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.
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?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 6.97% APR (with Auto Pay). Variable rate loan rates range from 2.47% APR (with Auto Pay) to 6.30% 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|
|2.47% – 6.30%1||Undergrad & Graduate|
|2.51% – 8.09%4||Undergrad & Graduate|
|3.02% – 6.44%2||Undergrad & Graduate|
|2.69% – 7.21%5||Undergrad & Graduate|
|2.79% – 8.39%6||Undergrad & Graduate|