Educational debt is a fact of life for millions of people. There are 44.7 million student loan borrowers, according to the Federal Reserve Bank of New York, and 7.86 million of them owe more than $50,000.
Although many people find themselves with student loan debt, borrowers can still get tripped up paying it back because the process can be complicated. “A recent study by Laurel Road found that nearly one-third of millennials didn’t understand the basics of student debt, including timelines, monthly payments, interest rates, taxes, or refinancing before borrowing,” says Alyssa Schaefer, Chief Marketing Officer of Laurel Road, a digital lending platform and brand of KeyBank that offers student loan refinancing.
If you have student loans to pay back, here are the biggest blunders you can make—and how to avoid them.
Mistake #1: Waiting as Long as Possible to Start Paying Them Off
“Unless otherwise indicated, most loans begin accruing interest the day you take them out,” Schaefer says. While you’re probably pretty stretched while you’re in school, if your accumulated interest gets tacked on to your loan balance, it can really add up.
The fix: Put as much as you can—even if it’s just $25 a month—toward your accrued interest while you’re in school or during your grace period after graduation. “That will go a long way to maximizing your total savings over the life of a loan,” Schaefer says.
Mistake #2: Making Late Payments
Missing payment due dates on your student loans can result in late fees, higher interest rates, and even a lower credit score if your servicer reports your late payment to the credit bureaus.
The fix: Set your student loan payments to automatic so that they’re directly withdrawn from your bank account each month, ensuring that you always pay on time. Plus, signing up for automatic payments can often score you a slightly lower interest rate from your servicer, so it’s a win-win.
Mistake #3: Putting Student Loan Repayment Over Other Goals
When you have a lot of debt hanging over your head, it’s easy to feel like paying it off should take precedence over everything else. But don’t neglect other important goals (namely retirement) in order to put more money toward your debt. “Many people put such a high priority on paying down student loans that they don’t participate in their company’s 401(k) plan,” says Robert Johnson, PhD, a professor of finance at Heider College of Business at Creighton University.
The fix: If your company has a retirement account with an employer match, make sure you’re contributing enough of your salary to take full advantage of this benefit. “Perhaps the worst financial mistake anyone can make is turning down free money,” Johnson says.
Mistake #4: Not Taking a Tax Deduction for Your Student Loan Interest
If your income falls under certain limits—$85,000 if you’re single and $170,000 if you’re married and filing jointly—you can take a tax deduction for up to $2,500 in student loan interest each year. If you’re not taking this deduction, you’re paying more in taxes than you should.
The fix: If you meet the income qualifications, download your annual tax documents from your student loan servicer each year, and input the information into your tax software or give the paperwork to your accountant.
Mistake #5: Not Recertifying Your Income-Driven Repayment Plan
If you’re paying back loans under an income-driven repayment plan, you must recertify your income each year for your servicer. “As recently as 2015, the Department of Education reported that about 57% of borrowers failed to do so, resulting in a snap back to the amount they would have to pay under the 10-year standard repayment plan, which is often much higher,” says Derek Brainard, Director of Financial Education at the law student resource site AccessLex. “This is a shocking scenario that can be avoided with some attention to the certification deadline.”
The fix: If you’re on this kind of repayment plan, watch your paperwork and make sure you meet all of the deadlines for your servicer to avoid losing your plan privileges.
Mistake #6: Not Knowing the Difference Between Refinancing and Consolidation
According to Schaefer, both refinancing and consolidation can be effective ways to manage debt—but they’re not the same. “A direct consolidation loan allows borrowers to combine two or more federal student loans into one loan with one interest rate—which is a weighted average of the original loans’ rates—and one of their existing loan servicers,” she says.
Refinancing, on the other hand, is when two or more loans are combined into a single loan with a new lender and, often, a lower interest rate. (You can also refinance a single loan.) “This allows borrowers to leverage their credit profile to select the loan type and term that best meets their financial goals,” Schaefer says.
Both options come with the benefit of having just one payment, which means fewer bills to manage each month.
The fix: Do the math. Compare the amount you’ll pay over your lifetime under consolidation versus the lifetime payments at a potentially lower interest rate after refinancing into a private loan. (Don’t forget the taxes you’d owe on any amount that’s forgiven at the end of your income-driven repayment plan.) “Keep in mind that if you are refinancing any federal student loans with a private lender, you will no longer be able to take advantage of federal income-driven repayment programs or student loan forgiveness,” Schaefer says.
Mistake #7: Not Running the Numbers on Refinancing Your Federal Loans
Some people incorrectly assume that federal loans should never be refinanced into private loans. Others think that a lower interest rate on a refinance with a private lender is the only thing to consider, when there are some reasons why a federal loan may be better in the end, such as flexible benefits.
The fix: As above, calculate how much you’ll pay in total under an income-driven repayment plan versus a lower interest rate after refinancing into a private loan. (And again, don’t forget about those taxes, or the fact that you won’t have access to federal loan benefits.)
Mistake #8: Agreeing to a Hard Credit Check When Getting Quotes from Private Lenders
Before you decide on a private lender, you’ll want to get a few quotes to see who can offer the lowest interest rate. In the process, many lenders will require a hard credit check, or pull, as part of your inquiry process. The downside? This type of credit check can negatively affect your overall credit score by a few points—and if you’re getting quotes from multiple lenders, these can add up.
The fix: Try to seek out lenders such as Laurel Road that only do soft credit pulls during the quote-gathering phase of the refinancing process. This way, if you ultimately decide to go with another lender, your credit score won’t take an unnecessary hit, if even a small one.
The best way to avoid any of the above mistakes is to be proactive from the get-go. As Schaefer puts it, “Taking the time to research the implications of student debt and the specific details of your loan is vitally important to planning for the future.”