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Paying off student loans can be a pain — and if you’re not careful, some student loan mistakes could come back to haunt you. That’s why it’s important to avoid any missteps that could cost you. Here are four common student loan mistakes you should avoid.
1. Not making extra payments
It can be easy to fall into the habit of paying only the minimum amount due on your student loans. While making minimum payments is fine if it’s all you can afford, it’s usually a good idea to pay more if you have the means to do so.
Whether you pay just a little more than the minimum every month or even make biweekly payments, paying extra on your loans could reduce your overall interest charges. It might even help you pay off your loans faster.
For example, say you had a $25,000 student loan with a 6% APR and 10-year repayment term. If you stuck with the minimum monthly payment of $278, you’d end up paying $8,306 in interest over the life of the loan. However, if you made a $278 payment twice per month — $556 in total — you could pay off the loan in just over four years and would save $4,914 in interest overall.
You can use Credible’s student loan repayment calculator to see how increasing your payments could change your payoff date.
2. Not refinancing your student loans, in certain situations
If you refinance your student loans, your old loans are paid off with one new loan with a new interest rate and term. Depending on your credit, you might qualify for a lower interest rate, which could save you money over the life of your loan and even help you pay off your loans more quickly.
Though you could opt to extend your repayment term through refinancing to get a lower monthly payment, this can be costly. It may help lessen the strain on your budget each month, but having a longer term means you’ll pay more in interest over time.
How can refinancing help you save money? Say you had a $25,000 student loan with a 7% APR and 10-year repayment term. If you kept this original loan, you’d pay $9,833 in interest over time. But if you refinanced to a new loan with a 5% APR and a 10-year term, you’d save $3,013 in total interest charges.
Keep in mind that you can refinance both federal and private student loans. However, refinancing federal student loans will cost you your federal protections — including benefits under the CARES Act, which has suspended federal student loan payments and interest accrual through at least Sept. 30, 2021 due to the COVID-19 pandemic. As such, it might be a good idea to wait to refinance federal student loans while focusing on private student loans for now.
If you decide to refinance your student loans, be sure to compare as many lenders as possible to find the right loan for you. Credible makes this easy — you can see your prequalified rates from our partner lenders below in two minutes.
3. Not using a cosigner when refinancing
You’ll typically need good to excellent credit to potentially qualify for refinancing. If you’re struggling to get approved, consider applying with a cosigner. Even if you don’t need a cosigner to qualify, having one could get you a lower interest rate compared to what you’d get on your own — which can help you save money on interest charges over time.
For example, say you wanted to refinance a $25,000 student loan. If you applied on your own and were approved for a 10% APR on a 10-year loan, you’d pay $14,645 in interest over time. But if you applied with a cosigner and were able to get a 7% APR instead, you could save $4,812 in interest charges.
Keep in mind that if you have a cosigner, you might be able to release them from the loan in the future — though you’ll generally have to be creditworthy on your own to do so.
Several student loan lenders offer cosigner release, which lets you apply to remove your cosigner after you’ve made consecutive, on-time payments for a certain amount of time. Or you could refinance again, which will release your cosigner when your old loan is paid off.
4. Not comparing rates when refinancing
Before refinancing, it’s critical to compare rates from as many student loan refinance companies as possible to find a rate that works for you. If you skip this step and simply apply with the first lender you’re eligible with, you could miss out on low interest rates as well as perks like:
- Longer or more favorable repayment terms
- Autopay or loyalty discounts
- Few or no fees
- Flexible repayment dates
Credible makes it easy to compare student loan refinancing lenders. After filling out a single form, you can see your prequalified rates from our partner lenders below in just two minutes.
When should you refinance?
While refinancing can sometimes be a good choice, it isn’t right for everyone. Here are a few situations where refinancing might be a smart move:
- You want to lower your interest rate. Depending on your credit, you might qualify for a lower interest rate through refinancing. This could help you save money on interest and possibly even pay off your loans faster. You can use Credible’s student loan refinancing calculator to see how much you could save by refinancing.
- You need to lower your monthly payments. Opting for a longer repayment term through refinancing can reduce your monthly payment and make it easier to manage. Just keep in mind that choosing a longer term means you’ll pay more in interest charges over the life of your loan.
- You want one simple payment. Having several different student loans with varying interest rates and due dates can make repaying your loans more difficult. If you refinance, your student loans will be consolidated into a single loan with just one payment to manage.
Here are some scenarios where you might want to skip refinancing:
- You have federal student loans. If you refinance federal student loans, you’ll lose your federal benefits and protections, such as access to income-driven repayment plans and student loan forgiveness programs.
- You can qualify for loan forgiveness. Several federal programs offer student loan forgiveness to certain borrowers. For example, if you have federal student loans and work for a government or nonprofit organization for 10 years while making qualifying student loan payments, then you might be eligible for Public Service Loan Forgiveness. If you can qualify for loan forgiveness, then refinancing is likely a bad idea.
- You have bad credit. If you have poor or fair credit, then you might not qualify for a lower interest rate or better terms than you already have. In this case, it might be a better option to spend some time improving your credit before applying for refinancing in the future.
Coronavirus and student loan refinancing
Due to the COVID-19 pandemic, federal student loan payments and interest have been paused by the CARES Act through Sept. 30, 2021. If you have federal student loans, then you’ve likely already been enrolled in this administrative forbearance. While you can still refinance federal student loans, it’s probably better to wait until the relief period ends.
Keep in mind that private student loans don’t qualify for these benefits. However, many private lenders are offering various forms of assistance to borrowers who have been impacted by COVID-19. If you’re struggling to make payments on your private student loans due to the pandemic, be sure to contact your lender to see if any hardship assistance options are available to you.
How often can you refinance your student loans?
There’s no limit to how often you can refinance your student loans. For example, you might want to refinance your loans again if you:
- Want to release a cosigner
- Have improved your credit and can get a better interest rate
- Want to change your repayment term
If you decide to refinance your student loans, remember to consider as many lenders as you can to find the right loan for you. Credible makes this easy — you can compare your prequalified rates from our partner lenders in two minutes.
About the author: Dori Zinn has been a resident expert in personal finance for nearly a decade. A contributor to Credible, her writing has appeared in Wirecutter, Quartz, Bankrate, Credit Karma, Huffington Post, and more. She previously worked as a staff writer at Student Loan Hero.
