are realizing the transition from college to the “real world” can be pretty overwhelming. So much so that some important details can be overlooked, such as how to deal with student loans after graduation.

Early student loan mistakes can cost you big in the long-run. It’s important for all graduating college students to avoid the following six common student loan blunders post-graduation.

1. Racking up interest during your grace period

Students with subsidized federal loans are off the hook when it comes to accruing interest during the grace period. Unsubsidized federal loans, on the other hand, accrue interest while you are in school, during the grace period, as well as during forbearance.

However, 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.

If you do not pay interest on an unsubsidized student loan, the interest is capitalized – that is, added to the principal balance of your loan. That means your principal balance will not only get bigger, but you’ll pay even more in interest since it is calculated based upon your principal balance.

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.

2. Deferring student loans past the grace period

Federal student loans offer students a generous grace period of six months between graduation and the due date of the first student loan payment. Six months should theoretically be 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 pay their first student loan payment. Since deferring student loan payments is one of the perks of federal student loans, it might seem like a no-brainer to apply for a deferment when the grace period doesn’t seem like long enough. Unemployment is one of situations that qualifies for a deferment.

However, unsubsidized loans will continue to accrue interest during the deferment period, which will be capitalized. While Uncle Sam will pay your interest on subsidized loans during deferment, it’s still not a great idea to defer your loans past your grace period if you are having trouble finding work. There are limits to the amount of time you can defer student loans due to unemployment (generally a total of three years).

3. Consolidating student loans after graduation for the wrong reasons

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 into such a Direct Loan 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.

Many graduates, however, mistakenly believe that consolidating their student loans will save them money.

While consolidation can help lower the monthly payment amount, it will not lower your interest rate; the new interest rate is the weighted average of the rates on your old loans, plus a small percentage on top. Plus, consolidating often means extending the repayment term. You might end up with lower payments, but you’ll pay more in interest over time.

4. Assuming you’re stuck with that monthly payment

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 is right for you – your repayment plan isn’t written in stone and you can make monthly payments more affordable if necessary. You can apply for any of the following payment plans to lower your payments:

Pay As You Earn (PAYE) allows your monthly payments to be capped at 10 percent of your discretionary income and your payments will never be higher than what they would be through the Standard Repayment Plan.

Revised Pay As You Earn (REPAYE) is very similar to PAYE, except more borrowers are eligible. While payments are also capped at 10 percent of discretionary income, there is no limit to how high payments can be and it’s possible they end up higher than on the Standard Plan if your income increases.

Income-Based Repayment (IBR) caps your monthly payment at 10 to 15 percent of your discretionary income, depending on when you took out your loans. To qualify for IBR, you generally need to owe more than your annual salary.

Income-Contingent Repayment (ICR) caps student loan payments at the lesser of two options: 20 percent 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 lower but increase over time – generally every two years. You can expect payments under such a plan to be spread out over the course of 10 years, which makes this 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 does mean you will end up paying more overall for your student loans.

5. Missing payments

Missing a single student loan payment may seem like nothing to worry about. You are going to make 120 payments over 10 years, so what’s the big deal if you are late once in awhile?

Unfortunately, a single missed payment can have pretty 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 request deferment or forbearance. Then, you will likely be assessed a late fee by your lender and you may see a ding on your credit. After 270 days of delinquency, your loan is considered to be in default.

In addition, delinquency often disqualifies you for any rebates or interest rate reductions that you received on your loans.

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 to avoid delinquency.

6. Paying only the minimum on student loans after graduation

While some recent college grads might be living off of ramen in their parents’ basements, others are lucky enough to step into lucrative careers directly from college. Those graduates might be tempted to spend their hefty paychecks on a lavish place to live or a new car, but they would be better served by sending more money to their student loan servicers.

Making extra payments not only shortens your repayment period, but it also reduces the amount of money you will spend in interest. Because of the power of compounding, even a modest increase to your student loan payment – such as $100 per month – can have a huge long-term impact. See for yourself by plugging in the numbers below.

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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 the milestone. But taking the time plan for your student loans can help you avoid the common mistakes that could end up costing you for years to come.

Interested in refinancing student loans?

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1 Important Disclosures for Laurel Road.

Laurel Road Disclosures

  1. VARIABLE APR – APR is subject to increase after consummation. 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.

2 Important Disclosures for SoFi.

SoFi Disclosures

  1. Student Loan RefinanceFixed rates from 3.999% APR to 7.804% APR (with AutoPay). Variable rates from 2.480% APR to 7.524% APR (with AutoPay). Interest rates on variable rate loans are capped at either 8.95% or 9.95% depending on term of loan. See APR examples and terms. Lowest variable rate of 2.480% APR assumes current 1 month LIBOR rate of 2.07% plus 0.91% margin minus 0.25% ACH discount. Not all borrowers receive the lowest rate. If approved for a loan, the fixed or variable interest rate offered will depend on your creditworthiness, and the term of the loan and other factors, and will be within the ranges of rates listed above. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account. *To check the rates and terms you qualify for, SoFi conducts a soft credit inquiry. Unlike hard credit inquiries, soft credit inquiries (or soft credit pulls) do not impact your credit score. Soft credit inquiries allow SoFi to show you what rates and terms SoFi can offer you up front. After seeing your rates, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit inquiry. Hard credit inquiries (or hard credit pulls) are required for SoFi to be able to issue you a loan. In addition to requiring your explicit permission, these credit pulls may impact your credit score
  2. Terms and Conditions Apply: SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet SoFi’s underwriting requirements. Not all borrowers receive the lowest rate. To qualify for the lowest rate, you must have a responsible financial history and meet other conditions. If approved, your actual rate will be within the range of rates listed above and will depend on a variety of factors, including term of loan, a responsible financial history, years of experience, income and other factors. Rates and Terms are subject to change at anytime without notice and are subject to state restrictions. SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. Licensed by the Department of Business Oversight under the California Financing Law License No. 6054612. SoFi loans are originated by SoFi Lending Corp., NMLS # 1121636. (www.nmlsconsumeraccess.org)

3 Important Disclosures for CommonBond.

CommonBond Disclosures

  1. Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). The following table displays the estimated monthly payment, total interest, and Annual Percentage Rates (APR) for a $10,000 loan. The Annual Percentage Rate (APR) shown for each in-school loan product reflects the accruing interest, the effect of one-time capitalization of interest at the end of a deferment period, a 2% origination fee, and the applicable Repayment Plan. All loans are eligible for a 0.25% reduction in interest rate by agreeing to automatic payment withdrawals once in repayment, which is reflected in the interest rates and APRs displayed. Variable rates may increase after consummation. All variable rates are based on a 1-month LIBOR assumption of 2.08% effective July 25, 2018.

4 Important Disclosures for Citizens Bank.

Citizens Bank Disclosures

  1. Education Refinance Loan Rate DisclosureVariable rate, based on the one-month London Interbank Offered Rate (“LIBOR”) published in The Wall Street Journal on the twenty-fifth day, or the next business day, of the preceding calendar month. As of August 1, 2018, the one-month LIBOR rate is 2.07%. Variable interest rates range from 2.72%-8.17% (2.72%-8.17% APR) and will fluctuate over the term of the borrower’s loan with changes in the LIBOR rate, and will vary based on applicable terms, level of degree earned and presence of a cosigner. Fixed interest rates range from 3.50%-8.69% (3.50% – 8.69% APR) based on applicable terms, level of degree earned and presence of a cosigner. Lowest rates shown require application with a cosigner, are for eligible, creditworthy applicants with a graduate level degree, require a 5-year repayment term and include our Loyalty discount and Automatic Payment discounts of 0.25 percentage points each, as outlined in the Loyalty and Automatic Payment Discount disclosures. The maximum variable rate on the Education Refinance Loan is the greater of 21.00% or Prime Rate plus 9.00%. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change. Please note: Due to federal regulations, Citizens Bank is required to provide every potential borrower with disclosure information before they apply for a private student loan. The borrower will be presented with an Application Disclosure and an Approval Disclosure within the application process before they accept the terms and conditions of their loan.
  2. Federal Loan vs. Private Loan Benefits: Some federal student loans include unique benefits that the borrower may not receive with a private student loan, some of which we do not offer with the Education Refinance Loan. Borrowers should carefully review their current benefits, especially if they work in public service, are in the military, are currently on or considering income based repayment options or are concerned about a steady source of future income and would want to lower their payments at some time in the future. When the borrower refinances, they waive any current and potential future benefits of their federal loans and replace those with the benefits of the Education Refinance Loan. For more information about federal student loan benefits and federal loan consolidation, visit http://studentaid.ed.gov/. We also have several resources available to help the borrower make a decision at http://www.citizensbank.com/EdRefinance, including Should I Refinance My Student Loans? and our FAQs. Should I Refinance My Student Loans? includes a comparison of federal and private student loan benefits that we encourage the borrower to review.
  3. Citizens Bank Education Refinance Loan Eligibility: Eligible applicants may not be currently enrolled, must be in repayment of their existing student loan(s) and must make the minimum number of payments after leaving school. Primary borrowers must be a U.S. citizen, permanent resident or resident alien with a valid U.S. Social Security Number residing in the United States. Resident aliens must apply with a co-signer who is a U.S. citizen or permanent resident. The co-signer (if applicable) must be a U.S. citizen or permanent resident with a valid U.S. Social Security Number residing in the United States. For applicants who have not attained the age of majority in their state of residence, a co-signer will be required. Citizens Bank reserves the right to modify eligibility criteria at anytime. Interest rate ranges subject to change. Education Refinance Loans are subject to credit qualification, completion of a loan application/consumer credit agreement, verification of application information, certification of borrower’s student loan amount(s) and highest degree earned.
  4. Loyalty Discount Disclosure: The borrower will be eligible for a 0.25 percentage point interest rate reduction on their loan if the borrower or their co-signer (if applicable) has a qualifying account in existence with us at the time the borrower and their co-signer (if applicable) have submitted a completed application authorizing us to review their credit request for the loan. The following are qualifying accounts: any checking account, savings account, money market account, certificate of deposit, automobile loan, home equity loan, home equity line of credit, mortgage, credit card account, or other student loans owned by Citizens Bank, N.A. Please note, our checking and savings account options are only available in the following states: CT, DE, MA, MI, NH, NJ, NY, OH, PA, RI, and VT and some products may have an associated cost. This discount will be reflected in the interest rate disclosed in the Loan Approval Disclosure that will be provided to the borrower once the loan is approved. Limit of one Loyalty Discount per loan and discount will not be applied to prior loans. The Loyalty Discount will remain in effect for the life of the loan.
  5. Automatic Payment Discount Disclosure: Borrowers will be eligible to receive a 0.25 percentage point interest rate reduction on their student loans owned by Citizens Bank, N.A. during such time as payments are required to be made and our loan servicer is authorized to automatically deduct payments each month from any bank account the borrower designates. Discount is not available when payments are not due, such as during forbearance. If our loan servicer is unable to successfully withdraw the automatic deductions from the designated account three or more times within any 12-month period, the borrower will no longer be eligible for this discount.
  6. Co-signer Release: Borrowers may apply for co-signer release after making 36 consecutive on-time payments of principal and interest. For the purpose of the application for co-signer release, on-time payments are defined as payments received within 15 days of the due date. Interest only payments do not qualify. The borrower must meet certain credit and eligibility guidelines when applying for the co-signer release. Borrowers must complete an application for release and provide income verification documents as part of the review. Borrowers who use deferment or forbearance will need to make 36 consecutive on-time payments after reentering repayment to qualify for release. The borrower applying for co-signer release must be a U.S. citizen or permanent resident. If an application for co-signer release is denied, the borrower may not reapply for co-signer release until at least one year from the date the application for co-signer release was received. Terms and conditions apply.
  7. Average savings based on 18,113 actual customers who refinanced their federal and private student loans through our Education Refinance Loan between January 1, 2017 and December 31, 2017. The calculation is derived by averaging the monthly savings of Education Refinance Loan customers whose payments decreased after refinancing, which is calculated by taking the monthly student loan payments prior to refinancing minus the monthly student loan payments after refinancing. The borrower’s savings might vary based on the interest rates, balances and remaining repayment term of the loans they are seeking to refinance. The borrower’s overall repayment amount may be higher than the loans they are refinancing even if their monthly payments are lower.
2.57% – 5.87%Undergrad
& Graduate
Visit Earnest
2.80% – 6.38%1Undergrad
& Graduate
Visit Laurel Road
2.48% – 7.52%2Undergrad
& Graduate
Visit SoFi
2.47% – 7.99%Undergrad
& Graduate
Visit Lendkey
2.57% – 6.65%3Undergrad
& Graduate
Visit CommonBond
2.72% – 8.17%4Undergrad
& Graduate
Visit Citizens
Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality and will make a positive impact in your life. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print understand what you are buying, and consult a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time. Please do your homework and let us know if you have any questions or concerns.