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With student loan debt on the rise in the US, we could all use some help understanding the ins and outs of our student loans. From subsidies to repayment plans, deferment to forbearance, the technical jargon and hidden loopholes are endless. Read on to find out what’s hidden in the fine print – along with some helpful hints for paying them off!
1. Private vs. Federal – Know the Difference
Student loans generally fall into one of two categories; private or federal. Private student loans are offered by banks, credit unions, and other financial institutions, while federal student loans are offered by the government. Federal loans typically have lower, capped interest rates, but private institutions can offer more money to students that may not qualify for federal loans.
What you may not have known is that federal loans offer some additional repayment options that private loans may not, as well as various programs for student loan forgiveness that private loans don’t offer. Federal loans don’t require payments while you’re in school, but private loans can require that payments begin as soon as you take out the loan. Generally, federal loans offer some more flexibility, both in rates and payment options, where private loans are more rigid.
Another interesting fact is that federal student loans are among the only loans available that don’t require a credit check; for young adults just starting out, this is great news (until it’s time to pay them back, of course). Private student loans require a credit check and occasionally a co-signer if you don’t qualify on your own, and the interest is typically not tax-deductible like it is with a federal loan.
My favorite little-known fact about student loans vs. other types of loans is a little something called a “prepayment penalty”. Where other types of loans can charge you a fee for paying off your loans early, both federal and private student loans are exempt from this penalty; this is great news for borrowers looking to get out of debt!
2. Who Is Your Servicer?
For federal loans, a servicer is a third party that handles your loan after you’ve taken them out. While you may have thought that you would be dealing with the federal government, most loans get passed off almost immediately to student loan servicers. These third party companies handle the loan and collect your payments, but are notorious for changing hands. Over the course of paying off your student loans, you may have your loans moved a handful of times from one servicer to another, even though they are always technically owned by the U.S. Department of Education.
These servicers can’t change the terms of your original loans, but it’s important to know who they are and how to login to your accounts. Another little-known fact is that through your servicer, the U.S. Department of Education offers a small discount for signing up for auto-pay services; typically they’ll offer up to a .25% discount for signing up for direct deposit to collect your payment every month, so take advantage of this if your servicer offers it – who knew that our student loans had discounts?
3. Direct vs. Indirect Loans
For federal loans, direct loans are offered directly by the federal government, while indirect loans can be offered by private institutions (typically your school) but are guaranteed by the federal government. The only real difference is that with an indirect loan, you will typically deal with the institution (i.e. your school) or a third party servicer rather than with the federal government, but in most other ways, these loans are comparable.
Indirect loans are also called FFEL (Federal Family Education Loans), but what most people don’t know is that Stafford Loans, Perkins Loans, and Federal PLUS Loans can all be direct or indirect. Speaking of PLUS loans…
4. PLUS Loans Don’t Always Need a Parent
One interesting type of student loan that people often neglect is the Federal PLUS Loan, which stands for “Parent Loan for Undergraduate Students”. While this loan was previously extended to undergraduates exclusively via their parents, it is now also offered directly to graduate and professional students without the need for a parent to co-sign. For the millennial crowd, this is a huge win; by the time grad school rolls around most of us are pretty over asking Mom and Dad for help.
For undergraduates considering taking out a PLUS loan, be aware that it requires running your parent’s credit. If they don’t qualify for this type of loan based on their credit, then you won’t be able to take out a PLUS loan. If you run into this situation, consider other types of loans available to you, or look at applying for a part-time job to make ends meet while you’re in school.
5. Subsidized vs. Unsubsidized Loans
Out of all the need-to-know facts on this list, the difference between subsidized and unsubsidized seems to be the most misunderstood. While both of these are types of federal loans, a federal subsidized loan means that the federal government will pay the interest for you while you are in school. Unsubsidized means that you are responsible for paying back the interest that accrues while you’re still enrolled. While neither loan requires payment while in school, the accrued interest can pile up so it’s incredibly important to know the difference when taking out each kind of loan.
In addition to the way accrued interest is handled, subsidized loans are need-based, meaning that you have to demonstrate a financial need for these loans. The amount you borrow is determined by your school, so these loans will never cover more than what’s strictly necessary. Unsubsidized loans don’t require you to show that you have financial need, but they still take into account your cost of attendance and additional financial aid being offered to you.
Another major difference between the two types of loans is how much they can offer students. Because the federal government is paying for the interest while the student is in school on a subsidized loan, and these are based on need, the amount they can offer is almost always less than what you can borrow on an unsubsidized loan. Generally speaking, subsidized loans are preferable, but many students end up having to take out both since the subsidized ones don’t always cover what they need. Who knew the word “subsidy” had so many nuances?
6. Why your Grace Period Matters
For federal loans, the typical grace period is 6 months following graduation before you have to begin paying your loans back, but can actually be as long as 3 years depending on the circumstances. If you join the military following college, for example, you can extend your grace period while you are on active duty. This period is important because of accrued interest; on your unsubsidized loans, you’re still racking up interest even though no payment is due. For subsidized loans, the government still covers the interest during your grace period.
In light of the accrued interest on unsubsidized loans, you might consider starting to make payments during your grace period to get the interest under control. Another good way to use your grace period is to choose a payment plan, budget for your upcoming payments, and set up direct deposit with your loan servicer. Don’t wait until your grace period is up to figure out how much your payments will be; most people are surprised by how much they have to pay, so using this time to prepare is critical.
7. Payment Plan Options
For federal loans, the default option is their Standard Repayment Plan, which sets one fixed monthly payment for the entire life of the loan. For most students just graduating, this amount can be difficult to pay, so they offer additional options to reduce payments early on. What you may not have known is that you can make a change to your student loan repayment plan at any time during your repayment period – and it’s free to make the change. Did you also know you can request to change your payment date to make it more convenient for you?
As far as repayment plans go, the Graduated Payment plan offers low payments up front, increasing every 2 years with the assumption that the borrower will make more money over time. The Extended Payment Plan extends the life of the loan for up to 25 years to bring payments down, but keep in mind that this means you’ll be paying more in interest over the life of the loan. There are also a number of income-based repayment plans available depending on your situation; go to your loan servicer’s website to learn more about your repayment options.
8. Deferment & When to Consider It
Deferment is an entitlement offered on federal loans to stop making payments temporarily on your student loans. This option is most often used when students decide to attend graduate or professional school following their undergraduate studies. Deferment can be applied for by contacting your loan servicer, and allows you to stop making payments while in school, unemployed, serving in the Peace Corps, or the military. Be sure to check your eligibility before applying.
While in deferment, the same rules apply to accrued interest as when you were in school; for subsidized loans, you are not responsible for paying the interest, but for unsubsidized loans you will be responsible for the accrued interest. This factor should be considered when weighing the benefits of deferment. Some private loans will offer deferment options as well; contact your lender for information specific to your loan.
9. Avoid Forbearance at all costs
While forbearance is similar to deferment, there are a few key differences that make forbearance a more serious consideration. While deferment can be used for a number of years, forbearance is a more temporary measure that lasts no more than 12 months at a time. The eligibility requirements vary from deferment, but you can sometimes apply for forbearance if you don’t qualify for deferment.
The key difference is that during forbearance, you are responsible for all of the accrued interest on every type of federal loan, regardless of subsidies. This is a crucial difference that can add up to thousands of dollars, so consider carefully before applying for forbearance. While it may provide temporary relief, you will end up owing more on your loans than when you started.
10. Consolidation Isn’t Right for Everyone
Many companies offer student loan consolidation plans that seem attractive, but because everyone has a slightly different situation, be sure to do your research before applying for a consolidation loan. For private loans with higher interest rates, consolidation might be a valid option, but many times the rates offered don’t beat the capped interest rates of federal student loans.
If you haven’t consolidated your loans and are paying the minimum payments on them, consider making additional payments to reduce the overall amount you will pay over time. Early on, a large portion of your monthly payments will go towards interest; making additional payments reduces the principal balance to speed the process along. If you’ve done your research and want to look into consolidating, check out Credible for some of the best rates I’ve seen for student loan consolidation; this is especially helpful for anyone with large private student loans, as your rates are likely to come down.
What methods are you using to pay off your student loan debt? Share your tips & advice in the comments below!