Sallie Mae Graduate School Loans vs. Direct PLUS Loans

Taking out a federal Direct PLUS Loan for grad school may not be a bad idea if you need to borrow money for your education. Federal repayment options such as Income-Based Repayment, Revised Pay As You Earn, and Public Service Loan Forgiveness can make Direct PLUS Loans an attractive option for student borrowers.

However, these loans currently come with a high interest rate of 7%. On top of that, you will have to pay an origination fee between 4.264% and 4.267% just to take out the loan in the first place.

Recently, Sallie Mae put a new line of loans on the market that may outperform what is available to grad students through the federal government. While there are some negatives, like not qualifying for the aforementioned repayment programs, there are some major positives, like no origination fees and potentially lower interest rates, which could save students a lot of money over the long haul.

In this review, we’ll see how Sallie Mae grad school loans compare to federal Direct PLUS loans.

Sallie Mae vs. Direct PLUS Loan

Sallie Mae’s recent releases include three classes of loans: one for MBA programs, one for dental and medical school students, and a separate loan program for other health care professionals.

In order to qualify for any one of these loan programs, you must be enrolled in a program at a degree-granting institution with the intent of getting a degree. These loans are not for certificate programs or continuing education.

It is worth noting that you do not have to be enrolled half-time to qualify, which differs from the standards for federal PLUS loans.

Interest rates and terms

With any one of these loans, you can borrow between $1,000 and the maximum your school charges for your degree — as long as you qualify either on your own or with a co-signer. Interest rates and loan terms will vary depending on which loan you take out, though.

In the table below, we’ve compared rates for Sallie Mae’s grad school loans against the current rates for the Direct PLUS Loan program.

Keep in mind that variable rates may be lower at first, but have the potential to change significantly over the course of repayment. Fixed rates, on the other hand, tend to start out higher, but will stay stable and predictable for the course of your loan.

None of the loans come with origination fees, and you can pay them off early without incurring a penalty.

3 options to repay your Sallie Mae grad school loan

When you take out any one of these three loans, you can pick how you’ll repay. You have three options:

  1. Deferred Repayment. With this option, you make zero payments while you’re in school and during the six months following graduation — the time frame known as the “grace period.” While it’s nice that you won’t have to shell out any money while you’re focused on your studies, you will accrue interest to be paid later. This option also gives you the highest interest rate of the three options.
  2. Fixed Repayment. Maybe you can’t afford to make full monthly payments while you’re in school, but you can afford to throw a little bit of money at the interest. During your education and grace period, you’ll make nominal, interest-only payments. You will still have back interest applied to your account when your grace period is over, but the amount will be less than if you chose the Deferred Repayment plan.
  3. Interest Repayment. When you choose this plan, you’ll get the lowest interest rate that your credit history and income qualify you for, but you’ll have to make full, interest-only payments while you’re in school through your grace period. After that, you’ll start making interest-plus-principal payments just like the other two options, but your payments will be smaller as there won’t be any back interest to tack on.

Graduated Repayment Period

Worried that you’ll struggle to find a job immediately after graduation? Sallie Mae does offer a principal deferment option called Graduated Repayment Period. For the first 12 months following graduation, you have the option of making interest-only payments, but it’s not automatic. You have to opt in, and there is only a small time frame where you’ll be allowed to do so. Your monthly billing statement will alert you when you’re eligible. Start looking for the notification beginning two months before your grace period is over.

Residency and internship deferment

If you have a Dental and Medical School Loan or a Health Professions Graduate Loan, you may qualify for deferment for the entirety of your residency or internship. If you chose Deferred Repayment, you won’t have to pay anything during this time, though interest will still accrue. If you chose Fixed Repayment, you’ll continue making nominal interest payments, and if you chose Interest Repayment, you’ll continue to make full interest payments while you’re completing this necessary step.

In order to qualify for this deferment option, your residency or internship must meet one of the following three criteria:

  1. Require a bachelor’s degree.
  2. Be a supervised program that leads to a degree or certificate.
  3. Be a supervised program that is required for entry into your field.

How to qualify for a Sallie Mae grad school loan

To qualify for one of Sallie Mae’s graduate-level student loans, you must be a U.S. citizen or permanent resident, or be a nonresident with an American co-signer. U.S. citizens and permanent residents can use the loan to study abroad, but all studies for nonresidents must be completed in the U.S. at American institutions.

If you have any other Sallie Mae loans, you must be current on them in order to qualify. That includes not being in forbearance or deferment. You won’t meet this requirement if you’re on a modified payment plan.

Sallie Mae grad school loans vs. federal PLUS loans

Pros and cons of Sallie Mae grad school loans

This new set of graduate school loans from Sallie Mae has a lot of good things going on, but as with any financial product, there are both pros and cons.

Pros

  • You could potentially score a lower interest rate than federal PLUS loans.
  • No origination fees.
  • Ability to pay back early without penalty.
  • Quite a few options for repayment — including deferment options after graduation.
  • The 20-year repayment term on the Dental and Medical School Loan gives you a more realistic timeline for paying back your debt.
  • You can take out a loan even if you’re taking a credit-by-credit approach. Federal student loans require you to attend at least half-time.

Cons

  • There is the potential of getting an even higher interest rate than you’d find on a PLUS loan, though you’d still have no origination fees. This is most likely to impact those with a spotty credit history — especially if they opt for the Deferred Repayment option.
  • Dental and medical school students should take note that while a 20-year term is attractive, you will end up paying more over the course of your loan than if you had a shorter repayment term. Take advantage of the fact that there is no early repayment penalty, if at all possible.
  • Because these are private loans, you will not qualify for advantaged repayment options like the Department of Education’s REPAYE, IBR, or PSLF. Direct PLUS Loans do qualify for these programs.
  • The window for enrolling in Graduated Repayment is short. You may miss it if you’re not paying attention.

How to apply

You can complete the application process online. Before you start, make sure you’re armed with this information:

  • Your address
  • Your Social Security number
  • The name of your school
  • Your enrollment status
  • Your intended degree/course of study
  • How much money you want to borrow
  • Information on any other financial aid you’re receiving
  • Current employer information
  • Current salary information
  • Bank account information
  • Monthly mortgage/rent payments
  • Contact information of two personal references

If you’re a permanent resident, you’ll have to furnish some additional paperwork. Be prepared with either your Alien Registration Receipt Card, or its conditional counterpart accompanied by INS Form I-751. If you don’t have either of those, you can also furnish an unexpired foreign passport with an unexpired stamp certifying employment, or a Permanent Resident card.

If you’re a nonresident, you’ll need to provide an unexpired passport, an unexpired student visa, or an Employment Authorization card. You’ll also need all of the above bulleted information for your co-signer.

There is a separate application page for each loan type: Health Professions Graduate Loan, MBA Loan, and Dental and Medical School Loan.

Who are Sallie Mae’s new grad school loans best for?

Sallie Mae’s new student loans have an extremely targeted audience. If you’re studying in one of the specified fields, they can be a good option for you if you have a good credit history and can qualify for an interest rate lower than the one offered on PLUS loans. Just be mindful that while the repayment options are plentiful, they’re not quite as generous as some federal student loan programs that allow you to repay based on your income or even forgive a large portion of your debt after dedicating a portion of your career to public service.

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How These Student Loan Borrowers Are Getting Their Debt Dismissed in Court

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Student debt is only forgiven or discharged in special cases, but a new report by The New York Times might offer a glimmer of hope to some student loan borrowers struggling to manage their debt.

If a student loan lender or servicer can’t prove that they own the debt that they are attempting to collect from a consumer, it’s possible that the debt can be dismissed in court.  That’s what happened in a recent case profiled by New York Times reporters Stacy Cowley and Jessica Silver-Greenberg involving private student lender National Collegiate Student Loan Trusts, one of the nation’s largest owners of private loans.

National Collegiate sued dozens of former students who had defaulted on their private student loans. But in court National Collegiate failed to prove they owned the loans. This happens often when loans are sold to another lender, or otherwise handed to another account manager and paperwork gets lost. Ultimately, the courts dismissed the lawsuits, citing the fact that National Collegiate had no way of proving they owned the debts in the first place.

This isn’t always how the scales tip in cases against consumers for unpaid debts.

If consumer debts are left unpaid for an extended period of time, consumers can and often are taken to court by the companies they owe. Often, consumers don’t answer these lawsuits at all. And when lawsuits aren’t answered, judges usually rule in favor of the plaintiffs. With those judgments in place, companies can then push to have the consumers’ wages or federal benefits like Social Security garnished.

The outcomes in these National Collegiate lawsuits are proof of what can happen if consumers simply show up at court and try to fight back.

“Individuals trying to get rid of student loan debt should be proactive in demanding proof of ownership of the loan documents from the lender that is collecting or trying to enforce the [loan],” says Attorney Evelyn J. Pabon Figueroa, based in Orlando, Fla.

People who are going through the bankruptcy process and are attempting to have student loan debt discharged should also ask their lenders for proof that they own the debt, Figueroa says. If proof isn’t provided, they should dispute the debt.

Figueroa says in some cases borrowers should even stop making payments if they believe the lender doesn’t have the right documents to prove they own the loan. Instead, send the lender a debt verification letter, which asks lenders to provide proof that the debt belongs to a person. You can download a sample debt verification letter from the Consumer Financial Protection Bureau website.

The CFPB suggests asking these three questions in your letter:

  • Why a debt collector thinks you owe this debt.
  • The amount of the debt and how old it is.
  • Details about the debt collector’s authority to collect this money.

If the lender can’t provide proof, you should consider disputing the debt, either in court (if the lender has filed a lawsuit against you at that point) or through the three major credit bureaus (if the debts are appearing on your report and subsequently hurting your credit score).

How student lenders lose track of their debts

If the National Collegiate debacle sounds familiar, it should. It’s similar to the same issues mortgage lenders encountered during the 2008 subprime mortgage crisis. Lenders took borrowers to court to pursue unpaid mortgage debts, but when the lenders could not provide proof that the borrowers owed the debt, courts often ruled that the loans were not collectible. The lack of documentation was so pervasive that many borrowers intentionally defaulted on their mortgage loans on the off chance a lender could not prove they owned the debt.

National Collegiate is already anticipating that it will face the same problem — that borrowers will simply stop paying their debts — as word spreads of its inability to win lawsuits against borrowers. “[A]s news of the servicing issues and the Trusts’ inability to produce the documents needed to foreclose on loans spreads, the likelihood of more defaults rises,” the company said in a recent legal filing.

What to do if you’re sued by a student lender or debt collector

First, don’t panic. The last thing you want to do if you’re ever sued is admit in writing or verbally that you owe the debt. In the event the lender can’t prove they own the debt, this may come back to haunt you. By taking these few key steps, you can protect yourself both legally and financially in the event you’re served with a lawsuit from a lender:

  1. Ask them to verify the debt. If you’re already suspicious your loan lender may have lost your paperwork and can’t prove the debt, start by sending out a debt verification letter. If the lender doesn’t respond (give them 30-60 days), they must cease attempting to collect the debt. If they don’t stop, you’ll likely need to contact a lawyer. You may not need to hire one, but a quick consultation for legal advice for your best course of action will be well worth it.
  1. Never discuss the debt over the phone. If a lender or collection agency contacts you via phone before you are served a lawsuit or receive anything in the mail, be sure to get the the caller’s name, company, and license number. Once you have this information, it’s best to communicate via certified USPS mail to track and document that every correspondence has been received by the legitimate collections company and lender. If you end up in court, this is important, as it establishes a paper trail for your communications. (Email and electronic timestamps can easily be forged.) Keep in mind you don’t ever have to answer the phone if you don’t recognize the number, and you have a legal right to tell debt collectors to stop contacting you entirely.
  1. Contact a lawyer. Lawsuits involving large sums of money are no small game to play in a courtroom. Most consumers don’t know the intricacies of the laws that actually protect them (and sometimes may not know how to read the contracts they signed), but a lawyer versed in contract law or one who specializes in bankruptcy can easily help dispute the debt and, if it’s valid, negotiate a settlement without ever stepping into a courtroom. The CFPB keeps a handy list of legal aid groups so you can find an affordable lawyer in your state.

 

The post How These Student Loan Borrowers Are Getting Their Debt Dismissed in Court appeared first on MagnifyMoney.

Student Debt Confessions: How I Got Kicked Off My Income-Driven Repayment Plan

Liz Stapleton wrote about her experience getting kicked off her income-driven repayment plan for MagnifyMoney. Overnight, her monthly student loan payment skyrocketed from $365 to nearly $2,000.

I graduated from college at the onset of the recession in 2008 and graduated from law school just in time for the recession to hit the legal market in 2011. By the time I finished with both my degrees I had $193,000 of federal student loan debt, which has since grown to over $250,000. Needless to say, I’ve never been financially able to make student loan repayments under the standard repayment plan.

Once my six-month student loan grace period ended in 2011, I immediately signed up for an Income-Driven Repayment Plan with each of my three loan servicers.

Every borrower enrolled in one of these plans has to renew their eligibility through their loan servicer every year. Since I have three servicers, that means at this point I have been through the renewal process 18 times. The first 17 recertifications went off without a hitch.

So I was stunned when I found out my 18th and most recent submission for recertification through one of my three loan servicers was denied. That was it — I was kicked out of the program. Suddenly, my monthly payments of $362 were going to balloon to nearly $2,000.

I got on the phone with the lender right away, determined to find out why I was booted from the program. In the end, I was able to successfully re-enroll.

Why my income-driven repayment renewal was denied

It turns out my status as a self-employed worker was to blame.

After I was laid off from my job as a solutions consultant at the end of 2016, I started a business as a freelance writer in 2017. One of the requirements to recertify your eligibility for income-driven repayment plans is to submit proof of income. When I was working full time, that was no problem. I just used records of my pay stubs to verify my income.

But now that I was self-employed, I didn’t have pay stubs. Early in 2017, when my deadline to recertify with one of my loan servicers was approaching, I called them and asked what documents I could use to verify my income.

I was told that all I needed was a self-certifying letter stating that I’d been laid off and was now self-employed as a freelance writer. I also needed to include my gross monthly income. I wrote the letter and stated what my approximate monthly income was thus far, and my submission for recertification on the Income-Driven Repayment (IDR) Plan was approved, no problem.

But remember that I have three different loan servicers. So I had to go through the same process with the other two as well. Unfortunately, when I tried to use the same strategy to renew my certification with my second servicer, I was denied.

I was shocked and stressed out, to say the least.

Resubmitting my application

I called this loan servicer and asked why I had been denied. At first, the representative I spoke with told me there wasn’t sufficient documentation of income. When I asked why my self-certifying letter wasn’t enough, the representative on the phone explained that it usually was enough. I pressed her to find out what exactly was wrong with my letter that had resulted in a denial. It turns out, they didn’t like that I used the word “approximate” when stating my gross monthly income. They needed a firm number. Additionally, they wanted a work address.

I rewrote the letter to take out the word “approximately” and explained that as a self-employed freelance writer I worked from home and had no additional company address. I submitted my forms again and crossed my fingers.

In the meantime, my loan servicer agreed to put my loans into deferment for one month. That would ensure that I wouldn’t get hit with my new larger payment the following month.

Here’s what the application looks like to re-certify your enrollment in an income-driven repayment plan. Download a copy at https://studentaid.ed.gov.

The long wait for news

After I resubmitted my IDR Plan recertification application, I was told I would hear back within 10 days. It was nearly a month before I heard back from them in June. It was good news – my documents were approved, and I would be enrolled in my new IDR Plan starting in August.

But the celebration was short-lived.

Since I had only been granted a one-month deferment, which covered me for June, and my new IBR Plan wouldn’t kick in until August, that meant I would have a gap in July. And I’d have to pay my new, larger monthly payment. I couldn’t afford the payment of nearly $2,000 and to miss it would mean defaulting on my loans. Defaulting on federal loans could mean losing access to the income-driven repayment plans as well as forbearance and deferment options, not to mention it would wreak havoc on my credit.

Once again I was caught off guard and stressed out. And, once again, I called my loan servicer to find out why the new plan wasn’t being applied sooner. Apparently, the billing cycle had already passed for July.

To solve the problem, I requested another month of deferment for July, which I was granted.

Asking for a forbearance or deferment is never fun, but it is always better than defaulting on your loans and losing access to those options and flexible repayment plans.

What to do if your recertification is denied

  1. Be proactive. One of the biggest lessons I learned from this ordeal is that it pays to be proactive. Don’t count on the loan servicer sending the paperwork you need to fill out; you can find a recertification document here. If you are struggling with payments, you have to take action. Ask your loan servicer questions to find out what might work best for you, a new payment plan or a temporary forbearance or deferment. If your loan servicer is being stingy with answers, persist, do not hang up the phone until you have the answers you need.
  2. Don’t be shy about requesting deferment or forbearance. Loan servicers won’t necessarily anticipate that you may need a deferment or forbearance if your repayment plan is denied. So be sure to ask.
  3. Resubmit your application. It isn’t unusual to have your recertification denied for a number of reasons. For example, if you are a salaried employee, paid biweekly, and only submit one pay stub, you could be denied for not demonstrating an entire month’s worth of income. But remember, you don’t have to accept that denial as final; you can usually resubmit if something was wrong with your original submission.

The Bottom Line: Not all loan servicers are created equally

As I learned the hard way, some loans servicers are pickier about the language you use on your renewal forms than others.

“For those that are self-employed, some [servicers] will have specific requirements in the phrasing of the documents used to certify income,” says Columbus, Ohio-based financial advisor Natalie Bacon. “What works for one loan servicer may not work for another.”

The biggest lesson I learned was not to assume that just because one loan servicer accepted my documentation, the other loan servicer would as well. It’s always important to communicate with each of your student loan servicers.

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Should You Use a Mortgage to Refinance Student Loans?

Fannie Mae, the largest backer of mortgage credit in America, recently made it a little easier for homeowners to refinance their student loans. In an update to its Selling Guide, the mortgage giant introduced a student loan cash-out refinance feature, permitting originators that sell loans to Fannie Mae to offer a new refinance option for paying off one or more student loans.

That means you could potentially use a mortgage refi to consolidate your student loan debt. Student loan mortgage refis are relatively new. Fannie Mae and SoFi, an alternative lender that offers both student loans and mortgages, announced a pilot program for cash-out refinancing of student loans in November 2016. This new program is an expansion of that option, which was previously available only to SoFi customers.

Amy Jurek, a Realtor at RE/MAX Advantage Plus in Minneapolis/St. Paul, Minn., says people with home equity have always had a cash-out option, but it typically came with extra fees and higher interest rates. Jurek says the new program eliminates the extra fees and allows borrowers to refinance at lower mortgage interest rates. The policy change could allow homeowners to save a significant amount of money because interest rates on mortgages are typically much lower than those for student loans, especially private student loans and PLUS loans.

But is it a good idea?

Your student debt isn’t eliminated; it’s added to your mortgage loan.

This may be stating the obvious, but swapping mortgage debt for student loan debt doesn’t reduce your debt; it just trades one form of debt (student loan) for another (mortgage).

Brian Benham, president of Benham Advisory Group in Indianapolis, Ind., says refinancing student loans with a mortgage could be more appealing to borrowers with private student loans rather than federal student loans.

Although mortgage rates are on the rise, they are still at near-historic lows, hovering around 4%. Federal student loans are near the same levels. But private student loans can range anywhere from 3.9% up to near 13%. “If you’re at the upper end of the spectrum, refinancing may help you lower your rate and your monthly payments,” Benham says.

So, the first thing anyone considering using a mortgage to refinance student loans should consider is whether you will, in fact, get a lower interest rate. Even with a lower rate, it’s wise to consider whether you’ll save money over the long term. You may pay a lower rate but over a longer term. The standard student loan repayment plan is 10 years, and most mortgages are 30-year loans. Refinancing could save you money today, but result in more interest paid over time, so keep the big picture in mind.

You need to actually have equity in your home.

To be eligible for the cash-out refinance option, you must have a loan-to-value ratio of no more than 80%, and the cash-out must entirely pay off one or more of your student loans. That means you’ve got to have enough equity in your home to cover your entire student loan balance and still leave 20% of your home’s value that isn’t being borrowed against. That can be tough for newer homeowners who haven’t owned the home long enough to build up substantial equity.

To illustrate, say your home is valued at $100,000, your current mortgage balance is $60,000, and you have one student loan with a balance of $20,000. When you refinance your existing mortgage and student loan, the new loan amount would be $80,000. That scenario meets the 80% loan-to-value ratio, but if your existing mortgage or student loan balances were higher, you would not be eligible.

You’ll lose certain options.

Depending on the type of student loan you have, you could end up losing valuable benefits if you refinance student loans with a mortgage.

Income-driven repayment options

Federal student loan borrowers may be eligible for income-driven repayment plans that can help keep loan payments affordable with payment caps based on income and family size. Income-based repayment plans also forgive remaining debt, if any, after 25 years of qualifying payments. These programs can help borrowers avoid default – and preserve their credit – during periods of unemployment or other financial hardships.

Student loan forgiveness

In certain situations, employees in public service jobs can have their student loans forgiven. A percentage of the student loan is forgiven or discharged for each year of service completed, depending on the type of work performed. Private student loans don’t offer forgiveness, but if you have federal student loans and work as a teacher or in public service, including a military, nonprofit, or government job, you may be eligible for a variety of government programs that are not available when your student loan has been refinanced with a mortgage.

Economic hardship deferments and forbearances

Some federal student loan borrowers may be eligible for deferment or forbearance, allowing them to temporarily stop making student loan payments or temporarily reduce the amount they must pay. These programs can help avoid loan default in the event of job loss or other financial hardships and during service in the Peace Corps or military.

Borrowers may also be eligible for deferment if they decide to go back to school. Enrollment in a college or career school could qualify a student loan for deferment. Some mortgage lenders have loss mitigation programs to assist you if you experience a temporary reduction in income or other financial hardship, but eligibility varies by lender and is typically not available for homeowners returning to school.

You could lose out on tax benefits.

Traditional wisdom favors mortgage debt over other kinds of debt because mortgage debt is tax deductible. But to take advantage of that mortgage interest deduction on your taxes, you must itemize. In today’s low-interest rate environment, most taxpayers receive greater benefits from the standard deduction. As a reminder, taxpayers can choose to itemize deductions or take the standard deduction. According to the Tax Foundation, 68.5% of households choose to take the standard deduction, which means they receive no tax benefit from paying mortgage interest.

On the other hand, the student loan interest deduction allows taxpayers to deduct up to $2,500 in interest on federal and private student loans. Because it’s an “above-the-line” deduction, you can claim it even if you don’t itemize. It also reduces your Adjusted Gross Income (AGI), which could expand the availability of other tax benefits.

You could lose your home.

Unlike student debt, a mortgage is secured by collateral: your home. If you default on the mortgage, your lender ultimately has the right to foreclose on your home. Defaulting on student loans may ruin your credit, but at least you won’t lose the roof over your head.

Refinancing student loans with a mortgage could be an attractive option for homeowners with a stable career and secure income, but anyone with financial concerns should be careful about putting their home at risk. “Your home is a valuable asset,” Benham says, “so be sure to factor that in before cashing it out.” Cashing out your home equity puts you at risk of carrying a mortgage into retirement. If you do take this option, set up a plan and a budget so you can pay off your mortgage before you retire.

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How Does Student Loan Deferment or Forbearance Affect Your Credit Score?

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According to the latest annual report from the Institute for College Access and Success, 2015 college graduates showed a 4% increase in student loan debt over 2014 graduates. Among 2015 seniors, 68% who graduated had student loan debt, with the average balance being $30,100 per borrower.

With more college students graduating with student loan debt and balances continually increasing, it’s no wonder many are seeking deferment or forbearance. But if you are considering these options, there are some things you need to know first, including how it might affect your credit score.

What Is Deferment?

Student loan deferment is a period of time when the repayment of your loan’s principal and interest is temporarily delayed.

Unlike forbearance, when your student loan is in deferment, you do not need to make payments. And in some cases, the federal government may even pay the interest portion of your student loan payment. In order to qualify, you must have a federal Perkins Loan, a Direct Subsidized Loan, or a Subsidized Federal Stafford Loan.

Interest on your unsubsidized student loans or any PLUS loans will not be paid by the federal government. You will be responsible for interest accrued during deferment (if it’s not paid by the federal government), but you don’t have to make payments during the deferment period. If you’re not paying interest during deferment, it’s important to know interest may still be added to your principal balance. This may result in higher future payments.

There are several situations in which you may be eligible for student loan deferment:

  • If you are enrolled in college or career school at least half-time
  • If you are in an approved graduate fellowship program
  • During a period where you have qualified for Perkins Loan discharge or cancellation
  • During a period of unemployment
  • During a time of economic hardship (including Peace Corps)
  • During active military duty
  • During the 13 months following active military duty

Most deferments are not automatic, and you will need to submit a request for deferment to your student loan provider. If you are still in school at least part-time, you can apply through your school’s financial aid office.

What Is Forbearance?

If you are unable to make your student loan payments and don’t qualify for deferment, your loan officer may allow forbearance. When your student loans are in forbearance, you may be able to make smaller payments or skip payments altogether for up to 12 months.

However, before you apply for forbearance, keep in mind that interest will continue to accrue on all types of loans. This means your balance will grow, increasing the amount of time and money it will take to pay off your student loans. You can choose to pay the interest-only portion during forbearance. If you choose not to, the interest may be capitalized and added to the principal balance of your loan.

According to the Federal Student Aid office at the U.S. Department of Education, there are two types of forbearance, discretionary forbearance and mandatory forbearance.

Discretionary forbearance is when you, the borrower, request forbearance from your lender due to financial hardship reasons or illness. Ultimately, the lender decides whether or not to grant your discretionary forbearance request.

With mandatory forbearance, your lender is required to grant you forbearance on your student loans if you request it. However, you must meet the following criteria:

  • You are completing a medical or dental internship or residency program, and meet specific requirements.
  • The total you owe each month for all the student loans is 20% or more of your total monthly gross income.
  • You are serving in a national service position and received a national service award.
  • You are a teacher and qualify for teacher loan forgiveness.
  • You qualify for partial repayment of your loans under the U.S. Department of Defense Student Loan Repayment Program.
  • You are a member of the National Guard and have been activated by a governor, but you are not eligible for a military deferment.
  • Similar to deferment, forbearance doesn’t happen automatically. You must apply for forbearance and may be required to show proof of these situations in order to be granted forbearance.

What Happens to Your Credit Score When Your Student Loans Are in Deferment or Forbearance?

As long as you continue making your student loan payments on time and in full until your request for deferment or forbearance is approved, your credit score should not be affected.

According to Rod Griffin, Director of Public Education at Experian, “When a student loan is in forbearance it is not in a repayment status. As a result, the late payments would not be reported. If it is reflected as current and not in repayment, it likely would not have a negative effect on credit scores.”

What Happens if You Default on Your Student Loans?

If you miss a payment between the time you apply for and are approved for deferment or forbearance, you will be considered to be in default on your student loans, and your credit score could be negatively impacted by this missed or late payment.

“Defaulting on a student loan is no different than defaulting on any other installment loan. Failing to pay as agreed will severely damage your credit history and, therefore, your credit scores,” Griffin said.

Being 60 days late or more on a student loan or credit card payment could damage your credit score as much as 100 points.

The Bottom Line

If you are unable to afford your student loan payments, deferment or forbearance may be options to consider. However, it’s important to remember that your student loans will continue to accrue interest, which could result in your paying more over the long run. Between the time of application and the time you are approved for deferment or forbearance, you must continue to make your student loan payments in full and on time in order to avoid potential damage to your credit score.

The post How Does Student Loan Deferment or Forbearance Affect Your Credit Score? appeared first on MagnifyMoney.

How This California Couple Paid Off $100,000 of Debt in 2 Years

Illustration by Kelsey Wroten
Illustration by Kelsey Wroten

When 31-year-old Priscilla Jones completed her MFA in film in 2011, she was left with a total of $96,000 of student loan debt from both her undergraduate and graduate studies. (She requested that we change her name for privacy reasons). Over the next three years, thanks to compounding interest charges, the original amount ballooned to $118,000. On her current payment plan, it would take another 15 years to pay off all her debt.

Rather than dragging the process out, she and her husband (we’ll call him Nathan), decided to aggressively pay down her debt. Over the next 22 months, they paid off $100,000 of the original loan balance — all while raising a young child in Los Angeles.

Here’s how they did it:

Making a pact

While Nathan, 41, was fully aware of Priscilla’s debt load when they got married in 2011, it wasn’t until 2014 — on Valentine’s Day, to be exact — when the couple opened the hood on Priscilla’s student loans to uncover what was lurking underneath.

“For the first few years of our marriage, we just couldn’t afford to buckle down to pay them off, so we didn’t really take a close look,” says Nathan.

The catalyst for examining Priscilla’s loans? In less than two months, one of the largest loans Priscilla carried — a total of $88,000 — would come out of forbearance. The additional loan payment would triple their monthly bill from $300 to $900. Two weeks later, they decided to dump their savings accounts, putting $24,000 toward her largest debt.

And then they made a pact: They would do everything they could to pay off the loans within three years.

Working overtime

On top of working a full-time job in operations at a tech startup, Priscilla took side jobs, working an additional 20 to 30 hours a week. She kept $600 a month from her salary for personal spending and used the rest to pay off her student loans. She and Nathan made sure to keep $5,000 to $10,000 in an emergency fund at all times.

Bonuses and promotions

They lived off of Nathan’s salary in management at a tech startup, and Nathan’s work bonuses went straight toward paying off the debt. When Nathan started his current job in 2012, he earned $53,000, including bonuses. His company soon saw tremendous growth. As a result, Nathan quickly ascended the ranks, and his income spiked dramatically. The couple’s combined salary in 2014 was $170k and $160k in 2015, and every penny they could pinch went toward their debt load.

“We think of ourselves as being very fortunate,” says Nathan. “But even if my income hadn’t grown as it did, we would’ve used the same mindset and tactics to pay off our loans. Instead of it taking three years, it would’ve taken 10.”

Never ‘act your wage’

Although they were in a high income bracket, no one would have guessed as much by looking at their spending habits. They lived as frugally as possible to focus on paying off the student loans. They stayed in the two-bedroom, two-bathroom apartment in Venice that Nathan had locked down at a low rate during the recession. They drove two beat-up cars that were paid off in full and had good gas mileage.

“We really had to examine our needs versus wants,” says Priscilla. While they’ve never been big spenders, and value community and experiences, they had to put some of their wants on hold. For instance, Nathan, who loves to invest, contributed just the minimum toward his employer’s 401(k) to qualify for the full matching contribution. Priscilla curbed any frivolous spending on clothes. They also put off getting new carpet and furniture, both of which needed desperately to be replaced.

They shopped at the Dollar Store, didn’t buy clothes that required dry cleaning, and refrained from traveling for pleasure. They paid as many bills as they could on their credit cards, which were paid in full each month. Any reward points they racked up went toward gift cards for restaurants and movies. A rare dinner out would be at El Pollo Loco or In-N-Out Burger.

“We turned it into a game, and had fun with it,” explains Priscilla. For instance, the couple placed a chalkboard in their kitchen and wrote on it the outstanding debt amounts and interest rates, along with specific dates for hitting their goals.

The ‘avalanche’ method

To prioritize which debts would be paid off first, they decided to use the ‘debt avalanche’ method. They aggressively knocked off the loan with the highest interest rate first, then worked their way down. They would challenge each other to save as much as they could toward paying off the loan. “Working together to pay off debt helped us bond,” adds Nathan.

“To stay motivated, we would obsessively calculate how much interest we were paying each day,” says Priscilla. “At one point we were paying $37 a day in interest alone.”

Taking time to celebrate

When they reached a debt payoff total of $100,000 in February 2015, they decided to ease up on their loan repayments. To celebrate, they rented a limo and had a night out on the town. They also finally were able to give their apartment a facelift. “We no longer have to move furniture around to hide the holes in the carpet anymore,” Priscilla says.

In September of this year, the couple made their final loan repayment and are completely debt- free.

They say that it’s essential to maintain perspective when paying off student debt.
“Remember, you’re not dying,” Nathan says. “Just focus on paying it off, and your debt will get crushed.”

The post How This California Couple Paid Off $100,000 of Debt in 2 Years appeared first on MagnifyMoney.

Debt-Ridden ITT Tech Students Grapple with Uncertain Futures

Kevin Jackson, age 34, graduated from ITT Tech's Newtown, Va., campus in 2007. He is paying off $40,000 in private and federal student loan debt.
Kevin Jackson, age 34, graduated from ITT Tech’s Newtown, Va., campus in 2007. He is paying off $40,000 in private and federal student loan debt.

The news that for-profit university chain ITT Tech would shutter 137 campuses across the country this week amidst a federal investigation into predatory lending, recruiting practices left thousands of students’ futures uncertain. They have big choices to make and, in many cases, few options.

Roughly 35,000 of the school’s 45,000 students are eligible to have their federal student loans discharged, which could total as much as a half billion dollars alone, according to the Department of Education. But if students decide to continue their education at a different school, they may disqualify themselves from loan forgiveness altogether.

“We may be underestimating the potential impact of this and students filing for forgiveness of loans,” said Mark Kantrowitz, publisher and vice president of strategy for Cappex.com, a college and scholarship comparison site. “This isn’t the last we’ll see of this situation.”

Students who were still enrolled when the campuses closed — or withdrew in the last 120 days — can apply for a federal loan discharge. Those who graduated or withdrew several months ago or have private student loans, however, are likely still on the hook for their debt. Their only recourse is to file a borrower’s defense claim, a difficult process that would require them to prove they were defrauded by ITT Tech in some way.

“In a properly regulated environment, we don’t have 45,000 students left holding the bag and 8,000 staff members becoming unemployed,” said Barmak Nassirian, director of federal relations and policy analysis at the American Association of State Colleges and Universities. “If there’s any silver lining, it’s that this operation won’t be able to pull in any new victims.”

ITT Tech officials were unavailable for comment; however, the company pushed back against regulators’ allegations in a statement this week.

“We had no intention prior to the receipt of the most recent sanctions of closing down despite the challenging regulatory environment that now threatens all proprietary higher education,” the statement says.

MagnifyMoney reached out to ITT Tech students to find out how they are moving forward in the wake of the school closure.

ITT Tech Tyler

Unmet expectations

Like many people who enroll at for-profit universities, for Kevin Jackson, age 34, it all started with a commercial.

When Jackson, who studied computing at ITT Tech’s Newtown, Va., campus between 2003 and 2007, saw the iconic ITT Tech commercial, the timing was perfect. He was looking for a nontraditional college experience and a program that would prime students for jobs in their field. The first three semesters went smoothly. The administrators seemed to care, and teachers even called to check on him when he had the flu and missed class.

By the fourth semester, however, he noticed teachers were leaving, and eventually the campus dean departed. New teachers didn’t seem to know the class material, he said. One particularly troubling incident occurred in 2003, halfway through his program. He was called to the financial aid office and thought his paperwork was incomplete. Instead, the financial aid counselor asked him to cosign a student loan for someone in his class. He balked.

Tyler McCormick, age 34, graduated from ITT Tech’s Bessemer, Ala., campus in June 2015. He’s considering filing bankruptcy to relieve part of his $70,000 in federal and private student debt.

“I knew I would have problems paying my own loans, and I wasn’t going to put his education in my hands,” Jackson said. “They spent 45 minutes trying to twist my arm but finally dropped it and asked another student. When I said ‘no,’ that’s when they began to treat me differently.”

Jackson enrolled with ambitions of working in IT support. He graduated with $40,000 worth of federal and private student loans and no offers of employment. In job interviews, employers would question his decision to attend ITT Tech, he said. He took administrative jobs over the next decade until he finally landed a job in 2014 with Xerox. He processes applications for new Medicaid enrollees.

“[The loans] are constantly weighing on me now,” he said. “They’ll allow you to pile forbearance on top of forbearance, but that interest builds up.”

Tyler McCormick, age 34, graduated from ITT Tech’s Bessemer, Ala., campus in June 2015. He’s considering filing bankruptcy to relieve part of his $70,000 in federal and private student debt.

About 100 miles away in Norfolk, 31-year-old Michael Ragsdale says he has little to show for the $20,000 in student loans that piled up during his years at ITT Tech.

Ragsdale enrolled in ITT Tech in 2005 when he attended a recruitment fair at a mall near campus. What drew him in was a sign that offered a free laptop. His computer had recently died, and he couldn’t afford a new one. He signed up to visit the campus that day.

“[The laptop] wasn’t free, of course. That cost is rolled into your student loans,” he said. “They suckered me in then, and it’s tough to relive it all now.”

Ragsdale, who uses a wheelchair, applied for the game design program but was put into network design classes, which he stuck with at the time. After a year, Ragsdale withdrew from the program and decided to attend a local community college. He later transferred to a four-year college. He now works for the college’s Residence Hall Association.

Professionally, he tries to pretend like ITT Tech never happened. “Like many ITT students, I now only put my community college and four-year college on my resume,” he said. “I don’t work in my field of study, but I’m happy where I am.”

Ragsdale hopes to help others like him find a good career despite ITT Tech.

“You can turn your life around,” he said. “The world doesn’t end with the collapse of ITT.”

ITT Tech Brandon

Waiting for answers

Brandon VanVorst, age 30, signed up for computer networking classes at ITT Tech’s Albany, N.Y., campus in 2009 because it offered him the option to continue working his full-time job in the restaurant industry and take both day and night classes. For the first few semesters, the arrangement worked. His employers knew he was taking classes, and his guidance counselors helped him find the best classes to fit his schedule.

After six months, however, staffing dropped, and the campus cut back on class offerings. The available classes didn’t fit VanVorst’s work schedule, but the guidance counselor signed him up anyway. To continue qualifying for federal financial aid, he had to take at least three classes. He failed several due to poor attendance, racking up $40,000 in student loan debt in the process.

Kandi Canales, age 46, was halfway through a two-year nursing program at ITT Tech's Norfolk, Va., campus when the school announced it was closing for good.
Kandi Canales, age 46, was halfway through a two-year nursing program at ITT Tech’s Norfolk, Va., campus when the school announced it was closing for good.

“They would sign me up for classes that I couldn’t take and wouldn’t work with me on flexibility,” he said. “The selling point of ITT is that adults can better their careers, but in reality, it doesn’t work for those who have real jobs.”

VanVorst put his federal loans in forbearance two months ago and filed a defense to repayment application in hopes that he can receive loan forgiveness. He’d like to be reimbursed for the classes that he couldn’t attend based on the scheduling, which shows up on his transcript as failures due to attendance.

“I do have a job in the IT world, and I’ve climbed the company chain because of my work ethic,” he said. “So many people have said they believe their degree is worthless, but to me, the person holding the piece of paper makes it worth it.”

Tyler McCormick, age 34, graduated from ITT Tech’s Bessemer, Ala., campus in June 2015. His $70,000 in federal and private student loans were in deferment through the end of August. Just days before ITT Tech announced its closing, McCormick received a bill for the entire amount of his loan. Now he’s seeing loan consolidation ads online for ITT Tech students.

“The vultures are trying to swoop in and take advantage of students,” he said. “I’m trying to take a breath and pause for a second.”

McCormick is contacting lawyers in his area for professional advice before making decisions and considering Chapter 7 bankruptcy as an option. He’s heard through several ITT Tech student groups on social media that lawyers have been reluctant to take cases because everything is still up in the air.

“I learned about computers, not bankruptcy,” he said. “I think we all need to step back and see what professional student loan experts say.”

ITT Tech Kandi

Finding a way forward

Kandi Canales, age 46, was shocked when she opened her email to find news about ITT Tech’s closing last Tuesday. Canales completed her first year in the nursing program at the Norfolk, Va., campus and planned to start the next quarter on Sept. 12. Instead, she no longer had a school to attend.

“I got sick to my stomach because I’ve worked very hard to get where I am,” she said. “I started crying and even threw up. It took me back to how I felt in 2011 when my 20-year marriage ended.”

She heard rumors about trouble at ITT Tech but hadn’t paid much attention to the media coverage. It was her psychology instructor who told her about the new student ban in late August.

“None of us thought anything about it, just that we wouldn’t have new students coming to the school,” she said. “But on Tuesday morning at 8 a.m., an email went out that ITT closed, effective immediately. That’s the only notice we received.”

Canales is one of many nursing students across the country struggling to figure out the next step. In the ITT Tech Warriors group on Facebook, several students are turning to their state nursing boards for permission to complete programs at other schools or sit for licensing exams. Canales scheduled an appointment to visit her local community college on Friday, take a placement exam, apply for new financial aid, and start again next semester.

“At my age, there is no option to sit back and say, ‘Woe is me.’ I have to keep moving forward,” Canales said. “I have to start from scratch all over again, but I’m going to get this degree.”

The post Debt-Ridden ITT Tech Students Grapple with Uncertain Futures appeared first on MagnifyMoney.

Credit Expert Confession: I’m Afraid of Retirement

retirement

I’m not easily rattled. When it comes to fear, I’m not shaken by spiders, horror movies or even unknown sounds on a dark city street. As a 30-something journalist, wife and mother, my greatest fear boils down to one word: retirement.

I’m not alone in my trepidation. A Transamerica Center for Retirement Studies survey revealed that 41% of Americans are doubtful about their ability to retire. For younger generations, the goal is more difficult than ever thanks to a new set of challenges.

Life Expectancy

According to the Center for Disease Control and Prevention, the current life expectancy for Americans is 78.8 years. Although living longer can be a comforting thought, it’s also financially complicated. A retiree who leaves the workforce at 65 reportedly needs approximately 80% of their final income to account for every year of retirement. Assuming you earn $100,000 per year, your savings should be — at minimum — $1.2 million. That certainly isn’t a subtle amount.

The Uncertainty of Social Security

While it’s likely that Social Security will exist in the decades ahead, don’t expect the payout to support your old age. A 32 year old earning $100,000 per year will only qualify for $1,830 in monthly benefits by the age of retirement, according to the Social Security Administration’s quick calculation tool. Unfortunately, this meager sum isn’t enough to sustain the average post-employment lifestyle.

Student Debt

My college days are long behind me, but the student loans that helped me fund my education are still very present in my life. Setting aside monthly funds for education debt can mean sacrificing retirement savings.

The Future for Children

Independence isn’t a given in today’s world. In fact, 32.1% of adults ages 18 to 34 live at home with their parents, according to a Pew Research study. The challenges of unemployment, a high cost of living and student loan debt have forced this generation back into the nest — whether they like it or not. Will circumstances change as my child ages, or can I look forward to a 30-year-old sleeping in my basement? I don’t know, but I worry about the answer and its impact on my retirement income.

3 Ways to Help You Address These Concerns

These concerns are common for people in every age group, and it begs the question, What is the solution? These risks aren’t likely to go away as time passes, but there are a few ways to minimize the consequences.

1. Save as Much as Possible

Time is a valuable asset when saving for retirement, and it’s never too soon to invest.

  • Pay Off Debt Sooner: Losing money to interest fees means you’ll have less to invest for the future. Talk to a financial planner about the best way to tackle debt and prioritize savings. A healthy balance is essential.
  • Max Out Your Retirement Contributions: Many companies match a percentage of their employees’ 401K contributions. Check with your employer and see if this is the case, and then take advantage of this as soon as you can. It’s a good idea to max out your matching contributions and consider upping your monthly investment as well. For example, suppose you currently set aside 10% of your income for retirement. Would a budget overhaul allow you to increase your savings to 15%? Think carefully about your daily spending choices and how they will impact your future.
  • Consider Tax Implications: Investment vehicles come in many forms, and taxation could save or cost you thousands of dollars. Strategize with your financial planner to determine the best way to invest.

2. Live Within (or Below) Your Means

The housing crash of 2008 taught us a valuable lesson about the dangers of overspending. It’s easy to risk your financial safety by splurging too often or borrowing too much. In reality, I feel it’s wise to keep 15% of your income in liquid savings and another 15% or more for retirement. Do you have the ability to funnel 30% of your income into savings? If not, perhaps it’s time to rethink your budget.

3. Focus on Credit Health

Retirement is one of many factors that benefits from credit health. A high score allows you to save money on variable and fixed interest rates, insurance premiums and even qualifies you for better employment. (You can see how your habits are affecting your credit by viewing two of your credit scores for free, updated each month, on Credit.com.)  

None of us can predict the challenges we’ll face as retirement nears. Although my doubts and fears are likely to rage well into my 60s, I’ve found that saving for those final years is the best way to prepare.

This story is an Op/Ed contribution to Credit.com and does not necessarily represent the views of the company or its partners.

Image: Ridofranz

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6 Student Loan Mistakes to Avoid at All Costs

avoid_student_loan_mistakes

Every time I read the news, I hear how America’s problems with student loan debt have gotten worse.

For example, I learned recently that collective student loan debt surged to over $1.4 trillion nationally. And in an article in the Wall Street Journal, I learned that more than 7 million student borrowers were at least one year behind on their payments.

Also, average student loan debt is up to over $37,000 this year, leaving many young adults questioning their future prospects. With so much debt at a young age, more young people are putting off marriage and parenthood than ever before.

So, what should people do?

No matter where you are with your loans, you can make your situation better (or worse) depending on what you do from here on out.

To learn about some of the mistakes students, borrowers and even co-signers should avoid, I reached out to several financial planners who have experience in this space. When it comes to student loans, they say to avoid these six mistakes at all costs.

1. Choosing a Four-Year School Without Researching Other Options

According to wealth adviser Joseph Carbone of Focus Planning Group in Bayport, New York, too many young people assume they need a four-year degree without thinking it through. And once they get into their four-year degree program, they start racking up more debt than they need. A lot of times, at least some of these students would be better off pursuing a two-year program first.

As Carbone notes, this is especially true in the state of New York, where kids can attend a two-year SUNY program at a considerable discount.

“If you start with a good SUNY two-year program, and then transfer to the school of your choice, you could save tens of thousands of dollars,” he says.

If you already graduated, this tip can’t help you now. But if you’re gearing up for school, it can pay to explore some of the degree options two-year schools offer. A lot of times, you can begin lucrative careers with a two-year degree or even an apprenticeship.

“Parents and students have to accept the idea [that] there is a flood of college graduates with limited job prospects,” says financial planner Tom Diem of Diem Wealth Management. Meanwhile, there are also many unfilled, high paying jobs in technical fields.

Because of this, says Diem, you need to think about long-term value when choosing a program.

And remember, like Carbone says, you can always start with a two-year degree, then transition to a four-year program later.

2. Living Off Your Student Loans

Depending on the student loans you choose, you may be able to borrow more than the cost of your tuition and books. When that’s the case, it’s tempting to spend the “overage” on a lifestyle you couldn’t afford otherwise.

But, just because you can use student loans for a Spring Break trip to Mexico doesn’t mean you should. Remember, you have to pay back every cent you borrow – plus interest.

Kansas City financial planner Clint Haynes says he has seen this situation play out time and again, with disastrous results.

“Student loans should only be used [for] education expenses, not going out to the bar with your friends,” says Haynes.

Yes, you may need to get a part-time job or be more frugal with the money you saved from your summer job. However, you will be so grateful you did after you graduate and start paying your bills.

“The goal is to get your degree with as little debt as possible,” he says.

Once you graduate and start earning a real income, then you can go to Cancun.

3. Dismiss Working During School

Sure, you can borrow enough to cover your tuition and your living expenses, but should you? According to financial planner Josh Brein of Brein Wealth Management in Bellevue, Washington, you can make your life easier by working during school and borrowing less.

“I’m a huge advocate of working while you’re learning, because it teaches us that money doesn’t grow on trees,” says Brein. Plus, you can use some of your earnings to pay for school along the way. You don’t have to prepay all of your tuition, of course, but any amount you can pay will help.

4. Co-Signing Without Understanding the Potential Consequences

This tip is for parents and guardians that might co-sign on a student loan. A CBS News Money Watch article from August 2014 stated that nearly 156,000 older Americans saw their Social Security checks dinged the previous year for delinquent student loan payments.

Because student loan delinquencies are on the rise, you should think long and hard before attaching your name to a brand new loan.

“Parents and grandparents co-sign with the best of intentions but often without thinking about the financial ramifications if the student doesn’t pay,” says Charles C. Scott, a financial adviser in Scottsdale, Arizona. “Be aware and be careful,” he says. If the person you co-signed for quits paying, you’ll be on the hook.

5. Refinancing Without Running the Numbers

Oftentimes, new graduates assume refinancing is a good deal without ever running the numbers or considering what they’ll lose.

“Don’t make this mistake,” says Portland, Oregon-based financial planner Grant Bledsoe. “Private lenders do offer competitive rates when refinancing, but by leaving the federal system, you forfeit many of the associated benefits.”

Any time you refinance a federal student loan with a private lender, you miss out on certain protections like income-driven repayment plans, deferment and forbearance. So even if you get a lower interest rate by refinancing, you’re barring yourself from choosing these options down the line.

Refinancing is the best option in some circumstances, but be wary of what you’re giving up,” says Bledsoe.

6. Paying Off Student Loans Instead of Other High-Interest Debts

While it’s reasonable to see your student loan debt as an emergency, paying off other debts first — while making your minimum monthly student loan payments — might leave you better off.

“If you have other loans with high interest rates, make sure to prioritize those for repayment first,” says financial advisor Billy Xiao of Mobius Wealth, in Vancouver.

If you have high interest credit card debt or personal loans, for example, you can easily save more on interest by making extra payments on those first. And since you might be able to deduct the interest you pay on student loans on your taxes, there are additional financial considerations to ponder as well.

To reiterate, that does not, of course, mean skipping student loan repayments so you can make the other payments with higher interest rates. Skipping repayments and possibly going into default can have very serious consequences for your credit scores. (You can see where your credit currently stands by viewing two of your credit scores, updated each month, for free on Credit.com.) The bottom line: Make sure to take a holistic look at your finances before paying extra toward your student loans. Sometimes, other debts should take precedence.

While a college degree can certainly pay off, borrowing unlimited amounts of money can make your post-college life harder than it has to be. Before you sign on that dotted line, make sure you know exactly what you’re getting into. With a few smart moves and some self-restraint, you can borrow less, pay down debt faster and avoid many of the pitfalls that befall too many college graduates with debt.

Image: DragonImages

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The FAFSA Is Changing This Year: Here’s Everything You Need to Know

fafsa-is-changing

People starting college in the fall of 2017 probably haven’t yet decided where they’re going to school, let alone figured out how much money they’ll need to do it, but it’s almost time to start applying for financial aid. In the past, students and their families could turn in the Free Application for Federal Student Aid (FAFSA) starting Jan. 1 of the year they’ll need the aid, but that date has been moved up.

It’s coming up quickly, too. For the 2017-18 academic year, people can turn in the FAFSA as early as Oct. 1, 2016. That’s in less than 3 months.

Why So Early?

Before we get into the specifics of this change, it’s important to point out why you’d want to turn in the FAFSA so early. Figuring out how you’re paying for college is one of those “the sooner, the better” kind of things. Though the application has “federal” in the name, states and schools also use the FAFSA to dole out financial aid, and every state and school has different ways of doing that. Some distribute aid on a first-come, first-served basis, so the longer you wait to turn in your FAFSA, the lower your chances of receiving assistance.

With that sort of pressure, you’d think college-bound people (or their parents) would greet the stroke of midnight with a toast of “Happy New Year! But first, FAFSA.” It doesn’t tend to happen that way, for a few reasons. First, a lot of people don’t realize how important it is in getting financial aid, or they assume they won’t qualify for aid, so they don’t bother with the paperwork. (Insert “you won’t know if you never try” cliche here.) In addition to the common mistakes of not knowing deadlines or underestimating the importance of the FAFSA, people put it off because they think they won’t have all the information they need to complete it until after they’ve filed their taxes.

For example: The FAFSA for the 2016-17 school year required applicants to enter their income information from the 2015 tax year. The deadline for submitting your 2015 income tax return was April 18, 2016. At that point, the FAFSA deadline in many states had passed, or states had already awarded all available aid. How could an application that requires 2015 tax information come due before your 2015 taxes, you ask? You can estimate your financial information on the FAFSA, allowing you to turn in the application before you file your taxes, which is something a lot of people may not realize.

Yes, it’s confusing, which brings us to the new policies coming in a few months.

What Changed?

For the 2017-18 academic year, students and their families will use their financial information from the 2015 tax year to fill out the FAFSA. The idea is that this will make it easier to fill out the form earlier. It also allows more people to take advantage of the IRS Data Retrieval tool. It transfers your tax information to the FAFSA, but because many people have traditionally filled out the FAFSA before completing their taxes, that tool hasn’t been as helpful as it could be.

“This will simplify the FAFSA, cutting about a page of questions from the form,” Mark Kantrowitz, said in an email to Credit.com. Kantrowitz is a financial aid expert and publisher and vice president of strategy at Cappex, an online platform for researching colleges and scholarships. “Also, any data element that is transferred unmodified from the IRS will not be subject to verification … This is especially important for low-income students, who often have difficulty completing verification.”

What You Need to Know Before October

The Education Department recommends filling out the FAFSA online, but you can also fill out a PDF version (you submit that through the mail) or request a paper form be sent to you. You also need a federal student aid ID (FSA ID) to sign your FAFSA, and it can take up to 3 days after registering for your FSA ID before you can use it to sign your application.

You still don’t need to have filed your taxes in order to fill out the FAFSA (though it’s easier that way, with the IRS Data Retrieval tool), and you also don’t have to know where you’re going to school. You can list a college on your FAFSA, if you want them to receive your FAFSA, even if you haven’t yet decided if you’re applying there. Keep in mind you have to fill out the FAFSA every year you’re applying for aid, as well, so for people who have gone through this process before, now you can start it earlier.

“The switch to prior-prior year also increases the amount of time available to apply for financial aid, from 18 months to 21 months,” Kantrowitz said. He said he hoped the earlier availability of the form would lead to more low-income students filing their FAFSAs early, consequently allowing them to qualify for more state aid.

Changes to how people apply for federal student aid hardly solves the burden of rising education costs and the ever-growing student loan debt in the U.S., but they simplify a process that many people find intimidating.

Of course, paying for college goes beyond this single form. Figuring out how much you can afford to spend (and borrow) to get a degree can be really tricky, but it’s important that students and their families consider the future cost of these decisions. Student loans have a significant impact on borrowers’ credit scores (you can see just how much by reviewing two of your free credit scores each month on Credit.com), and falling behind on loan payments can seriously damage your financial stability. You can read more about options for paying for college or repaying student loan debt here.

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