4 Mistakes to Avoid When Repaying Your Student Loans

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Student debt: The next credit bubble?
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Student debt: The next credit bubble?

Student loan defaults have surged this year, with the U.S. Department of Education reporting 6.8 million federal student loan borrowers failing to make payments. What does that mean for student-loan payers across the nation? Most of you are doing it wrong.

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And as the cost of higher education continues to rise, and the increasing amount of student loan debt threatens to push the economy past its breaking point, it’s more important than ever to know the mistakes before it is too late.

Here are four mistakes to make sure you avoid.

1. Picking the wrong plan for you. Experts generally recommend to not take out loans that exceed your expected starting salary after you graduate. There are four main plans you can chose to pay off your loans with, ranging from a minimum of $50 a month for 10 years or incrementally increasing payments for as much as 30 years. But if you know you’re going to have a low income and you’re worried about defaulting, consider the income-based repayment plan, which is best for graduates who do not have a steady cash flow. The annual amount you owe is based off of 15 percent of your projected income for the year and after the 25th year, the rest of the debt is exonerated.

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2. Stalling payments when you don’t have to. If a graduate qualifies for deferment or forbearance, postponing the payments may seem like tempting options. But some deferments and all forbearances will continue to tack on interest rates to the overall debt, increasing the total amount a borrower will have to pay. During deferment, borrowers with subsidized loans won’t have to pay interest on the debt, while unsubsidized loans will still accrue the extra charges.

3. Paying the minimum each month. Transaction charges and interest rates will drive up the cost of the total amount a borrower owes. Graduates with student loan debt also should consider that the longer a payment plan lasts, the more money will be tacked on to the overall bill. For some options which can take up to 30 years, you could have to pay thousands more.

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4. Thinking you can likely get out of it with bankruptcy. Unless you can prove continuing to repay your student loans after bankruptcy would cause “undue hardship” in court, your student loan debt won’t go away after filing for bankruptcy. While knowing that there isn’t an easy way out may be daunting, but it’s better to know now instead of banking on that escape route.

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