5 Mistakes Borrowers Make When Repaying Student Loans

Student loan repayment mistakes cost borrowers thousands of dollars and years of unnecessary debt. According to Federal Student Aid’s loan portfolio data, over 43 million Americans carry federal student debt, yet a significant portion remain on default repayment plans that do not match their financial situation. Understanding which errors to avoid is the fastest way to reduce total loan cost.

With policy changes and new repayment plan options still evolving in 2025, borrowers who stay passive risk leaving real money on the table.

Are You Ignoring Income-Driven Repayment Plans?

Sticking with the standard 10-year repayment plan when your income does not support it is one of the most expensive student loan repayment mistakes a borrower can make. Income-driven repayment (IDR) plans cap monthly payments at 5–10% of discretionary income and offer loan forgiveness after 20–25 years of qualifying payments.

The four main IDR options — SAVE, PAYE, IBR, and ICR — are administered by the U.S. Department of Education. Each has different eligibility rules based on loan type and disbursement date. Borrowers who never reviewed these options may be overpaying by hundreds of dollars monthly.

If you are new to federal borrowing, our guide on how to apply for student loans for the first time explains which loan types qualify for IDR from the start.

Are You Skipping Loan Forgiveness Programs You Qualify For?

Failing to pursue Public Service Loan Forgiveness (PSLF) or employer repayment assistance is one of the costliest student loan repayment mistakes among public-sector workers. PSLF forgives the remaining federal loan balance after 120 qualifying payments while working full-time for a government or nonprofit employer.

According to Federal Student Aid’s PSLF program page, approval rates have improved significantly since 2021 reforms. Still, many eligible borrowers never submit the required Employment Certification Form, which disqualifies them entirely.

Employer Student Loan Benefits

Since 2021, the CARES Act has allowed employers to contribute up to $5,250 per year tax-free toward employee student loans. Many large employers — including Fidelity Investments, PricewaterhouseCoopers, and Aetna — now offer this benefit. Borrowers who do not ask their HR department about this program leave free money unused.

Are You Refinancing Federal Loans at the Wrong Time?

Refinancing federal student loans into a private loan is one of the most irreversible student loan repayment mistakes a borrower can make if done without full information. Once you refinance federal loans with a private lender, you permanently lose access to IDR plans, PSLF, and federal forbearance protections.

Private refinancing makes sense only when your credit score is strong, your income is stable, and you do not qualify for — or need — federal forgiveness programs. According to the Consumer Financial Protection Bureau (CFPB), borrowers should compare total cost over the full repayment term, not just monthly payment reductions, before refinancing.

Understanding the difference between loan types before borrowing helps prevent this mistake later. Our comparison of federal vs. private student loans outlines the key protections you give up when you switch.

Are Minimum Payments Costing You More Than You Realize?

Paying only the minimum required amount each month is a deceptively costly student loan repayment mistake — especially on unsubsidized loans where interest capitalizes. On a $30,000 unsubsidized loan at 6.53%, making only minimum payments over 10 years results in over $10,700 in total interest paid.

Making even small additional principal payments accelerates loan payoff dramatically. A borrower adding just $100 per month to the standard payment on that same loan can cut repayment time by nearly 2 years and save over $2,400 in interest.

Understanding Interest Capitalization

Interest capitalization — when unpaid interest is added to your principal balance — is a key driver of rising balances. This occurs after forbearance periods, after leaving an IDR plan, and at the end of the grace period on unsubsidized loans. The U.S. Department of Education’s 2023 rule under the SAVE plan eliminated capitalization in several scenarios, but it still applies in others.

Do You Know When Deferment Hurts More Than It Helps?

Requesting deferment or forbearance without understanding the interest consequences is a frequent student loan repayment mistake, particularly among borrowers who face short-term financial stress. On unsubsidized and PLUS loans, interest continues to accrue during deferment and will capitalize at the end of the pause period.

A 12-month forbearance on a $25,000 unsubsidized loan at 6.53% adds approximately $1,630 in capitalized interest to your principal balance. Borrowers who repeatedly use forbearance can find their balance growing rather than shrinking.

A better alternative in most cases is an IDR plan, which can set payments as low as $0/month based on income — without triggering capitalization under the SAVE plan’s new rules. According to Federal Student Aid’s temporary relief guidance, IDR enrollment preserves more long-term protections than forbearance in almost every scenario.

Frequently Asked Questions

What are the most common student loan repayment mistakes borrowers make?

The five most common student loan repayment mistakes are: staying on the default standard plan without reviewing IDR options, ignoring PSLF eligibility, refinancing federal loans prematurely, making only minimum payments, and using forbearance when IDR would cost less. Each mistake can add thousands of dollars in unnecessary interest over the loan’s life.

Can I switch from a standard repayment plan to an income-driven plan at any time?

Yes. Federal borrowers can enroll in or switch between income-driven repayment plans at any time through the Federal Student Aid portal. There is no penalty for switching, and your previous qualifying payments toward PSLF or IDR forgiveness are preserved when moving between eligible plans.

Does refinancing student loans hurt your credit score?

Refinancing triggers a hard credit inquiry, which can temporarily lower your score by 5–10 points. However, this is usually minor and short-lived. The more significant risk is losing federal protections — IDR, PSLF, and forbearance options — which cannot be recovered once you refinance into a private loan.

What happens if I miss a student loan payment?

A federal student loan becomes delinquent the day after a missed payment. After 90 days of delinquency, the servicer reports the missed payment to all three major credit bureaus — Equifax, Experian, and TransUnion — which can significantly damage your credit score. After 270 days, the loan enters default, triggering wage garnishment and tax refund seizure.

Is it better to pay off student loans early or invest the money?

The answer depends on your interest rate. If your student loan rate exceeds 6–7%, paying it down aggressively often outperforms average market returns after fees. If your rate is below 5%, investing in a tax-advantaged account like a 401(k) or Roth IRA may generate greater long-term wealth. Evaluate both options using your exact loan rate and expected investment return.

How do I know which loan servicer manages my federal student loans?

Log into your account at studentaid.gov using your FSA ID to see your current loan servicer. As of 2025, federal loan servicers include MOHELA, Aidvantage, EdFinancial, and OSLA Servicing. Servicer assignments can change, so verifying this annually ensures you never miss a payment or a forgiveness opportunity.