There is a lot of information out there about student loans.
Unfortunately, some of it is very misleading.
I know this because I talk with a lot of people who have student loan debt. Whether it’s blog readers, family/friends, or clients from my day-job as a financial planner, I hear about student loans a lot.
And as you already know, I graduated law school with $206k in student loan debt. I’ve paid off $100k+ in four years while cutting my salary in half. I’m so committed to paying off my debt asap that I pay over half my income to it. And I make up for the shortfall every month by blogging. (Here’s a look at how I make money blogging, for those of you who are wondering!)
Needless to say, I have a lot of experience with student loans.
So, I came up with a list of the most common mistakes I see people making with their student loan debt.
Here are the top 10 mistakes I see people making with their student loan debt.
1. Not knowing your student loan information
Not knowing your student loan details is a huge mistake. I see people making this mistake all the time, surprisingly.
At a minimum, you should know how much total debt you owe, the interest rate on each loan, and the types of loans you have (Federal, private, subsidized, unsubsidized, etc.). And know how to log in to your student loan servicer online.
- Related: Which Student Loans To Repay First
2. Staying on an income-driven plan after you can afford to pay your loans
Staying on income-driven repayment plans can be a huge mistake.
Staying on an income-driven plan and paying the minimum can result in your debt increasing because your payments do not cover the interest. The result is that every year your debt grows, causing a huge mess.
People who do this are usually in one of two situations. The first situation is that they don’t realize the debt is increasing. They just stay on the income-driven plan because the loan servicer is letting them and it’s a lower payment every month.
The second situation is people who know their debt is increasing and don’t care. They believe they shouldn’t have to repay their debt and don’t want to spend money on it.
This is not so bad when things are going well in life. But down the road when $50k turns into $150k and something goes wrong in your life, this debt is a big deal.
The bottom line is to understand that income-driven plans are meant to be government assistance for when you need it because you can’t afford your normal payment.
3. Refinancing your Federal loans
Refinancing your student loans is a huge mistake I see people making.
The reason this can be a huge mistake is that when you refinance student loans, you create a new private loan. If the loan you are refinancing Federal loans, those Federal loans will become private when you refinance them. You cannot refinance a Federal loan and keep it Federal. The only refinancing programs available are through private lenders. This means when you refinance Federal loans, they become private. And this changes everything.
With private loans, you don’t have the protections you have with Federal loans. There is no option for forgiveness, deferment, forbearance, or income-driven repayment. This is fine when you’re healthy and fully employed and plan to repay your debt asap. But if you die or if you become disabled, you are SOL unless you have the proper insurance in place.
Here’s an example. Let’s say you refinance your Federal student loans. They’re private after the refinancing. Then let’s assume you either become disabled, lose your job, or die.
- If you become disabled, you are still responsible for your payments because they’re private loans (if they were Federal, you would have options to go on an income-driven plan or apply for forbearance). So, you better have disability insurance that covers those student loan payments.
- If you lose your job you will still have to pay the full monthly loan payment (with Federal loans you could go on an income-driven plan).
- If you die, private loans are not forgiven (Federal loans are). The debt would go to the cosigner on the loan if there is one, or to the estate. Either way, it’s not good. You need life insurance in place to cover private loan debt for this reason
I’m not saying refinancing is bad in and of itself. If you already have private student loans, then refinancing those loans may be a good option. But if you’re thinking about refinancing Federal loans, you need to make sure you have the right disability and life insurances in place.
You can look into various types of life insurance options through an online broker, like Policy Genius.
Unfortunately, when I see people refinancing, they only focus on the interest rates. They have no idea about the consequences of what they’re doing and how risky it is and don’t think about insurance at all.
4. Assuming your loans will be forgiven
Whether it’s the Public Service Loan program or Federal loans being forgiven after 20 years, there are options for student loan forgiveness out there.
The mistake I see people making is assuming these forgiveness programs apply to them.
You should call your loan servicer and verify which forgiveness programs apply specifically to your situation and your loans. Then, verify what the loan servicer tells you by doing your own research.
I know someone who paid $200/month onto his student loan debt for 20 years thinking that it would be forgiven. Unfortunately, because he was on an income-sensitive repayment plan, his loans did not qualify for the Federal forgiveness program after 20 or 25 years of repayment. Ouch.
And even if your debt is forgiven, you still have to pay taxes on the forgiven portion. If you have six-figure debt that’s forgiven, that is going to be a hefty tax bill.
5. Not having the appropriate life and disability insurances when you have private loans
As I mentioned in #3 above with refinancing, private loans are a whole different animal.
Private loans don’t have certain protections in place in the case of death, disability, or loss of income. Federal loans do.
Now, it is possible that private loans have some protections, but it will depend on the loan. Every private loan is different (just like one mortgage contract has different terms from the next mortgage contract). This is why you need to read the fine print very carefully.
Remember this story from 2014 that CNN published? Parents were on the hook for student loan debt after their daughter died because she had taken out private student loans for nursing school. If these loans were Federal, they would’ve been forgiven upon her death. If the parents had life insurance covering the total student loan amount, they would’ve been able to pay the debt upon their daughter’s debt.
If you have private student loans, you need to look into life insurance (especially if you have a cosigner) and disability insurance (to protect against loss of income). Again, you can search for life insurance online using Policy Genius as a starting point.
6. Ignoring your student loan debt and focusing on investing
I see people focusing on investing instead of paying off their student loan debt a lot. This is another big mistake.
Paying off your debt is the only way you can guarantee a rate of return to yourself.
For example, if you have student loans with a 5.3% interest rate, when you pay that off, you are no longer paying the 5.3%. And with a fixed interest rate, you know that the sooner you repay your student loan debt, the sooner you no longer pay that 5.3%. You’re essentially getting back that 5.3% that you’re paying in interest when you repay your loans.
When you invest in the market, you don’t know what return you’ll get. Even with strategic investing, you can’t guarantee a certain rate of return. You could make 7% one year and 3% the next.
What this means is that paying off your debt is often one of the best investment moves you can make.
The biggest reason I see people investing instead of paying off student loan debt is because investing is sexier. It feels like in your 20s and 30s you want to start investing and get ahead financially. Paying off debt doesn’t sound sexy and it isn’t sexy to talk about.
The reality is, paying off your student loan debt is one of the best financial moves you can make, regardless of the interest rate.
7. Focusing on the interest rate instead of focusing on fast repayment
I hear people talking about interest rates and refinancing their student loans more than I ever hear them talk about cutting expenses or putting lump-sum payments onto their debt.
Usually, this comes from really smart people. They have spreadsheets and calculations showing the interest payments now versus what it would be with a lower rate and how much they’ll save in interest. The time and energy spent focusing on interest rates is astounding to me.
Focusing so much on the interest rate can be the wrong approach. If you are committed to getting out of debt asap and building a successful financial future, then you should focus on making huge payments onto your debt as fast as possible. If you do this, then you’ll repay your debt in a short time and the extra money on interest won’t be that significant.
The only time that focusing on interest rate is important is when you plan to take a much longer time to repay your debt (e.g.: 10-20+ years). Since I’m not a proponent of that, I don’t think focusing on interest is the way to go.
8. Not paying enough to cover the interest so your debt is actually increasing over time
In #2 above, I discussed how staying on an income-driven plan can result in your debt increasing because your payments do not cover the interest.
But this goes beyond income-driven plans. There may be other situations when you can pay minimum payments on your loans (whether it’s during deferment, forbearance, or some other plan) and have your debt increase.
Think about other types of loans for a minute. Take a mortgage and car loan, for example. Let’s say you had high interest rates on them and you were supposed to repay them in 30 years and 5 years, respectively. For whatever reason (job loss, enrolled in school, or something else), you can’t afford those payments anymore. With a house and a car, you can sell these items (because the loans are collateralized), refinance, or go into default. That’s about it. You can’t simply say I’m going to pay what I can afford. If you were able to do this, your debt would balloon.
But with student loans, you’re allowed to only pay what you can afford in some situations. There is no “collateral” to turn over to get out of the debt (you can’t return or sell your education).So, when you make minimum payments that don’t cover the interest or any principal, your debt increases. It makes no sense mathematically for this to be okay. Typically, the reason this is allowed is based on public policy and promoting education. As a way to help you during tough times, some student loan lenders (specifically the U.S. Department Of Education) allow you to pay less than what will even cover the interest.
What sounds great (paying less on your student loans) can turn into a nightmare. It can turn your debt into significantly more debt over time. Lenders don’t mind this because you are on the hook for student loan debt no matter what (it’s nearly impossible to claim bankruptcy on student loan debt).
9. Feeling like you were too young to know what you were getting into and “someone should’ve told you” about the consequences of taking out loans
If you’re like most people, you probably had no idea what you were getting into when you signed up for student loans at the ripe age of 18. It’s unfair and unreasonable for you to have known what you were getting into at that time. There is no class in school about this, unfortunately.
So, why do I think it’s a huge mistake for you to go on thinking this way?
Because this mentality makes it nearly impossible to get out of debt. This mentality is a victim mentality. And even if it’s true, it’s only doing you harm to hold onto this belief.
A victim mentality prevents you from solving your problem. You’ll be stuck in the “why me” and “this isn’t fair” mentality instead of the “how can I solve this problem” mentality.
The number one distinguishing factor between people who repay their debt and people who don’t is the belief that they can. You need to feel empowered to repay your debt. (Here’s my post about how to get out of debt, if you’re starting that journey now.)
If you think your student loan debt is ridiculous because you were too young to know the implications and someone should’ve told you about the consequences, it’s going to be nearly impossible to find the motivation, commitment, and focus to repay your debt as quickly as possible.
This is why I choose to be thankful for my student loan debt. Without my student loan debt, I never would’ve started a blog, quit practicing law, become a financial planner, or learned how to make money online. Amazing things have come out of my student loan debt because I chose to solve my problem instead of blame someone else.
With the right mindset, you can change your financial life, regardless of the amount of student loan debt.
10. Thinking your student loan debt is just like any other debt or is good debt
Student loan debt is different than other types of debt. Specifically, it’s not collateralized (you can’t return or sell your education) and it’s generally not dischargeable in bankruptcy, so you’re stuck with it.
Not that you want bankruptcy to be your go-to option, but knowing that it’s there for everything else except you student loans is something you should understand.
This means that you can have your finances in shambles, claim bankruptcy, and come out of it still owing your student loan debt. Yikes.
While student loans can enable you to pursue the career of your dreams, it’s also very risky and should be considered numero uno for debt repayment.
A Final Note!
The best thing you can do with your student loan debt is pay it off as soon as possible. Here’s a post that will walk you through which student loans to repay first.
My student loan debt has been a blessing and is responsible for getting me on this crazy personal finance and personal development journey. Without it, I don’t know where I’d be.
My biggest advice is to turn your debt into something good. And find a way to pay it off asap.