TOP 10 STUDENT LOAN MISTAKES
Graduation Day. It's great to be starting the first phase of your career, that is until you realize how complex it is to manage all of the loans you took out in undergrad and medical school. If only you would have gotten that Bureaucracy minor in order to understand all of the paperwork and options. It's easy to feel hopeless and try not to think about it, but by that point you could have already cost yourself 10's of thousands of dollars of avoidable mistakes. Let's run through the most common mistakes I see in my practice.
FORBEARANCE
The number one mistake to avoid. Often very intelligent, new graduates and medical residents can't afford their monthly payments so they look to Forbearance to keep the payments at bay. While you are in Forbearance, your payments will stop, but the juice will keep going. So your loan balances keep growing while you fall farther behind. Compare this to an Income Driven Payment plan like REPAYE which provides an interest subsidy which helps keep your debt balance from spiraling out of control. The income driven plans also keep you from making the second mistake:
NOT TAKING ADVANTAGE OF PUBLIC SERVICE LOAN FORGIVENESS (PSLF)
Unfortunately, many people either find out about PSLF after they have been on an incorrect payment plan for several years, or mistakenly think they qualify, but their loans aren't eligible. Public Service Loan Forgiveness was enacted so those that go into Public Health, Education, Military, or Public Safety can have their loans forgiven after 10 years of qualifying payments. While it seems simple enough, only certain types of loans and certain payment plans qualify and the borrower must submit a form certifying their employment. If you think you are going to qualify for PSLF you must follow the steps to a "t", which makes it critical to avoid the next few mistakes.
CONSOLIDATING YOUR LOANS
You were 5 years into repayment and heard it was a good idea to consolidate so that you have 1 monthly payment instead of several. This is fine for most borrowers, but if you were trying to take advantage of PSLF, your 5 years of qualifying payments just went down to 0. Unfortunately, those consolidating often don't know they are making a permanent choice that cannot be undone.
NOT CONSOLIDATING YOUR LOANS
Before you say, "How does that make sense, you just said I shouldn't be consolidating my loans if I want to use Public Service Loan Forgiveness," hear me out. Loan Consolidation is a useful tool to transform loans that wouldn't normally qualify for PSLF into a shiny new Direct Consolidation Loan that not only qualifies for PSLF, but qualifies for all of the major income-driven payment plans as well. For instance, if you had some FFEL or Perkins loans that aren't eligible for loan forgiveness, you could consolidate them into a Direct Consolidation loan and make them eligible for PSLF. Just remember, your qualifying payment counter only counts the payments made on the Direct Consolidation loan and not those previously made on the FFEL and Perkins loans.
WRONG PAYMENT PLAN
To qualify for PSLF you have to be on a qualifying payment plan. That means the standard payment plan (which doesn't make sense because your loan will be paid off in 10 years anyway) or an income-driven plan (Income-Based Repayment, Pay as You Earn, Revised Pay as You Earn, or Income Contingent Repayment). Any other payment plan, (unless it pays off the loan as quickly as a standard payment plan, which we already know doesn't make any sense with PSLF) does not qualify. If you qualify for PSLF, you should review all of your payment plan options to minimize your monthly payments and allow you to maximize your future loan forgiveness.
NOT CERTIFYING EMPLOYMENT
If you think you are eligible for PSLF and not certifying your employment, you are setting yourself up for a big disappointment. Now everything may end up fine, but it would be terrible to get to the end of 10 years of making qualifying payments only to find out your employer didn't qualify. Put it on your calendar and complete this form once a year. I recommend doing it in January, but you can submit it at any time. Consider it your annual PSLF employer checkup.
NOT TIMELY SUBMITTING YOUR PROOF OF INCOME
In order to qualify for an Income Driven Plan you have to submit proof of your income. If you don't update this annually, you could end up back on a Standard Plan and unable to afford your payments. What's worse, it can take weeks or even months for your your Income Driven Plan application to be approved forcing you into Forbearance. Again, mark it on your calendar and make sure to submit it early. I'm looking at you procrastinators.
REFINANCING WITH A PRIVATE LENDER
This is the option many of my financial planning colleagues will recommend without knowing the harm they are causing. It sounds great on paper. Refinance your loans at a lower rate! Who wouldn't want that? Anyone who could be eligible for Loan Forgiveness or who can only afford their payments on an Income-Driven Plan, that's who! When you refinance with a private lender, you permanently give up all Federal Loan Options and Public Service Loan Forgiveness.
NOT REFINANCING WITH A PRIVATE LENDER
That being said, if you know you aren't going to be eligible for Loan Forgiveness, and you don't need to remain on an income-driven plan, it's time to look at refinancing your loans. There are a bunch of providers out there. SoFI, Earnest, and Lend Key just to name a few. It's worth shopping around because a slightly lower rate can mean thousands of dollars in the long-term.
LISTENING TO LOAN SERVICERS
Looking at online reviews for any of the student loan servicers will make you wish you never went to college or med school. While I'm sure there are several knowledgeable, hard working folks at FedLoan, Navient, and Great Lakes, there are just as many that have no idea what they are talking about. So before trusting what an hourly employee at a call center tells you, do your own research, or have someone you trust in your corner to help you through the process.