The average college graduate has more student loan debt than ever before. As tuition continues to rise as a rate that far outpaces inflation, students are forced to take on ever-increasing debt to finance their education. After graduation, these loans can have a serious impact on their financial security — making it hard to pay for basic living expenses, put aside money for major expenses, or save for retirement.
If you are struggling with student loan debt or want to avoid the problems that plague so many college graduates, read on to learn how to avoid these common student loan mistakes that can cost you money — and damage your overall financial health.
Not Taking Advantage of Income-Based Repayment Plans
Most recent college graduates do not start their careers with six-figure salaries. Depending on your chosen field, a low salary is the norm — which can seriously hinder your ability to repay your student loans. If you have loans from the federal government, consider loan repayment programsthat help you repay your debt more quickly and reduce the total interest that you’ll pay over the life of your loan.
Depending on how much you make, you may be eligible for income-based student loan repayment programs. You’ll pay 10 to 15 percent of your annual discretionary income towards your student loans for a shorter loan repayment period (typically 10 years). At the end of the payment plan, you may be eligible to have the remaining debt forgiven.
This plans are ideal for anyone whose debt exceeds their income or for borrowers whose debt is two-thirds or more of their income. It can help you repay your loans more quickly, with monthly payments that are based on a number of factors, including your income and family size. So if you have significant student loan debt from the federal government, consider an income-based student loan repayment program to help relive the burden.
Not Learning About Your Loans
One of the biggest mistakes made by borrowers is not taking the time to learn about the loans that you are signing. If you don’t understand your loans, it will be difficult to take advantage of different loan repayment options — or to pay off your loans more quickly.
There are two main types of student loans: federal and private. Federal student loans are backed by the government, and have set interest rates. Private loans are offered by private lenders, with rates dependent on the student’s credit history. Knowing what type of loans you have and their interest rate is the first step in making a game plan to pay off your loans.
When you know the type of loans that you have and their interest rates, you can determine if it makes sense to refinance or consolidate your loans, or if you can take advantage of loan repayment programs. Once you have this information at your fingertips, you can start the process of analyzing your loans and researching options to reduce your monthly payments and get out of debt faster.
Not Researching Student Loan Forgiveness Programs
As mentioned above, the federal government offers various programs to help students repay their loans — and in some cases, to erase part of a borrower’s debt. These programs are available for people who work in public service and for borrowers on income-based repayment plans, and can be incredibly helpful in getting out of debt.
If you work in the public sector and have federal student loans, you may be eligible for the government’s Public Service Loan Forgiveness Program. This plan allows teachers, law enforcement officers, doctors, lawyers and other employees of non-profit organizations and the government to have their loans forgiven after 10 years of payments. Importantly, the amount that is forgiven is tax-free so that they do not have an additional burden. To participate in these programs, look for an income-based repayment plan.
If you are enrolled in an income-driven repayment plan, you may also be eligible for loan forgiveness. After making payments for 20 to 25 years, you may be eligible for cancellation of the remaining debt. However, unlike the Public Service Loan Forgiveness Program, the cancelled debt will be taxed — which can be a significant amount of money of one-third or more of the amount forgiven. Carefully consider the benefits of these plans before agreeing to participate.
Not Automating Payments
Missing a payment on any bill — including a student loan — can have major consequences for your credit history. If you miss student loan payments, you may also be pushing back the date that you can be eligible for loan forgiveness. That is why setting up automated payments is a smart choice for borrowers.
In addition to never missing a payment, automating your student loans has an additional advantage. Many lenders reduce the interest rate on a student loan for automated payments and/or for making a certain number of payments on time. This can add up to significant savings over time, allowing you to repay your loans more quickly. It’s a simple step to take — and one that is highly beneficial to your bottom line.
Not Saving for Retirement
Becoming debt-free is important — but so is saving for retirement. One of the best ways to build up a substantial nest egg is by saving early and taking advantage of your employer’s matching contributions. When you are allocating your money each month, be sure to set aside funds for retirement — and to not prioritize paying off student loans over saving for retirement.
Many student loans have relatively low interest rates (especially federal loans). While it’s best to pay them off as soon as possible, you should not do so at the expense of saving for retirement. Analyze your budget to see how much money you can put towards your 401(k) plan each month. Try to maximize this amount to obtain your employer’s matching contribution — and then put any extra money towards paying down your student loans. If you are unable to save for retirement with your current student loan payments, consider an income-based repayment plan to free up some cash.
Author: Jeff Gitlen
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