Americans owed astronomical sums on their student loans as of early 2017 – a little over $37,000 per average borrower and $1.3 trillion cumulatively.
The rising costs of college coupled with decreasing student aid have created the perfect storm for wholesale indebtedness, leaving millions of graduates wondering how they’ll cope.
As if the burden of debt wasn’t enough, there are pitfalls and student loan scams to avoid as you pay down your student loans as well. Sometimes it’s a matter of predatory student loan companies bungling your repayment efforts.
Other times, borrowers just fail to read the fine print. Either way, it's smart to educate yourself on common loan repayment issues so you make informed decisions on how to get out of debt.
7 Dangers You Face When Repaying Student Loans
To learn about the dangers of student loans, I interviewed Jereme Albin of Credible.com – a company that offers risk-free student loan refinancing opportunities for indebted student borrowers.
According to Albin, it's possible to pay your student loans off faster – and save money – if you know which student loan scams and issues to steer clear of. Here are the biggest ones:
Danger #1: Misallocated Extra Payments
One way for indebted borrowers to pay off their student loans sooner is to try to pay more than their minimum monthly payment.
“Regardless of whether you're paying back private or federal student loans, you have the right to pay off your loan in its entirety at any time without being charged fees or penalties,” says Albin. “You're also allowed to accelerate repayment of your loans by making prepayments above and beyond your minimum monthly payment.”
Unfortunately, the way student loans are set up can make prepaying harder than it needs to be. One pitfall to be aware of is that you must let your student loan company know you want to extra funds applied to the principal of your loan balance.
If you don’t, you may be left in a position where the loan company does not apply your extra funds towards principal, and applies them toward future monthly payments instead.
So, what exactly should graduates do in this case? According to Albin, the Consumer Financial Protection Bureau (CFPB) recommends you put a note in with your loan payment stating you want the extra funds applied to your loan’s balance. That way, your loan company cannot plead ignorance and apply the funds elsewhere.
Danger #2: Student Loan Forgiveness Scams
The fact that so many people struggle with student loan debt has led to an array of scams targeting indebted borrowers. According to Albin and Credible.com, students need to be careful when they are approached about refinancing or consolidating their student loans because not every company that promises these services is, dare I say, “credible” or even honest.
The hallmark of a student loan forgiveness scam is when they say you can pay a small amount of money upfront and have your total loan balance lowered dramatically later. Or, they’ll charge a fee for erasing your student loan balance, but ultimately take your money and run.
When it comes to student loan refinancing, always remember this golden rule: If it sounds too good to be true, it probably is.
If you’re thinking about refinancing or consolidating your loans, you should check out any company you plan to work with thoroughly before moving forward. If their promises don't make sense or they have awful reviews online, it's probably a scam.
Danger #3: Dishonesty About Student Loan Prepayment
Thanks to the Higher Education Opportunity Act of 2008, student loan borrowers can prepay their student loans at any time without penalty. Unfortunately, not all loan companies want their clients to know this.
Many times, student loan companies are downright dishonest about the fact that anyone can prepay their loans at any time. Albin says he talks to borrowers like this all the time at Credible. They truly want to prepay their loans, but they’ve been led to believe they cannot.
Since Credible’s main goal is helping people navigate all of their student loan issues, it's their mission to help consumers understand that they can prepay their loans no matter what their loan company says. Not only is it fair to allow prepayment without penalty, but it’s also the law.
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Danger #4: Mismanagement of Partial Payments
While many people graduate college and land a job that makes it easy to repay their student loans, that’s not always the case. Sometimes, graduates struggle to get their lives going at first and can’t quite make all their loan payments on time.
This is another situation where the way student loans are set up can make things trickier. Let’s say a graduate has 5 or 6 loans with the same servicer, a situation that’s common. If they owe $400 per month across those loans, they might make one monthly payment that covers them all.
Now, let’s say they are short on funds and can only pay $200. In that case, it’s possible where the student loan servicer would break up their payment across each loan – making each individual loan delinquent since the entire payment wasn’t made.
This is why you want to be careful with partial payments, says Albin. In most cases, you’d be a lot better off covering the whole payment on some of your loans and keeping those current.
Danger #5: Issues with Automatic Payments
In the world of personal finance, automating is almost always a good thing. Setting bills up on auto-pay ensures they’re paid if you forget, and automating your investments can help you stay on track.
But when it comes to student loans, auto-pay comes with benefits and problems. According to Albin and Credible, you may be able to score a discount by setting your student loan payments up so they’re paid automatically. Unfortunately, you’ll need to give them access to your bank account and allow them to withdraw money.
If you’re short on funds on the date of their debit for any reason, you can encounter late fees on your loans and overdraft fees from your bank.
Another thing to be aware of with auto-pay is that it doesn’t always work in your favor when it comes to interest payments. As Albin noted, most lenders debit your payment on the same day each month. But if the bank is closed, they may wait a day or two. In that case, some loan companies will go ahead and charge interest on your payment funds for those additional days.
Danger #6: Misrepresentation of Late Fees
We all know that making a late payment on any loan will bring on some sort of late fee. Unfortunately, not all loan companies are honest about how these fees are charged.
At Credible, Albin encounters lots of confusion on how late fees are charged and which loans currently charge them. If you’re unsure how much late fees cost or when they will be charged, make sure to ask your loan issuer to lay out how your late fees might work. You can also read through your loan document thoroughly to find the exact details.
Ideally, you should make sure you understand your loans’ terms, conditions, and due dates so you can avoid late payments and their associated fees altogether.
Danger #7: Overpaying Your Loans
This last danger is one that arises when you fail to take action. If you don’t look into your options, you could wind up paying a lot more interest on your student loans than you should.
Student loan refinancing isn’t for everyone, says Albin, but it can be life-changing for the right type of borrower. By refinancing your student loans to a new loan product with a lower interest rate, you can save money on interest and potentially pay off your loans faster.
The best part about refinancing is that there is no cost or obligation to see if you qualify. With Credible, you can shop around for a new loan without having your credit impacted by the pre-qualification process.
“Borrowers who use Credible to refinance into a loan with a shorter repayment term lower their interest rate by 1.71 percentage points, on average, and will save close to $19,000 over the life of their new loan,” says Albin. “Some people also decide they'd rather take longer to pay off their student loans, so they can have a lower monthly payment. Refinancing at a lower interest rate can reduce or eliminate the additional interest expenses you'd pay if you extended your loan term in a government repayment plan. ”
These days, it’s smart for all borrowers to make sure they have the best student loan deal possible and to make sure they avoid student loan scams With thousands of dollars in loans and interest payments on the table, most people can’t afford not to.