Top 4 mistakes to avoid when making student loan repayments
Updated on September 22, 2019
No one likes making mistakes, especially when it comes to loan payments. However, when it comes to clearing your student debt, the ball really is in your court. Here are the top 4 mistakes you should avoid when making loan repayments.
Choosing an overly long repayment plan
Extended repayment plans seem attractive because of their lower monthly payments. However, longer repayment plans accumulate interest over the lifetime of the loan. For instance, increasing the repayment period by just 6.8% will cut your monthly installments by a third but on the other hand, the interest accumulated by the loan doubles. One should choose a shorter repayment plan to save on thousands of dollars on interest.
Accelerating repayments of the wrong loan/snowball method
There are no penalties on prepaid private or federal students loans. If you have extra money, you can go ahead and try to clear the loan as quickly as possible. Making such payments on loans with the highest interest rates will save you a lot of money. However, some borrowers make extra repayments on loans with the lowest interest rates. The myth behind this approach is that you will clear the loan quickly. It is crucial to note clearing more demanding loans gives you a more psychological boost than paying a small debt first.
Defaulting on loans
No one should strategically choose not to make loan payments as agreed. The federal government has strong powers and authorities to compel anyone who decides to default their loans. Some of these tools include wage garnishment, offsetting of state income and federal tax refunds, and disability and the social security retirement benefit payments. All these approaches would be charged at a higher rate than the one agreed upon, plus the borrower will have to pay up to 20% collection charges on each. There’s no simple getaway or financial benefits when one opts to default on the loan.
Losing track of your payments
Some loan borrowers are late or default their loans simply because they forgot about it. It is vital to keep loan information on the student loan checklist portfolio. Additionally, a borrower should update the service provider with their new contact information such as their address or phone numbers to facilitate efficient and quick communication between the two parties. Lack of updates can lead to late loan repayments, which in turn can ruin a student’s credit score.