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13 Common Mistakes to Avoid in Repaying Student Loans

Losing track of loans.
Borrowers are sometimes late with a loan payment or even default on a loan because they forget about one of their loans. This can happen because a typical Bachelor’s degree recipient graduates with 8-12 loans. Payments are due even if the lender does not send the borrower a statement or a coupon book. Keep track of vital loan information on a student loan checklist.
Failing to notify the loan servicer about changes in contact information.
Borrowers must update their address and other contact information to receive loan statements and bills on time. Old contact information can cause delays, which may lead to late loan payments.
Being late with a payment.
A single late payment is all it takes to damage an otherwise very good credit score. The credit score is intended to measure whether a borrower will repay his or her debts on time. Borrowers with lower credit scores are less likely to qualify for a loan and will be charged higher interest rates if the loan application is approved. Late payments can also mean that the borrower will not qualify for cosigner release.
Not signing up for auto-debit.
Auto-debit automatically transfers the loan payments from the borrower’s bank account to the lender. Not only does this reduce the likelihood of a late payment, but some lenders will reduce the loan’s interest rate by 0.25% or 0.50% as an incentive. Some borrowers don’t like the idea of the lender reaching into their bank account to take the loan payment. But, the borrower always remains in control and can stop the automatic payments at any time.

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Failing to claim the student loan interest deduction.
Borrowers can deduct up to $2,500 in interest on federal and private student loans on their federal income tax return. The student loan interest deduction is taken as an above-the-line exclusion from income, so taxpayers do not need to itemize to claim the deduction. The deduction often yields several hundred dollars of tax savings.
Choosing too long a repayment plan.
Longer repayment terms lead to lower monthly payments. But, longer repayment terms also lead to more interest being paid over the life of the loan. Increasing the loan term on a 6.8% loan may cut the monthly payment by a third, but more than doubles the total interest paid over the life of the loan. Choose shorter repayment terms to save interest.
Misunderstanding loan amortization and how interest accrues.
Every month, the borrower will be charged interest on the outstanding principal balance of the loan. Initially, most of each loan payment will be applied to interest charges, not the principal, so the loan balance will decrease slowly. There may also be interest that accrued during a deferment or forbearance. This interest must be paid off before the principal balance will decrease. Only after several years in repayment will a kind of domino effect cause the progress in paying down the loan balance become more noticeable. The only way to get quicker progress in paying down the loan debt is to pay more per month.
Not considering the consequences of interest capitalization.
Deferring repayment can cause the loan balance to grow if interest is not paid as it accumulates. While the federal government pays the interest on subsidized loans during deferment periods, it does not pay the interest on unsubsidized loans during deferment periods or on any loans during forbearance periods. If the borrower does not pay the interest as it accrues, the interest will be capitalized by adding it to the loan balance. This can yield a bigger loan, digging the borrower into a deeper hole. Federal education loans are capitalized once, at the end of the deferment period, while private student loans may be capitalized more frequently, leading to interest being charged on interest, not just principal.
Accelerating repayment of the wrong loan.
If a borrower has extra money, he or she can make extra payments on his or her loans. There are no prepayment penalties on federal and private student loans. Applying the extra payments to the loan with the highest interest rate will save the borrower the most money. Some borrowers, however, make extra payments on the loan with the lowest loan balance. This approach, called the snowball method, argues that the borrower will pay off that loan quicker, yielding a psychological boost. But, this does not necessarily save the most money. Accelerating repayment of the loan with the highest interest rate will also lead to quicker payoff of all the loans. Watching the loan balance decrease quicker gives more of a psychological boost than paying off a small loan first.
Paying a fee to consolidate.
Borrowers can consolidate federal student loans for free at StudentLoans.gov. Borrowers can also choose alternate repayment plans that reduce the monthly loan payment without paying a fee. This is simple and can be done without professional or commercial help. Borrowers should never share their FSA ID with anybody and should beware of the risks of identity theft. Call the Federal Student Aid Information Center, a toll-free hotline sponsored by the U.S. Department of Education, at 1-800-4-FED-AID (1-800-433-3243) for free information and advice about federal education loans and other forms of federal student aid.
Assigning blame incorrectly.
Borrowers sometimes think that a refinance will solve all of their problems. Most borrowers do not love their lenders, so switching lenders might not make the borrower happier. Even if a refinance leads to a lower interest rate, often, the real problem is the amount of debt, not the interest rate. A refinance may also be difficult to obtain, especially if the borrower has been experiencing financial difficulty. Ignoring problems will not make them go away and sometimes will cause them to get worse. Talk to the lender before defaulting on the loan.
Defaulting on the loans.
The federal government has very strong powers to compel repayment, including administrative wage garnishment, offset of federal and state income tax refunds and Social Security retirement and disability benefit payments. There is no reason why a borrower should strategically choose to default, as the monthly payment under administrative wage garnishment is higher than the monthly loan payment under income-based repayment or pay-as-you-earn repayment, and the borrower will also have to pay collection charges of up to 20% of each payment. There is no getting away from the debt and no financial benefit to defaulting on the loans.
Counting on bankruptcy discharge.
Federal and private student loans are almost impossible to discharge in bankruptcy. Very few borrowers each year succeed in getting a full or partial discharge of their student loans. To get student loans discharged in bankruptcy requires an adversarial proceeding and proof that repaying the loans represents an “undue hardship” on the borrower and the borrower’s dependents. Each judge has a different interpretation of what it means to have an undue hardship, but generally the borrower must demonstrate a present and future inability to repay the debt and maintain a minimal standard of living for most of the life of the loans. Borrowers must also have made a good faith effort to repay the loans.

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Interest Rates

Variable as low as: 2.25% APR¹

Fixed as low as: 2.74% APR¹

Repayment Terms

5, 7, 10, 15, 20 years

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Rates as low as 2.25% variable and 2.74% fixed¹
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Private student loans lenders: SoFi Student Loan Refinancing

¹Fixed rates from 2.74% APR to 6.94% APR (with AutoPay). Variable rates from 2.25% APR to 6.59% APR (with AutoPay). Interest rates on variable rate loans are capped at either 8.95% or 9.95% depending on term of loan. See APR examples and terms. Lowest variable rate of 2.25% APR assumes current 1 month LIBOR rate of 0.1% plus 2.40% margin minus 0.25% ACH discount. Not all borrowers receive the lowest rate. If approved for a loan, the fixed or variable interest rate offered will depend on your creditworthiness, and the term of the loan and other factors, and will be within the ranges of rates listed above. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. See eligibility details. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account. The discount will not reduce the monthly payment; instead, the interest savings are applied to the principal loan balance, which may help pay the loan down faster. Enrolling in autopay is not required to receive a loan from SoFi. *To check the rates and terms you qualify for, SoFi conducts a soft credit inquiry. Unlike hard credit inquiries, soft credit inquiries (or soft credit pulls) do not impact your credit score. Soft credit inquiries allow SoFi to show you what rates and terms SoFi can offer you up front. After seeing your rates, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit inquiry. Hard credit inquiries (or hard credit pulls) are required for SoFi to be able to issue you a loan. In addition to requiring your explicit permission, these credit pulls may impact your credit score.Terms and Conditions Apply. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE.

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Interest Rates

Variable as low as: 2.94% APR¹

Fixed as low as: 2.99% APR¹

Repayment Terms

5, 10, or 15 years²

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College Ave Student Loans

Variable rate range: 2.94% – 7.74% APR¹
Fixed rate range: 2.99% – 7.84% APR¹
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College Ave Student Loans products are made available through either Firstrust Bank, member FDIC or M.Y. Safra Bank, FSB, member FDIC. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply.

¹The 0.25% auto-pay interest rate reduction applies as long as the borrower or cosigner, if applicable, enrolls in auto-pay and authorizes our loan servicer to automatically deduct your monthly payments from a valid bank account via Automated Clearing House (“ACH”). The rate reduction applies for as long as the monthly payment amount is successfully deducted from the designated bank account and is suspended during periods of forbearance and certain deferments. Variable rates may increase after consummation.

²This informational repayment example uses typical loan terms for a refi borrower who selects the Full Principal & Interest Repayment Option with a 10-year repayment term, has a $40,000 loan and a 5.5% Annual Percentage Rate (“APR”): 120 monthly payments of $434.11 while in the repayment period, for a total amount of payments of $52,092.61. Loans will never have a full principal and interest monthly payment of less than $50. Your actual rates and repayment terms may vary.

³$5,000 is the minimum requirement to refinance. The maximum loan amount is $250,000 for those with medical, dental, pharmacy or veterinary doctorate degrees, and $150,000 for all other undergraduate or graduate degrees.

Information advertised valid as of 10/21/2021. Variable interest rates may increase after consummation. Approved interest rate will depend on the creditworthiness of the applicant(s), lowest advertised rates only available to the most creditworthy applicants and require selection of full principal and interest payments with the shortest available loan term.

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Recommendation

Best for Student Loan Refinancing

Interest Rates

Variable: 1.74% APR - 5.74% APR²

Fixed: 3.49% APR - 6.99% APR²

Repayment Terms

10-yr/20-yr repayment term based on creditworthiness

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Subject to credit approval, borrowers can consolidate up to the aggregate amount of their education loan debt. Maximum limits may apply.
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¹Visit DiscoverStudentLoans.com/AutoDebitReward for terms and conditions.

²Lowest APRs shown for Discover private consolidation loans are available to the most creditworthy applicants who are approved and choose a shorter repayment term, and include a 0.25% interest rate reduction while enrolled in automatic payments.

The fixed interest rate is set at the time of application and does not change during the life of the loan. The variable interest rate is calculated based on the 3-Month LIBOR index plus the applicable margin percentage. For variable interest rate loans, the 3-Month LIBOR is 0.125% as of October 1, 2021. Discover Student Loans may adjust the rate quarterly on each January 1, April 1, July 1 and October 1 (the “interest rate change date”), based on the 3-Month LIBOR Index, published in the Money Rates section of the Wall Street Journal 15 days prior to the interest rate change date, rounded up to the nearest one-eighth of one percent (0.125% or 0.00125). This may cause the monthly payments to increase, the number of payments to increase or both. Our lowest APRs are only available to applicants with the best credit. The APR will be determined after an application is submitted. It will be based on credit history, the selected repayment option and other factors, including a cosigner’s credit history (if applicable). If a student does not have an established credit history, the student may find it difficult to qualify for a private student loan on their own or receive the lowest advertised rate. Learn more about Discover Student Loans interest rates.

³Lowest APRs shown for Discover private consolidation loans are available to the most creditworthy applicants who are approved and include a 0.25% interest rate reduction while enrolled in automatic payments.

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Recommendation

Best for Student Loan Refinancing

Interest Rates

Variable as low as: 2.15% APR¹

Fixed as low as: 2.99% APR¹

Repayment Terms

5, 8, 12, or 15 years

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Interest Rates

Variable Rates: Rates between 1.95% - 5.63 APR¹

Fixed Rates: Rates between 2.55% - 5.59% APR¹

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Variable Rates between 1.95% - 5.65% APR¹
Fixed Rates between 2.48% - 6.62% APR¹
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Cosigner release with 24 consecutive on-time payments²
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¹Interest Rates

Fixed interest rates range from 2.48% APR (with auto debit discount) to 6.62% APR (without auto debit discount). Your interest rate will depend on your (and if applicable, your cosigner’s) credit qualifications. The fixed interest rate will remain the same for the life of the loan.

Variable interest rates range from 1.95% APR (with auto debit discount) to 5.65% APR (without auto debit discount). Your interest rate will depend on your (and if applicable, your cosigner’s) credit qualifications. Variable rates may increase after consummation. The variable interest rate is equal to the One-Month London Interbank Offered Rate (“One-Month LIBOR”) plus a margin. The One-Month LIBOR in effect for each monthly period (from the first day of the month through and including the last day of the same month) will be the highest One-Month LIBOR published in The Wall Street Journal “Money Rates” table on the twenty-fifth (25th) day (or if such day is not a business day, the next business day thereafter) of the month immediately preceding such calendar month. The Annual Percentage Rate (APR) for a variable interest rate loan will change monthly on the first day of each month if the One-Month LIBOR index changes. This may result in higher monthly payments. The current One-Month LIBOR index is 0.09% as of October 1, 2021.

Auto Debit Interest rate reduction of .25% for automatically withdrawn payments from any designated bank account (“auto debit discount”). Auto debit discount applies when full payments (including both principal and interest) are automatically drafted from a bank account. The auto debit discount will continue to apply during periods of approved forbearance or deferment if the auto debit discount was in effect at the time of receiving the forbearance or deferment. Auto debit discount will remain on the account unless (1) the automatic deduction of payments is canceled or (2) there are three consecutive automatic deductions returned for insufficient funds at any time during the term of the loan.

The lowest rate for each loan type requires automatically withdrawn (“auto debit”) payment. The lowest rate is available only to the most creditworthy applicants. Not all borrowers will receive the lowest rate. The interest rate and Annual Percentage Rate (APR) may be higher depending upon (1) the credit history of the borrower and, if applicable, the cosigner, (2) the repayment option and loan term selected, (3) the loan type selected, and (4) the highest level of education attained. If approved, applicants will be notified of the rate qualified for within the stated range.

²Cosigner Release. A request for the cosigner to be released can be made by either the borrower or cosigner when each of the following conditions has been met:

The account must have been in full principal and interest repayment for at least 24 months.
Twenty-four consecutive, on-time principal and interest payments, or lump sum equivalent, must have been made. NOTE: A lump sum payment does not replace the requirement to have been in full principal and interest repayment for at least 24 months. Interest-only or fixed-pay payments while enrolled in school do not qualify towards the 24 consecutive on-time payments.
The loan must be current at the time of request.
The loan must not have been in deferment, hardship forbearance, or other alternative payment assistance plan within the past 24 months.
The loan must not have been permanently modified from its original terms in the credit agreement.
The primary borrower must be a U.S. citizen or have permanent residency in the United States.
The primary borrower must meet the age of majority requirement in their permanent state of residency.

Requirements are subject to change. If all of these conditions have been met, then an application for cosigner release may be submitted. The primary borrower is required to demonstrate they have the ability to assume sole responsibility for the loan(s) by providing proof of income, meeting debt-to-income requirements, and having a satisfactory credit history. (A credit report will be obtained during the review process).

³Refinance Loan Eligibility: You must be a U.S. citizen or permanent resident alien with a valid U.S. Social Security number, and be the legal age to enter into binding contracts in your state/territory of residency, or be at least 17 years of age and apply with a cosigner who is at least the age of majority in their state/territory. Non-residents can apply with an eligible cosigner who is a U.S. citizen or permanent resident alien with a valid U.S. Social Security number. The student loans you refinance must be in their grace or repayment period, and you can no longer be enrolled in school on a half-time or more basis. You must have at least $5,000 in student loans to refinance. You, or your eligible cosigner, must have an annual income of at least $36,000. Approval subject to credit review. Other credit criteria may apply.

Refinance Loan Limits:

Minimum loan amount: $5,000

Maximum student loan limits:

$125,000 for borrowers with an undergraduate degree.

$175,000 for borrowers with a graduate, MBA, or law degree.

$500,000 for borrowers with a graduate health professional degree.

Nelnet Bank, and any associated logos or design marks, are trademarks or service marks of Nelnet, Inc. All loan programs and terms are subject to change or may be discontinued at any time without notice. Certain restrictions and limitations may apply.

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13 Common Mistakes to Avoid in Repaying Student Loans

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