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Top 5 Mistakes Millennials Make with Student Loans
July 25, 2016
Source: GreenPath Financial Wellness
By: Nick Demeester - GreenPath Student Loan Counseling Manager
If you are a recent graduate or young professional, or know of someone in a similar situation, odds are they have some form of student loan debt. They could be overwhelmed with the idea of how much they owe and are struggling to make payments. Like many other millennials, they may be strapped for cash and do not know how to make any progress.
Being short on money and facing debt can be scary, and it can lead to making mistakes. These common errors can end up costing thousands of dollars and even harm one's financial future.
GreenPath has compiled five millennial mistakes, when it comes to student loans:
1. They underestimate their payments. According to a recent study, 60% of students underestimate their monthly student loan payments and how much of their income will go towards their debt. After graduation, they may have gotten their first apartment or car. If they did not account for student loan payments, their budget would be blown and would risk defaulting on their loans or missing rent and car payments.
2. They do not know their interest rates. In the same study, 30% of students were not aware of their interest rates. The interest rate has a huge impact on how much money will be paid back over time. A higher interest rate can add thousands of dollars to a balance. There are ways to bring the rate down; for many loans, setting up automatic payments can shave the percentage down by .25%, and when a certain amount of payments are made on-time, they will be awarded with another .25% discount on interest. While that may sound tiny, it can add up to significant savings. More of the money can go towards the principal, instead of interest.
3. They are not aware of their repayment options. Nearly 30% of millennials with student loans are currently in default. However, a huge portion of people missing payments had other repayment options they did not use. Approximately half of those millennials who missed payments were eligible for modified repayment plans, based on income, meaning their payments could have been much lower and more affordable. Understanding options can help stretch dollars and keep from getting behind on loans.
4.They miss out on valuable tax deductions. Many recent graduates do not realize that their student loan interest is tax deductible, and they pay more money than they should. If they've been making student loan payments, they can lower their tax bill by deducting up to $2,500 in student loan interest on their taxes.
5. They do not know where to go for help. Many young professionals do not know that they can get help for managing their student loans. If they cannot afford payments, don't know which student loan payment plan is best for their current situation, or are considering consolidation, a trained professional can help navigate the process and come up with a comprehensive plan for moving forward. By understanding options, they'll be empowered to start building a more secure future.
Student loans can be overwhelming. But, with some research and planning, the debt can be paid down, allowing one to start saving for other needs. For more information, reach out to GreenPath's student loan experts at 877-337-3399 or check out our website at www.greenpathref.com, then click on "Student Loan Counseling".
GreenPath is a Financial Wellness partner of MAFCU and assists our members with financial education, guidance and recovery.