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Student loan repayment can be a chore – and if you’re not careful, some student loan mistakes can haunt you. That is why it is important to avoid missteps that could cost you. Here are four common student finance mistakes that you should avoid.
It can be easy for you to get into the habit of paying only the minimum amount of your student loan. While it’s okay to make minimum payments when you can afford it, it is usually a good idea to pay more if you have the means.
Whether you pay just a little more than the minimum each month or even pay biweekly, you can still pay your loans on top to lower your overall interest costs. It might even help you pay off your loans faster.
For example, suppose you had a $ 25,000 student loan with an APR of 6% and a 10 year repayment period. If you stick to the minimum monthly payment of $ 278, you will pay $ 8,306 in interest over the life of the loan. However, if you made a payment of $ 278 twice a month – a total of $ 556 – you could be paying off the loan in just over four years and would save a total of $ 4,914 in interest.
You can use Credible’s student loan repayment calculator to see how increasing your payments could change your payout date.
2. Failure to refinance your student loans in certain situations
When you refinance your student loan, your old loans will be paid off with a new loan with a new interest rate and new term. Depending on your loan, you may be eligible for a lower interest rate which can save you money over the life of your loan and even pay off your loans faster.
While you can choose to refinance your repayment deadline to get a lower monthly payment, it can be costly. It can help ease your budget each month, but a longer term means you’ll pay more interest over time.
How Can Refinancing Help You Save Money? For example, let’s say you had a $ 25,000 student loan with an APR of 7% and a 10 year repayment period. If you kept this original loan, you would pay $ 9,833 in interest over time. However, if you refinance to a new loan at 5% APR for 10 years, you save a total of $ 3,013 in interest costs.
Remember, you can refinance both government and private student loans. However, refinancing federal student loans will cost you your federal protection – including benefits under the CARES Act, which suspended payments for federal student loans and accrued interest until at least September 30, 2021 due to the COVID-19 pandemic. Therefore, it may be a good idea to wait with the federal student loan refinancing and focus on private student loans for the time being.
If you decide to refinance your student loan, compare as many lenders as possible in order to find the loan that is right for you. Credible makes it easy for you – you can see your pre-qualified rates from our partner lenders below in two minutes.
3. Do not use a co-signer when refinancing
You usually need good to excellent credit ratings in order to potentially qualify for a refinance. If you’re struggling to get approved, you should apply to a co-signer. Even if you don’t need a co-signer to qualify, you can get a lower interest rate compared to what you would get on your own – which can help you save money on interest charges over time.
For example, let’s say you want to refinance a $ 25,000 student loan. If you had applied for your own and had a 10-year loan approved at 10% APR, you would be paying $ 14,645 in interest over time. However, if you apply to a co-signer and receive 7% APR instead, you can save $ 4,812 in interest costs.
Remember that if you have a co-signer, you may be able to exempt them from the loan in the future – although this usually requires you to be creditworthy yourself.
Several student loan lenders offer co-signer release, which allows you to request to remove your co-signer after making consecutive, on-time payments for a period of time. Or you can refinance yourself, which your co-signer releases when your old loan is paid off.
4. No rate comparisons for refinancing
Before refinancing, it is important to compare the interest rates of as many student loan refinancing companies as possible to find an interest rate that works for you. If you skip this step and just apply to the first candidate lender you could be missing out on low interest rates as well as perks like:
Longer or cheaper repayment periods
Autopay or loyalty discounts
Little or no fees
Flexible repayment dates
Credible makes it easy to compare student loan refinancing providers. After filling out a single form, in just two minutes you can see your pre-qualified rates from our partner lenders below.
When should you refinance?
While refinancing can sometimes be a good choice, it is not for everyone. Here are some situations when refinancing could be a smart move:
- You want to lower your interest rate. Depending on your creditworthiness, a refinance may qualify you for a lower interest rate. This can save you interest and possibly even pay off your loans faster. You can use Credible’s refinance calculator to see how much you could save by refinancing.
- You need to lower your monthly payments. If you opt for a longer term through refinancing, you can reduce your monthly payment and manage it more easily. Remember that if you have a longer term, you will have to pay more interest costs throughout the life of your loan.
- You want an easy payment. Having multiple different student loans with different interest rates and maturities can make it difficult to repay your loan. When you refinance, your student loans are bundled into a single loan with only one payment to manage.
Here are some scenarios you might want to skip refinancing:
- You have federal student loans. When you refinance federal student loans, you lose your federal benefits and safeguards, such as access to income-based repayment plans and student loan relief programs.
- You can qualify for loan waiver. Several federal programs offer student loans to certain borrowers. For example, if you have a government student loan and have worked for a government or nonprofit for 10 years while making qualifying student loan payments, you may be eligible for public service loans. If you can qualify for loan relief, then refinancing is likely a bad idea.
- You have bad credit. If you have poor or fair credit, you may not be eligible for a lower interest rate or better terms than you already have. If so, it might be a better option to spend some time improving your credit before applying for refinance in the future.
Coronavirus and student loan refinancing
Due to the COVID-19 pandemic, payments and interest on federal student loans have been suspended until September 30, 2021 by the CARES Act. If you have federal student loans, you are likely already enrolled for this administrative indulgence. While you can still refinance federal student loans, it is probably better to wait until the discharge period ends.
Note that private student loans do not take advantage of these benefits. However, many private lenders offer various forms of assistance to borrowers affected by COVID-19. If the pandemic has made you difficult to make payments on your personal student loans, contact your lender to see if hardship support options are available.
How often can you refinance your student loan?
You can refinance your student loans as often as you like. For example, you might want to refinance your loans if you:
Would you like to approve a co-signer?
Your credit rating has improved and you can get a better interest rate
Would you like to change your repayment period?
When deciding to refinance your student loan, remember to consider as many lenders as possible in order to find the right loan for you. Credible makes it easy for you – you can compare your pre-qualified rates from our partner lenders in two minutes.
About the author: Dori Zinn has been a resident personal finance professional for nearly a decade. Her contributions to Credible have appeared in Wirecutter, Quartz, Bankrate, Credit Karma, Huffington Post, and others. She previously worked as an employee at Student Loan Hero.