As the class of 2015 looks ahead to graduation, many will have a grace period of six to nine months before they have to start repaying student loans. That may sound like plenty of time, but it’s a busy period for most graduates as they settle into a new job, find an apartment and take on other adult responsibilities.
Of people who miss a student loan payment, more than a fifth miss the very first payment, according to Mark Kantrowitz, senior vice president and publisher of Edvisors.com, a website for planning and paying for college. “[It’s] not because they don’t want to pay the loan,” he says. “It’s because they lose track of when they need to make the payment. You move to another state, you have other obligations for that new job — new business attire, furnishing the apartment — and student loans are the furthest thing from your mind.”
Payment history makes up more than a third of your FICO score, the credit scoring model used by many lenders, so missing student loan payments isn’t the way to build a solid credit history.
If you’re among the 40 million Americans who have at least one student loan, according to the credit bureau Experian, here’s a look at potential pitfalls to avoid when repaying your loans.
1. Not knowing what you owe. Your first step in repaying loans should be to take an inventory of what you owe, says Heather Jarvis, an attorney specializing in student loans. That’s especially true if you have a mix of loans, such as private and federal loans (the latter has more flexibility on repayment). For a list of all your federal loans, Jarvis recommends checking the National Student Loan Data System, which is the U.S. Department of Education’s online database for student aid. Outstanding private loans should also appear on your credit report. “None of the information [graduates] get will be useful unless they know which loans they’re making decisions about,” Jarvis points out.
2. Failing to keep your address current. Some recent grads move every year or so for jobs or personal reasons, and that mobility can make it hard for their lenders to communicate with them. “A lot of times the borrower will not have updated the lender on their change of address,” Kantrowitz says. “That adds delays to the receipt of the statement.” Make sure you update your mailing address each time you move, so statements don’t slip through the cracks.
3. Missing payments. To avoid missing payments (and potentially hurting your credit), Kantrowitz recommends making a note in your calendar two months before the first payment is due. “If you haven’t yet received a coupon book or a statement, contact the lender and say, ‘How do I make the payments on the loan?'” he says. “Just because you haven’t received that coupon, you still have to make the payment.” Going forward, he recommends setting up automatic debits from your checking or savings account, so you never miss a payment. The other benefit is that many lenders offer a small rate discount to borrowers who set up auto debits (typically a quarter percent for federal loans or a quarter to a half percent for private loans, according to Kantrowitz).
4. Consolidating without understanding the implications. Consolidating student loans makes sense in some — but not all — circumstances, so consider all your options before doing so. Jan Miller, a financial services industry veteran and founder of Miller Student Loan Consulting, urges borrowers to think it through before consolidating. “Once you consolidate your student loans, that’s your big play,” Miller says. “You’re stuck with one big loan, and it eliminates some of your repayment options, especially if you need additional assistance with forbearance.” In certain cases, keeping loans separate and targeting the higher-interest loans first can lead to more repayment assistance, he adds. If you consolidate a Perkins loan, you would lose access to forgiveness provisions, Jarvis says, but some other loans must be consolidated to qualify for loan forgiveness.
5. Stretching out the repayment term. “With federal student loans there are a lot of repayment options, and if you choose the right one, you can have affordable monthly payments and not pay too much for your loan over time,” Jarvis says. “But if you don’t consider your options closely enough you may pay more than you need to over the life of the loan.” Stretching out a 10-year loan to 20 years is a prime example of this because you’d have small monthly payments, but pay a significant amount of interest over the life of the loan. You’d also potentially still be paying off student loans into your 40s.
6. Skipping the student loan interest tax deduction. The IRS allows borrowers to deduct student loan interest on their taxes, even if they don’t itemize. Yet Kantrowitz estimates that only about a quarter of borrowers actually take this deduction (some may not qualify due to income phaseout limits). For the tax year 2014, the deduction could reduce the amount of income subject to tax by up to $2,500, so that’s nothing for most borrowers to sneeze at.
7. Ignoring financial problems instead of notifying your loan servicer. One of the biggest mistakes student loan borrowers make is burying their head in the sand, Miller says. “When people get so far past due with student loans, they give up,” he says. When you fail to make payments on a federal loan, the government can garnish your wages or seize tax refunds without getting a court order. Meanwhile, a private lender can send the matter to collections. Fortunately, Miller says, there are almost unending ways to fix problems with federal loans. One is income-based default rehabilitation, which allows borrowers to correct a default and get their loan back on track by making nine out of 10 monthly on-time payments based on what’s reasonable and affordable for their income. However, contacting your lender at the first sign of a problem can help you avoid this. In many cases, you may qualify for income-based repayment or a forbearance period that would allow you to avoid defaulting on your loans even if you lose your job or face other financial challenges.
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New Grads: Avoid These 7 Student Loan Slipups originally appeared on usnews.com
