7 mistakes that can cost you a fortune with your student loans (and how to avoid them)

There are almost as many mistakes you can make as there are people with student loans. However, I did an extensive analysis to boil the biggest and most expensive of these to a manageable list that you can easily absorb and more importantly, do something about. Let’s jump right in.

1: Wrong mindset

Let me ask you a simple question: what’s the one thing that pops in your mind when you think of your student loans? Is it fear? is it dread? Or is it an urge to do everything you possibly can to pay them off as fast as possible? If it was any of these emotion-based reactions, you’re not alone. In fact, you’re thoroughly human.

It’s hard to take a balanced approach to your student loans. Typical mindsets that won’t serve you well range from one of fear and denial, to the extent of not even looking at your actual outstanding debt, all the way to taking extreme measures like not taking important life actions like starting a family or embracing a deeply fulfilling career. The reasons for these are many, but they boil down to beliefs and assumptions that don’t end up serving you well.

A better approach, if you already have debt outstanding from your school years, is to accept the fact that you owe what you owe, and then to resolve to take charge of the reins, with a commitment to doing everything in your power to address this debt, while still keeping important life goals and values front and center. This means being open to multiple solutions, as well as to the fact that there might be paths and options you are still not aware of.

Most important of all, though, and one not frequently talked about when discussing student loans, is the importance of having an inspiring and emotionally meaningful “why” that fuels all your actions. Take some time now to think about what goal inspires you the most, and why paying off your student loans will matter to that.

A second key component to the right mindset is to give equal importance to the hard and objective facts, the numbers. A balanced approach between head and heart is likely to best serve you in living the life you want to live while at the same time taking a mature and smart approach to addressing your existing student debt. This entire platform is dedicated to helping you do that.

How to take action:

  1. State the “why” behind your desire to pay off your student loan. What life goal will be made possible or easier because of this?
  2. Resolve to start looking at at least one number every month on your student loans
  3. List at least one action you can easily take to tackle your student loans

2: Lack of understanding and tracking

One of my favorite activities is listening to the experiences and problems that real people have with their student loans, whether it is in person, or online, via the internet. In the course of this work, I continue to be shocked at the number of confessional blog posts I still see of people admitting that they never really understood the exact terms or even the amount of money they owe.

Of course, I have done it too, only for other things I didn’t want to face! The reluctance to look the monster in the eye is perfectly understandable and is part of how our brains are hard-wired to avoid pain and to seek pleasure. The problem arises with student loans because when we don’t look at the balances, the nasty feature called compounding does a trick on us and makes the balance much bigger than we imagined, and in a much shorter period of time. Compound interest is what makes your debts the rabbits of finance – it makes them multiply at alarming rates.

A second mistake is not understanding the exact terms of the loans. Differences in things like whether the loan is subsidized or un-subsidized, federal or private, while looking like boring words on a long document, can end up having a massive impact on your future life. This is because they will have a significant bearing on how much you will end up repaying over the life of the loan, whether you have access to relief and other hardship options, as well as easier exit ramps and better forgiveness options down the road.

The key to avoiding both these mistakes is to take a human and self-compassionate approach that acknowledges that the finance world is inherently not a natural one for us to navigate, and yet leverages the beauty of the same brain by mastering small steps and in creating high-payoff habits.

Compound interest is what makes your debts the rabbits of finance – it makes them multiply at alarming rates.

Photo by Mazaya Annaptashafa

How to take action:

  1. Take a look at your account statement and identify what loan type(s) you have
  2. Add up all your loans to find the total amount outstanding if you haven’t done this already
  3. Identify the loan with the highest interest rate.

3: Wrong pay-off plans and strategies

Another frequent theme of questions and comments I’ve seen is the different pay-off strategies people consider in extinguishing student loans. While the goal of paying them off as soon as practicable is absolutely spot on, it matters a great deal what road you choose to get there. The key is always to make sure you’re not taking on a bigger problem than the one you’re trying to solve.

Good pay-off plans and strategies involve reducing the total interest you pay over the life of the loan, and potentially the amount of the loan itself that you will end up having to pay back. They may also include a consideration of things like whether you’ll end up with a big and surprising tax bill in some cases(this will be important if you have the option of getting a loan forgiven). Largely though, the hunt is to reduce one or both of the total interest you’ll pay, and the amount of the actual loan itself you’ll pay back.

Poor pay-off strategies include things that increase your total interest , time period over which you will pay off, or the amount outstanding (yes, that can happen with student loans, even as you continue to make payments). An example of a poor payoff strategy is taking out credit card debt (especially with the lure of promotional zero balances)to pay off student debt.

Credit card debt doesn’t come with the protections and benefits of student loans, even private student loans, and is best not taken at all. Worse, if you’re paying off federal loans with credit card cash advances, you lose out a lot more benefit and flexibility that may come in very handy later on, such as forbearance, and other hardship options.

How to take action:

  1. Take a moment to write down in one or two lines what your repayment strategy is. For example, “I’ll select the 10-year plan and use tax refunds and bonuses to make extra payments”
  2. Think of, and write down, two different repayment strategies you could consider. For example, “Since I work for a hospital, I will look into PSLF as an option”

4: Poor repayment management

Managing your repayments is a critical, if boring and unglamorous part of life after school. The biggest mistake people make here is failing to put their payments on an auto-pay schedule. Doing so has multiple benefits:

  • First, you never have to worry about a late fee or a missed payment showing up on your credit history (or of having to remember the date every month).
  • Second, most servicers offer a discount in your interest rate for signing up to automatically debit your bank account for your monthly payments.
  • Last and most important, you can get an edge on this one by not only scheduling your payments to coincide with paydays (provided these are on time, of course), but to bump up the amount by enough that it will make a difference to your eventual payoff, perhaps $50 or $100 a month. The difference in how long it takes to pay off the loan will be very meaningful, and chances are you won’t even notice the “missing” amount every month.

How to take action:

  1. Find the payment dates of your loans.
  2. Find the nearest pay dates prior to these dates.
  3. Arrange for auto-debiting payments. Call the servicer and inquire about auto-pay discounts and steps needed to get them

5: Wrong repayment strategies:

Ah, the elephant in the room. If what I’ve seen/ heard about this topic is any indication, I could write an entire book on the subject. Do a quick search on “student loan repayment strategies” and you’ll come up with millions of results. Reading through them is daunting, so how do you make sure you don’t trip on this one?

Here’s the simple rule:
Pick the repayment plan that gets you to zero balance fastest, provided you have first ruled out forgiveness as an option.

How do you do this?
Step 1: Look to reduce how much you need to pay back.

You do this by exploring all forgiveness options, including those offered by the government and other organizations including your employer.

Most importantly, explore whether you can qualify for the Public Service Loan forgiveness program (PSLF). If you do, you will need to pick a repayment path that maximizes your chances of obtaining forgiveness. If you are employed by a government entity at any level, or in a nonprofit organization that is not dedicated to religious promotion, you may qualify for PSLF.(Remember many healthcare providers and hospitals are set up as nonprofits)

If so, the Public Service Loan Forgiveness (PSLF) program must always be your first port of call to see if you qualify. This is because the program could wipe off any remaining outstanding at the end of 10 years provided you meet all the requirements, and take all the actions needed. Best of all, the forgiveness is tax free! If this is an option, then you will pick one of the income-driven repayment plans.

Step 2: Look to reduce how much you pay in interest over the life of the loan.

The easy way to figure this out is to pick the one with the shortest repayment period, which is typically the 10 year standard repayment plan.

Step 3: Look to take advantage of possibility of forgiveness, even if with longer repayment periods

This is typically a plan where payments are based on your income. The details are beyond the scope of this piece.

But the main message is this: Have a simple hierarchy in mind and pick a plan at the beginning that evaluates these three possibilities in order.

Photo by Cathryn Lavery

How to take action:

  1. Search and list at least 2-3 possible forgiveness options applicable to your situation
  2. At a minimum, read about and understand the basic terms of the PSLF program
  3. Do a simple internet search for “student loan refinance” to see what current rates might be for refinancing your existing student loans. Note: it may not make sense to refinance yet, but it’s important to have an idea of what the current rates are.

6: Failing to keep up with the paperwork:

My favorite leisure activity in the whole world is organizing my financial paperwork, nothing even comes close. What I love even more is following up with many different financial institutions and enjoying all their flavors of hold music and then explaining my situation over and over again to highly apathetic customer service reps (for the fifth time).

Got you fooled? Just kidding! I hate paperwork as much as you do, but have learned sadly over the years that not paying attention can steal entire vacations, car payments, or even mortgage payments merely because I didn’t fill some form or other or submit some paperwork, and thus ended up losing big money.

Where this matters and can end up costing you with student loans is in two areas:

  1. First, simply keeping your contact information up to date with your servicer can fall through the cracks especially if you’re changing jobs, moving locations or even cities early in your career. If this happens, you may miss out on important communications from the servicer – they simply cannot reach you
  2. Second, and much more important, certain repayment plans based on income, as well as your chances of qualifying for the PSLF forgiveness program are dependent on filing periodic paperwork with the servicer. If you don’t file these forms, as much of a hassle as that is, you could end up losing the benefits or even the possibility of getting forgiveness.

The simple way is to keep everything organized in one place. My personal preference is for a paper-based journal, but do what works for you. (Sneak preview: I’m working on creating a dedicated student loan organizer – drop a note in the comments if this will be useful to you)

How to take action:

  1. Find and update your current contact information with all your servicers (if you haven’t done that lately)
  2. Find out if you’re currently on an income-driven repayment plan. If yes, contact your servicer to determine if you are up to date on all your certifications
  3. If you plan to apply for forgiveness through the PSLF program, contact your servicer and check to see if you’re current on all required submissions and certifications.

7: Employment and career-related mistakes

Considering that the entire reason you took up student debt was to be able to embark on a career, it’s surprising how many employment and career-related levers are missed in managing student loans. What can go wrong?

Many employers offer student loan payments as a perk – make sure you ask and take advantage of these. Having an employer make loan payments is a plus because these are made pre-tax, and can end up adding up to a significant chunk of cash over time – make sure you use the benefit. When you do use the benefit, direct the payment to your highest cost loans first, to reduce the lifetime cost of student debt.

A second and less obvious mistake is in failing to consider the possibility of public service loan forgiveness if you’re going to work for a non-profit, such as a hospital. Other conditions must be met, but always consider loan forgiveness as an important box to check every time you are considering new employment.

A third mistake is in failing to negotiate additional compensation when your employer may have an option to pay off a portion of your loan as a sign on bonus. If you can negotiate, make sure you negotiate in a way that reduces your highest cost debt. If not, apply it to your highest cost or private student loans first.

How to take action:

  1. Contact HR to see if there are any additional student loan related benefits you haven’t signed up for. If there are, sign up immediately at the next earliest opportunity (mid-year enrollments may or may not be permissible)
  2. If you’re in the process of looking for a different job, add student loan related benefits to your checklist for negotiation and/or evaluation of an offer.
Photo by Danica Tanjutco

The short answer:

While my full list of mistakes with student loans currently numbers 105 (and counting) this list above boils down the biggest and most egregious into a smaller. more manageable number so you can start taking action right away.

The key always is to be intentional and active in being the driver of progress, in taking small steps, keeping it simple, and ensuring you track what’s happening – whether it’s your own actions, or changes to your loan numbers.

Need more help? Check out the additional personalized support options we offer here.