Don’t fall prey to these 13 common student loan mistakes. Small mistakes can have consequences that may cost you tens of thousands of dollars or more. Make sure you understand what you are doing and if you have any questions, please setup a consult today.
Table of contents:
- Borrowing too much
- Making prepayments or paying more than required when you’re on track to receive PSLF or IDR forgiveness
- Borrowing with private student loans instead of federal student loans
- Enrolling in the wrong repayment plan
- Forgetting to file your Employer Certification Form annually
- Believing forbearance is your only option
- Waiting until the grace period is over to begin repayment
- Refinancing at the wrong time
- Filing taxes jointly as a married couple with both spouses working
- Not understanding the repayment options available for Parent borrowers
- Believing loan forgiveness for IDR programs is tax-free
- Assuming your loan servicer is tracking PSLF payments correctly
- Waiting until annual IDR recertification when income decreases
Take the expression “live like a resident” seriously.
When you are in school and taking out loans, find every way possible to reduce those loans by applying for grants, scholarships or even having your spouse work. I have a friend whose spouse works at the school where they are in med school and that reduces the tuition cost by half! That means a savings of tens of thousands, if not hundreds of thousands over four years.
Don’t take out loans for the entire school year in August. Instead, take out the loans for each semester when you need them. Reduced interest accrual on your loans can save you significant debt in the future.
2. Making prepayments or paying more than required when you’re on track to receive PSLF or IDR forgiveness
Many of us grew up with our parents instilling in us the desire to pay down our debts as quickly as possible to reduce the interest and payment term as much as possible. However, student loan repayment strategy for those on IDR plans can be viewed in the opposite way. Prepaying or paying more than is required can be detrimental.
If you are going for PSLF or IDR long-term forgiveness, you should make on-time payments in the amount you are required. Don’t pay any more than required. Don’t pay early and don’t pay late. The reason for this is that if you pay early, it will put your loans into “Pay Ahead Status”. Instead of shortening your payment term, it will increase it. It is counterintuitive and lacks rationale, but this is how Congress and the Department of Education have dictated the rules on federal loans.
For example: You’re enrolled in PAYE and are working towards PSLF. Your monthly AGI is $4000 and monthly payment is $400. You make the full on-time payment for this month and decide to pay an extra $400, so that the total paid during the month is $800.This would cause your account to be marked as “Pay Ahead Status”. Next month your automatic monthly payment will be $0, but because $0 is less than your monthly payment due, the payment won’t count as a qualifying payment towards PSLF.
Federal loan servicers don’t receive an incentive to have you pay off your loan any quicker, which is why they mark your loans as “Pay Ahead Status”. It is hard enough for your loan servicers to keep track of your payment count for PSLF when you make on time monthly payments. Don’t add any complexity or reasoning for them to miscount your payments.
Taking out loans using private student loans can be advantageous, but it is important to understand some potential disadvantages including:
- Less flexible repayment options
- High payments in early career years when income tends to be lower
- Inability to convert private loans to federal loans
- Private loans tend to have shorter forbearance periods that are commonly limited to a year. Federal loans have longer deferments and forbearances available to borrowers
- Death and disability discharges are less common
- Private loans don’t offer nearly as many loan forgiveness programs
This is often not your fault. The convoluted federal student loan system is tricky to navigate and many borrowers have ended up in the wrong plan. It’s also important to note that significant family changes can mean that a change would be beneficial. These events could include marrying someone who also has loans, marrying someone who has high income with no debt, adding kids to the equation, or other significant family changes.
A great example of this is when someone who was already enrolled in REPAYE gets married. If this person’s new spouse has a significant income, their student loan payment will likely increase because REPAYE is based on household income. By making a small change to their repayment plan and enrolling into PAYE or IBR this borrower could file MFS (Married Filing Separately) and exclude their spouse’s income. This would thereby reduce the student loan monthly payment.
A key requirement when going for PSLF is to make 120 qualifying payments. Filing the employer certification form annually or even twice a year is a great way to alert FedLoan Servicing to count up your payments and verify your employment qualifies for PSLF.
If you fail to file your ECF annually, FedLoan may lose track of your payment count and require you to make more qualifying payments than necessary in the future.
Forbearance is always worse than deferment. In deferment, usually only your unsubsidized loans will grow. In forbearance, subsidized and unsubsidized loans grow. When the forbearance ends, the accrued interest will be capitalized and increase the principal amount of your loans.
If you’re graduating and entering residency, be wary of your loan servicers telling you this is your only option to not default on your loans. Many attendings kick themselves because:
- They didn’t take advantage of the low, affordable monthly payments available in IDR
- They missed out on having these payments count toward public service loan forgiveness (PSLF) or Income Driven Repayment forgiveness
- They missed out on potential government subsidies in REPAYE if their monthly IDR payment doesn’t cover the accrued interest
Before you apply for forbearance, make sure you have exhausted all student loan repayment plan options. If you are enrolled in an IDR plan, your payment is often very low (especially early in your career) and should be affordable.
When you finish school, direct federal student loans have a 6 month grace period (Perkins loans have 9 months). During this time, your grad school loans, which are all unsubsidized (unless obtained before 2012), continue to grow. Here’s a quick example of how much your student loans can grow during your grace period.
Assume you have $300k in federal student loans at a 7% interest rate. $250k of them are unsubsidized. After your grace period, accrued interest would have increased by $8,750. Your new student loan balance would then be $308,750, which would cause your loans to grow even faster.
How much would you save if you opted to skip the grace period, consolidate your loans the day after you graduate and began repayment immediately? Over a 20 year period you would save more than $16k in interest. Not to mention, if going for loan forgiveness your repayment period would end sooner as well.
Many borrowers refinance at the wrong time and don’t refinance when it is the right time. It’s easy to know when to refinance private student loans. If interest rates drop, refinance and get a lower rate plus a refinancing bonus. It is quick, easy and free. Beware of lenders offering you a longer payment term with a lower monthly payment. This will always cost you more money in the long run.
Federal loans are a little trickier. You usually need to wait until you finish your training, have opted not to go for loan forgiveness and receive a lower rate than the effective rate after REPAYE subsidy is applied. Once refinanced, you are no longer eligible for federal loan programs.
Apply to refinance your loans on the refinancing page where you will find trusted partners with excellent rates and great refinancing bonuses.
Married couples with both spouses working makes student loan repayment tricky. Not just tricky for the borrowers themselves, but also for student loan experts. Each household’s situation is nuanced and warrants a deeper review.
Your CPA may advise you to file a married filing jointly (MFJ) tax return over married filing separately (MFS) since it’s less complex, cheaper and has more deductions. They often lack an understanding of how tax filing can greatly impact your student loan repayment. It is necessary to run the numbers to see if MFS vs MFJ can save you money year over year.
Another benefit to MFS vs MFJ is the ability to amend a tax return up to 3 years after it is filed. However, if you MFJ you can’t amend it to MFS unless you filed before the tax filing deadline and are able to file an amended return by the deadline.
Parent borrowers who take out Parent PLUS loans are limited in their selection of student loan repayment plans. After consolidating, they are eligible for amortized repayment options and Income Contingent Repayment. They are not eligible for better repayment options such as PAYE, REPAYE and IBR.
There’s a loophole not well known to parent borrowers called Double Consolidation. This would allow parent borrowers more IDR options such as PAYE, REPAYE and IBR. With the increased payment options, you can lower your payment and better maximize loan forgiveness opportunities. We can guide you through this process during your consult.
A common misconception is the 20-25 year long-term IDR loan forgiveness amount is tax-free. Borrowers who complete their 20-25 year payments by Jan 1, 2026, are eligible for tax-free forgiveness. However, this is set to sunset in 2026. And it’s anyone’s guess what the rule will be in the future. If the rule were to revert back, you would be hit with a tax bomb on the remaining principal and interest balance on your student loans. This is why we tell clients to start putting money aside each month in case they have to pay the tax bomb.
Public Service Loan Forgiveness (PSLF) is a different federal loan forgiveness program that is granted to borrowers who make 120 qualifying monthly payments. PSLF debt is forgiven without a tax bomb and with a shorter payment length.
Loan servicers aren’t great at keeping records for PSLF. You need to be an expert in PSLF, or this program is not worth your time and money. Make sure to read the fine print and don’t miss any requirements. Remember PSLF requires 120 qualifying payments, full-time work at a qualifying employer, a qualifying repayment plan and your loans must be direct federal loans.
Keep track of each payment and submit your employment certification form at least 1-2 times per year. Make sure they have your payment count correct and have documentation to back it up when (not if) they miss a payment. Create an excel spreadsheet to check off each monthly payment and keep a record of the corresponding bank statement for each one.
FedLoan is the loan servicer for PSLF. A payment tracking system was recently released which should help remedy the current issue with PSLF payment count.
In IDR, annual recertification is required to maintain your repayment plan. Failure to submit documentation by the deadline may result in capitalization of interest and increase your monthly payment. Payment is generally based on last year’s tax return or alternative documentation of income (pay stub).
If you experience a significant drop in income or increase pre-tax retirement contributions don’t wait until the next recertification date to make changes. Payment relief can be obtained sooner if you provide them with the changes.
Student loan management can be tricky, but we are here to help. Schedule an appointment today.