3 Costly Mistakes People Tend To Make With Student Loans

December 8, 2016
Consolidate Federal Student Loans

Your circumstances will dictate how you handle your student loan debt, and some common tips could leave you in a precarious financial position.

Consolidate Federal Student Loans

Many people mistake federal debt consolidation with student loan refinancing, and the two are quite different from each other. Consolidation could cost you more money, but you could lose benefits if you refinance your federal loans.

Consolidation will let you bring all your own loans into one loan, with an interest rate that averages your rates. You could end up with a loan that’s two times longer than your present loan term, and that means more money out of your pocket. You’ll also lose the ability to save money by paying the higher interest rate loan off first.

If you refinance your loans, you could get better terms. A private lender could buy your existing loans and offer you new ones under different terms. If you have a low debt-to-income ratio and good credit, you can have a low-interest rate. Refinancing your federal loans could cause you to forfeit the borrower protections like the Public Service Loan Forgiveness.

Going With Income-Drive Repayment

If you have difficulty making federal loan payments, there’s the income-driven repayment. It caps payments to a certain percentage income and extends the loan term to up to 25 years. If you have a balance left over, the balance is forgiven.

This plan adds interest payments to the loan, which means you don’t save a lot of money. This plan helps to manage your debts, so you don’t wind up defaulted on the loans. Two negative points – You have to constantly reapply and forgiven debt is taxable income.

You Take The Full Amount Awarded

The best thing you can do is reduce your student loan debt. According to some, folks, it helps your credit after you graduate and, while it does set up a credit history, how much you borrow isn’t taken into consideration. If you borrow too much, you boost your monthly payments.

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