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How to Avoid Making Student Loan Repayment Mistakes

Student loan misconceptions can be dangerous and can lead to big student loan mistakes. The wrong approach can cost you more than just money, so making sure you assess what’s best for you is vital. Let’s clear up common student loan misconceptions that can result in errors or poor choices in handling your student debt.

Common (and costly) student loan misconceptions

Student loans are like any other debt.

A lot of things make federal student loan debt non-traditional, such as:

With that said, your repayment strategy may be non-traditional. Also, whether private or federal, student loan debt is not an asset-backed debt. When paid off, you don’t have equity within something or an asset to sell.

Federal student loan interest compounds

Wrong. Federal student loans have interest that accrues, which means that when interest is charged, it grows in it’s own bucket if not covered in full by your payment. It does not continuously add to the principal balance unless you hit a capitalization trigger. Triggers include: Entering repayment for the first time or after deferment/forbearance, switching repayment plans, consolidating, or not recertifying income on time for income-driven repayment plans. This is good in a way because it prevents your balance from ballooning if you’re in a period of negative amortization.

Everyone should consolidate

Stop right there. Consolidation within the federal system has pros and cons that should be weighed carefully. Consolidation may not benefit you much and may actually have negative consequences like erasing qualifying payment history for a loan forgiveness program. Another related misconception on consolidation is that it lowers your interest rate: It doesn’t. Consolidation takes the weighted average of all your federal loans and rounds up to the nearest one-eighth of a percent.

PSLF doesn't work out for anyone

Thinking Public Service Loan Forgiveness doesn’t work for anyone is a common misconception. PSLF is a great program to take advantage of. To successfully achieve PSLF, do your due diligence. To be eligible for PSLF you need to:

  1. Have Direct Loans.
  2. Be on an Income-Driven Plan.
  3. Work full time for a qualified employer
  4. Make 120 qualifying payments.

You can confirm your employer qualifies with the Employment Certification Form. If you don’t have the right type of loans, you can consolidate to convert them into qualifying direct loans. Make sure you’re on an income-driven repayment plan, make your payments, and you're good!

Forgiveness on an income-driven repayment plan is free

Unlike PSLF, when you go for the maximum repayment forgiveness timeline under an income-driven repayment plan (20 or 25 years), there is a taxable consequence (as of the current tax code) for that forgiven debt. You will be taxed as if you made that forgiven amount as income in the year it is forgiven. This sounds scary, but mathematically, the forgiveness route can still make a lot of sense for borrowers with 1.5 to 2 times their income in federal student loan debt. Test the numbers yourself by using our free student loan calculator.

Related: 5 Myths About the New SAVE Plan, Demystified

You can’t buy a house with a large student loan balance

Your student loans will factor into your mortgage in the form of your back-end DTI ratio. In other words, the lender will want to know what your monthly payment obligation is going toward your student loans. If you’re on an income-driven repayment plan, this can work in your favor nicely by keeping your payment low, proportionate to your income.

Your loan servicer knows everything

No. Listen to the top 10 common mistakes we see loan servicers make, which can cost borrowers big time.

With some of the most common student loan misconceptions out of the way, let’s dive into student loan mistakes we see and how to avoid them.

15 ways to avoid common student loan mistakes

1. Not knowing what loans or debt you have

You need to know your loan situation: What loan types do you have? What are your interest rates? What is your balance? What repayment plan are you on and why? Knowing what you have helps you navigate your options and find the repayment strategy that is best for you based on your eligibility, current financial situation, income trajectory and your goals. You can find all of this information about your federal loans at www.studentaid.gov. If you have private loans, you can find it by logging into your account on your loan servicers’ website.

2. Not doing your due diligence when pursuing PSLF

You need to know your loan situation to make sure you’re checking all the boxes for PSLF eligibility so you don’t run into surprises later on. Get on the right track now! Avoiding procrastination can save you time, money and frustration.

3. Prioritizing student loans over other financial obligations/goals

Over the past 15 years, debt-fueled tuition inflation has rapidly increased the amount of outstanding student debt. People are now graduating with mortgage-sized student loan balances.

Even if you focused all of your extra cash flow on accelerating your payoff plan for your greater-than-your-income student loans, mathematically it may still take you 15 to 25 years to pay them off. And yes, you’d be debt free at that time, but what else would you have to show for it? A $0 net worth. Having an efficient repayment strategy is one thing, but prioritizing saving for your future is extremely important too. And you can do both.

4. Refinancing when you shouldn’t

People with 1.5 to 2 times their income of federal student loan debt may mathematically be better off taking the passive approach. Test the numbers yourself by using our free student loan calculator. Taking the passive approach to paying off your student loan debt can feel a little weird, almost wrong, because it is not the traditional way to think about debt. The passive approach, however, can be a student loan borrower’s safe haven.

5. Not refinancing when you should

When you have a balance close to your income or lower, mathematically you don’t get to leverage much within the federal student loan system. You’re better off paying this balance off efficiently. Reducing your interest cost with refinancing could save you a significant amount of money. You can apply using our cash-back refinancing links.

6. Continuously putting loans into forbearance

Forbearance allows you to pause your payments if money is tight, you lost your job, your income dropped or you’re experiencing some other hardship. In forbearance, your Unsubsidized loans will continue to accrue interest. When you re-enter repayment later, any accrued interest will capitalize into your principal, making your loan more expensive over time. If your income has been affected, making your payments hard to manage, you can reduce your payment down to $0 a month avoiding some interest accrual and the capitalization. Read the complete guide to capitalized student loan interest for more information.

7. Not considering filing separately for student loan purposes

When you’re on an income-driven repayment plan and file taxes jointly with your spouse, your joint adjusted gross income will be used to calculate your monthly payment. This calculation could be unfortunate because it can increase your required payment significantly if your spouse does not have student loans.

One way to avoid this is by filing taxes separately to exclude your spouse's income from your AGI. This approach keeps your payment based on your own income, which can help you maximize forgiveness if you’re going that route or can simply keep your payment manageable. There are downsides to consider when filing taxes separately. You can get more insights on filing jointly versus separately from the Student Loan Tax Experts.

8. Filing taxes separate when on REPAYE

Note: The former REPAYE plan was replaced by the Saving on a Valuable Education (SAVE) plan under the Biden administration. Under the SAVE plan, borrowers can file taxes separately to exclude spousal income. However, the future of SAVE is unknown at this time.

Old REPAYE didn't allow you to exclude your spouse's income from the payment calculation, regardless of whether you filed taxes separately. To take advantage of excluding your spouse's income from your payment, you would need to consider PAYE or IBR for your repayment plan. If you’re filing separately on REPAYE solely for student loan purposes, you could be costing yourself unnecessary money in taxes.

9. Not filing an ECF form regularly

For PSLF, one of the requirements is to make 120 qualifying payments. The Employer Certification Form is a trigger. As soon as you turn that form in, it alerts FedLoan Servicing to count up your qualifying payments up until the date on that form. We recommend submitting this form once or twice a year, even if you haven’t moved employers, to keep a pulse on your payment count record and catch problems sooner rather than later so you can fix them.

10. Borrowing private student loans instead of federal loans

Federal loans can be complex, but they allow for a lot more flexibility than private loans, such as income-driven repayment options, forgiveness options, death and disability discharges, and longer forbearance periods. Private loans don’t have these flexibilities and cannot be converted into federal loans.

11. Not starting repayment or your forgiveness timeline as early as possible

If your repayment strategy is to pursue loan forgiveness (PSLF or IDR), start your repayment ASAP! Repayment starts your forgiveness countdown clock sooner rather than later. Optimize your grace period, start payments in residency and start payments right away. Income-driven repayment options allow you to keep your payment proportionate to income and can be as low as $0 per month, so even if you feel like you can’t afford to make payments yet, at least confirm that you couldn’t lock in a $0 payment starting out.

12. Defaulting on your loan

Default is never the right answer. With income-driven repayment plans and deferment options, you should be able to find something to keep your loans in good standing and avoid wrecking your credit. Federal loans never go away either. Not only will interest accrue and fees be tacked onto your delinquent balance, but you can also have your wages and tax returns garnished if you keep ignoring your loans.

13. Paying extra when on PSLF or IDR forgiveness track

When you’re going for forgiveness, there is no reason to accelerate your payments. Your mindset should be to minimize your payment as much as possible and maximize how much is forgiven. Those extra payments don’t accelerate your timeline. They can actually hurt you by putting you into “paid ahead” status, which you want to absolutely avoid to not extend your forgiveness timeline.

14. Not taking advantage of community property rules with your IDR plan when married

Community property states have a unique way of separating income if you are filing taxes separately from your spouse, which can work in your favor with your income-driven repayment plan and forgiveness strategy. A community property state takes your household income and splits it in half. If the spouse with student loan debt has higher income, the spouse with lower income brings their household average down, reducing the payment calculation. If income levels are the reverse, you can still take advantage of filing separately to keep your payment based on just your income. You’ll want to submit a pay stub or alternative documentation to verify your income versus the married-filing-separately tax return.

15. Not considering the double consolidation loophole for Parent PLUS loans

Parent PLUS loans are a beast. They have fewer repayment options and can never be transferred into the name of the student within the federal system. Traditionally, only the amortized repayment options and the income-driven repayment plan ICR (income-contingent repayment) are available within the federal system, or refinancing. But what happens when those options don’t bring payment relief or are not efficient? Make sure you consider the Parent PLUS Double Consolidation Loophole.

Knowledge is power, and with the right repayment strategy, you can crush your student loan debt in the best way for your situation. Use the information provided in this guide to prevent misunderstandings when managing your student loans and help you avoid common student loan repayment mistakes.

If you have questions or if you’ve heard other misconceptions, sound off in the comments below!

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