For most of us, student loans are our first experience with debt. Paying them back can feel like by trial by fire as we balance payments, living expenses, and other financial obligations for the first time.
There are no training wheels with student loans. Mistakes can cost you big time, both in terms of your credit report and your wallet.
We talked to several recent grads about what they wished they’d known about repaying their loans. Consider their hard-earned lessons so you can avoid these potential pitfalls in your own loan repayment process.
1. Know what you owe
When Joni Sweet graduated from college in 2011, she thought she knew her loan balance. But later, she discovered that her balance was actually double what she’d originally thought.
“My private loans and federal loans, while provided by the same lender, were listed in two separate areas,” said Sweet, who’s now a New York-based writer and editor. “I’m not sure how I made such an error, but I was shocked once I figured out just how much I owe.”
Look over your loan statements carefully; if you’re unsure you’re reading them correctly, have someone review them with you.
Sweet also wishes she’d kept all her communication with her student loan servicer in writing. “Email might take longer than a phone call, but there’s a record of what’s been said,” she noted. “Whether I’ve been lied to or just given misinformation by the customer service reps, I’m not sure, but it has been a headache trying to get [my lender] to stand behind what their reps have told me on the phone.”
2. Don’t forget to factor in interest
Similar to Sweet, 2007 graduate Kristen Hicks thought she understood the borrowing process until it came time to pay back her loans (which are both federal and private), including both principal and interest.
“My parents are pretty financially savvy,” she explained. “One’s an accountant, one’s a banker. I felt like I knew what I was getting into, but I was taken aback by the amount of interest. The two numbers were pretty close to equal.”
Even knowing what she knows now, Hicks isn’t sure she would have done anything differently. She’s not sure that working more hours during college (to reduce the amount she had to borrow or to make interest-only payments) would have been feasible. However, she did consolidate her loans and started making extra payments as soon as she had the money to do so.
3. Interest accrues even during deferment
After finishing an associate’s degree, a bachelor’s degree, and two master’s degrees, Cindy Leonard had borrowed about $135,000 in principal (all in federal loans).
“I always took out the maximum amount possible so I would get a big student loan refund each semester,” she explained.
Leonard and her husband “had been wanting to buy a house for a long time and were unable to save up for a down payment with all of our extra income going to the student loan payments,” said Leonard, who now works for a nonprofit. “So, I requested a deferment for a year, which put close to $800/month in our pockets for a time.”
That was about a year ago; the couple closed on a home in December, but Leonard also learned that unless she paid interest during her deferment, the lender would capitalize it.
“They sent me a letter asking for $17,000 in interest payment on my consolidated loan, which clearly I couldn’t pay, because if I had that kind of money I wouldn’t have asked for a deferment in the first place,” she said. “Now I’m $197,000 in student loan debt.”
In retrospect, she feels that a bachelor’s degree and MBA would have been sufficient rather than an associate’s and second master’s. She also wishes that colleges would provide a mandatory workshop on personal finance to freshman. “The literature you get with your first student loan and promissory note doesn’t really cut it,” she said.
4. One missed payment can cost you big bucks
Missing student loan payments can damage your credit and tack on additional fees.
AJ Saleem, who now manages Suprex Learning, a tutoring company in Houston, learned this the hard way. “I simply missed one payment because I did not have the cash in my account at that time and I had to deal with a ton of fees,” he said.
“Now that I know about delinquencies, I would be more inclined to do automatic payments rather than manual payments. I would also keep more money in reserve so when I do have an issue, I can immediately know rather than finding out and paying additional fees.”
He wound up paying close to double the interest on that payment, but fortunately, it was only one time and his credit didn’t take a major hit.
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