If you’ve taken out student loans to invest in your education, you know that paying interest on those loans is simply part of the deal. But while “interest” can seem like an abstract notion when you first take out loans, over time it can become a force to be reckoned with —particularly for the many MBA, law, and med school grads with six figures worth of education debt to repay.
For example, a borrower with $100K in student loan principal at a 6.8% weighted average interest rate and a 10-year term can expect to pay an estimated $38K in interest over the life of the loan. And that’s if they make every payment on time.
Paying interest on student loans may be unavoidable, but there are a few mistakes that can cause some borrowers to pay more interest than they need to. Read on for tips on how to prevent these blunders from affecting your bottom line.
Mistake #1: Using Forbearance When it’s not Absolutely Necessary
Most federal loans and some private loans may allow borrowers to use forbearance to temporarily reduce or suspend loan payments in the event of qualifying financial or medical difficulties. But in most cases interest continues to accrue while payments are on pause—which means that the longer you remain in forbearance, the more you may have to pay in the long run.
Bottom line: If your goal is to minimize interest expenses, it’s a good idea to use forbearance only in cases of extreme financial hardship—and resume regular payments as quickly as possible.
Mistake #2: Unnecessarily Extending the Repayment Period
Federal loan consolidation with a Direct Consolidation Loan allows borrowers to combine two or more eligible federal loans into just one loan, helping to streamline their monthly bills. When you consolidate, you’re typically given the option to lower your monthly payment by extending your repayment period.
However, those smaller bills can come at a price. Extending the payment term from 10 to 30 years, for example, would mean the borrower has to pay considerably more interest over the life of the loan. (Because the borrower would be accruing 20 additional years of interest.)
Mistake #3: Not Prepaying When Possible
All education loans, whether federal or private, allow for penalty-free “prepayment” , which means that you can pay more than the minimum and pay off your loan balance early, without incurring any extra fees. Even paying an extra $100 per month could go a long way.
Whether it’s increasing your monthly payments when you get a raise or putting half your bonus toward your loans each year, every little bit helps to drive down total interest. (Just be sure you tell your lender this is what you’re doing and verify that your prepayments will be applied to your loan principal.) You can use this calculator to see how prepayment could help you get out of student loan debt sooner.
Mistake #4 Neglecting to Explore Refinancing Options
One of the best ways to stick it to your student loan interest is to refinance your student loans at a lower interest rate and shorten your repayment term. This option is typically available to borrowers who have a solid financial situation —for example, a comfortable income-to-debt ratio.
However, before refinancing federal loans, you should check to see if you qualify for any forgiveness programs or other federal benefits that are forfeited when refinancing student loans with a private lender.
Bottom line: Refinancing to a shorter term with a lower interest rate can help eligible borrowers take a big bite out of total interest.
The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.
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