13 Common Mistakes to Avoid in Repaying Student Loans

By Elaine Rubin

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1. 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.

2. Failing to notify the loan servicer about changes in contact information.

Borrowers must update their email 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. Student loan borrowers should not use a school email address for student loan accounts. Many schools don’t allow students to keep their student email after they graduate. It’s best to use a private email address.

3. 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 student loan 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.

4. 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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¹Fixed rates range from 2.49% APR to 6.94% APR with a 0.25% autopay discount. Variable rates from 1.74% APR to 6.59% APR with a 0.25% autopay discount. Unless required to be lower to comply with applicable law, Variable Interest rates on 5-, 7-, and 10-year terms are capped at 8.95% APR; 15- and 20-year terms are capped at 9.95% APR. Your actual rate will be within the range of rates listed above and will depend on the term you select, evaluation of your creditworthiness, income, presence of a co-signer and a variety of other factors. Lowest rates reserved for the most creditworthy borrowers. For the SoFi variable-rate product, the variable interest rate for a given month is derived by adding a margin to the 30-day average SOFR index, published two business days preceding such calendar month, rounded up to the nearest one hundredth of one percent (0.01% or 0.0001). APRs for variable-rate loans may increase after origination if the SOFR index increases. 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. This benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account. The benefit lowers your interest rate but does not change the amount of your monthly payment. This benefit is suspended during periods of deferment and forbearance. Autopay is not required to receive a loan from SoFi.

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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 12/21/2021. 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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¹Visit DiscoverStudentLoans.com/AutoDebitReward for terms and conditions.

²Lowest APRs are available for the most creditworthy applicants who are approved and choose a shorter repayment term, and include an Auto Debit Reward.

³The fixed interest rate is set at the time of application and does not change during the life of the loan unless you are no longer eligible for one or more discounts. The variable interest rate is calculated based on the 3-Month CME Term SOFR index plus the applicable margin percentage less any applicable discounts. The 3- Month CME Term SOFR index value for variable interest rate loans is 0.125% as of November 14, 2021. 3-Month CME Term SOFR is administered by CME Group and is published by CME Group on its website (cmegroup.com/termsofr). Discover Student Loans may adjust the variable interest rate quarterly on each January 1, April 1, July 1 and October 1 (each an “interest rate change date”), based on the 3-Month CME Term SOFR rate available for the day that is 15 days prior to the interest rate change date, rounded up to the nearest one-eighth of one percent (0.125% or 0.00125), or 0%, whichever is greater. This may cause the monthly payments to increase, the number of payments to increase or both. If the 3-Month CME Term SOFR rate is less than zero percent, then the index will be deemed to be zero percent (as stated in the promissory note) for purposes of calculating your interest rate. Your variable interest rate (index + margin – applicable discounts) will not exceed 18%. 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.

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¹Rates and offers current as of April 1, 2021. Annual Percentage Rate (APR) is the cost of credit calculating the interest rate, loan amount, repayment term and the timing of payments. Fixed Rates range from 2.99% APR to 5.15% APR and Variable Rates range from 2.15% APR to 4.45% APR. Both Fixed and Variable Rates will vary based on application terms, level of degree and presence of a co-signer. These rates are subject to additional terms and conditions and rates are subject to change at any time without notice. For Variable Rate student loans, the rate will never exceed 9.00% for 5 year and 8 year loans and 10.00% for 12 and 15 years loans (the maximum allowable for this loan). Minimum variable rate will be 2.00%.

5. 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.

6. 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.

7. 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 balance become more noticeable. The only way to get quicker progress in paying down the student loan debt is to pay more per month.

If you are repaying your federal student loan with an income-driven repayment plan (a repayment plan that bases your payments on your income and not your outstanding balance), your monthly payment may be less than the amount of interest you are accruing each month. While some of these income-driven repayment plans have an interest subsidy where the federal government covers a percentage of the interest you accrue each month that is not covered by your monthly payment. While those subsidies can be helpful, some are only offered for a limited amount of time and may not cover all accruing interest.

8. 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 outstanding principle balance. This can yield a bigger loan, digging the borrower into a deeper hole. Federal student loans are generally capitalized any time you have a change in your repayment status, and private student loans may capitalize more frequently.

9. 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.

10. 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.

11. 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.

12. 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.

13. 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.

FAQ

Do student loan payments go to interest or principal?

Your student loan consists of the amount you borrowed (principal balance) and what you pay for borrowing the loan (interest rate). Student loan borrowers are obligated to make a minimum payment on your student loan each month which goes towards interest accrued and fees first with the rest applied to the principal balance. If you want to pay more than the minimum amount, you can ask your lender to apply the extra payments toward your principal balance. However, this won’t work if you have outstanding interest, your lender is required to apply your payment to any outstanding interest first.   You want to make sure you notate to your lender that you would like to have the overpayment applied to your loan balance, or else your lender may just pre-pay your next monthly payment(s).

By making extra payments towards the principal, you will save money by paying less in interest over the life of the loan. Even if you have a large amount of outstanding interest, the overpayment of your monthly balance will help you get to a point where you can start attacking your principal balance.

Can I pay the principal on my student loan before the interest?

Lenders are generally required to apply your monthly payments or overpayments to any outstanding fees first, then interest, then your principal balance. You generally can’t request your lender to apply this in a different order, they have certain rules that they need to follow. You can always discuss this with your loan servicer so you understand your options of payment application for your student loans.

Is it better to pay interest or principal on a loan?

The rate at which student loan interest accrues on the principal depends on the type of loan. Federal loans have a fixed interest rate while private loans will have different terms in their contracts.

It’s more advantageous to pay down your principal down (since most student loans calculate interest using the simple daily interest calculation–which calculates your interest based on your outstanding principal balance. However, based on the way your payments are applied to your student loan, you will be required to pay off fees and interest charges before your principal balance.

Now, if your loan has yet to enter repayment, meaning you are either in-school or in a grace period, it is better to make interest-only payments to avoid interest capitalization once your loan officially enters repayment at the end of your grace period.

What is the principal on a student loan?

The principal is the amount of money you borrowed to pay for school and includes origination fees (if applicable). If you have had interest capitalized and added on to your principal balance, your new principal balance will be referred to as your outstanding principal balance.