5 Things Every Student Loan Borrower Needs to Know

Here are five things you definitely need to know as a student loan borrower.

Have you looked at the cost of attending college recently? The price of tuition and fees has increased, on average, $280 per year for the last decade, according to College Board. That adds up over time, so it’s no wonder many turn to student loans to afford their education.

But now that you’re approaching the end of college — or perhaps you’re already done — it’s time to figure out how you’re going to repay those loans. Before you make a decision about how to move forward, here are five things you need to know as a student loan borrower.

1. The Difference Between Federal & Private Student Loans

The first step in deciding how to pay off your college debt is knowing whether you have federal or private student loans.

Federal student loans are issued by the government. These loans have interest rates set by Congress and come with certain protections and benefits (like income-driven repayment options, deferment/forbearance and loan forgiveness).

Private student loans, on the other hand, are issued by financial institutions. They usually have higher interest rates than the loans you get from the government. Private loans don’t come with the same benefits as federal loans. But some of the best lenders will offer options to borrowers who experience financial hardship.

To simplify the repayment process, you can consolidate all of your federal loans together to make one payment each month. But you can’t include private loans in a federal consolidation.

On the other hand, if you refinance your loans privately, you can include federal and private loans together in one big loan. However, once you refinance your federal loans, you lose those benefits and protections mentioned above.

When I was faced with this choice, I consolidated my federal loans and refinanced my private loans separately. Sure, I made two payments for a while until I paid off the private loans. But this ensured that the bigger chunk of my debt — my federal loans — retained protection.

2. When & How to Enroll in an Income-Driven Repayment Plan

If you can’t afford your student loan payments, there is hope. If you have federal loans, you can set up a repayment plan based on your income.

The government offers income-based repayment plans for different situations. Your payment each month is limited to a percentage of your income. At the end of a set term, if you still have some federal student debt left, the remaining balance is forgiven.

You can’t get income-based repayment for private student loans, however. If you refinance federal student loans privately, you lose access to income-driven repayment options.

Be careful when choosing income-driven repayment, though. A longer loan term and a lower monthly payment can mean that you actually end up paying more than you expected over time. On top of that, there is a good chance that loan forgiveness might come with hefty tax consequences.

There are a number of student loan forgiveness programs that can help you with your student loan debt.

3. How Much You Owe & to Whom

By the time you’re done with college, it’s not surprising if you don’t know exactly how much you owe. Thankfully, this is a simple problem to solve.

The Department of Education will usually assign a servicer to your account. Private lenders usually will, too. Your loan servicer is the middleman between you and your student loan lender. They’re in charge of facilitating payments, making sure the terms of the loan are met and working out a payment plan if you’re struggling to keep up.

Of course, if you have several student loans, you probably also have several servicers. And it’s not always easy to figure out who they are.

To find federal student loan information about what you owe and who services your loan, go to the National Student Loan Data System. Select “Financial Aid Review” and accept the terms and conditions. You will need your FSA ID, but you can create one if you don’t have one yet. Once you’re in, you can see how much you owe, how much you’re paying in interest and how to contact your loan servicer.

When it comes to private student loans, the best way to find out who services them is by checking your credit reports. Your credit report will list all your open accounts. (You can view a free snapshot of your credit report, with updates every two weeks, on Credit.com.)

4. Refinancing Your Student Loans Can Save You Thousands

If you want to save thousands of dollars over the life of your loans, refinancing your student loans can be a solid option. Depending on your credit and income, it’s possible to get a much lower interest rate through refinancing.

Refinancing means taking out a new loan with a private lender to pay off your existing loans. The goal is to consolidate student loans, get a lower rate and/or secure a new repayment term.

The decision to refinance should be made carefully, however. Again, refinancing federal loans with a private lender means forfeiting many government-backed benefits.

Check with different lenders to see what rate you can get if you refinance. Also, consider your eligibility for income-driven repayment. Many high-earning professionals with a lot of student loan debt don’t qualify for income-driven plans. In such cases, it can make sense to refinance privately to take advantage of long-term savings.

5. Extra Payments Can Cut Years Off Your Repayment (& Save You Money)

Finally, making extra payments can help you save more money over time. If you don’t want your student loan debt hanging over your head, you can pay it off faster as your income increases.

Extra payments reduce your principal balance. That cuts down how much you pay in interest and the how long it takes to pay off your debt. Consider refinancing to a lower interest rate, then making extra payments to supercharge your savings and pay off your loans faster.

You can even use a student loan prepayment calculator to see just how much time and money you’ll save.

Student loans are a necessity for most of us. However, they don’t have to prevent you from living a good life. Explore all these options and figure out what is likely to work best for your situation.

Image: Mixmike

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The Weird Way Missing a Student Loan Payment Can Absolutely Destroy Your Credit

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If you have student loans and have looked at your credit reports, you might’ve noticed there are multiple entries for your loans.

That’s because each disbursement can be reported as a separate loan, even if you make just one repayment each month. And while a student may get just one federal loan for the year, it will usually be given to them in two or more disbursements. Multiply two or three disbursements over a four- or five-year period, and those accounts add up pretty quickly.

This reporting can negatively impact student borrowers in two ways when you’re first taking out your loans:

1. When newly reported, each disbursement/loan is considered a new loan, which can mean a slight reduction in your credit score due to the presence of a “new account” each time; and

2. With each new disbursement appearing as a new loan, your ‘average age of accounts’ can remain low and result in a lower score than if the average age were higher.

The Late-Payment Smackdown

That might not be a big deal while you’re in school, and as those accounts age, your credit scores will improve with timely payments. But what if you make a late payment on that one repayment you make each month? Yep, that multiplier effect can hurt you again, and pretty badly. Suddenly that one 30-day late payment shows up as 12 or 15 late payments. Two late payments? Ouch. Your credit scores have probably taken a beating.

“These loans are reported by the bureaus as installment loans with the payment history updated each month,” according to Thomas Nitzsche, media relations manager for ClearPoint Credit Counseling Solutions.

That’s actually a bright spot for student loan borrowers because installment balances don’t have the same scoring impact as revolving balances do in credit utilization calculations (the amount of outstanding debt you have in relation to your available credit). But still, if you’re making late payments, or skipping them altogether, you need to do something, and quickly.

Can Consolidation Help?

Of course, you can avoid the multiplier effect on your credit reports by consolidating your student loans, which will give you just one loan account that shows on your credit reports. But if you’re already making late payments or skipping payments because you’re financially strapped, it’s not going to make much difference if you can’t improve your financial situation. On top of that, before you consider consolidating your federal student loans, it’s good to keep in mind that you will give up some of the freedoms and benefits that these loans offer, particularly if you fall into financial hard times.

Regardless of the types of loans you have, whether public or private, consolidated or not, the single most important factor that will determine how your loans impact your credit scores is your repayment history. So no matter how many loans you have, it’s smart to keep track of them and pay them on time. If you can’t, it’s time to consider the following options.

To Defer Or Not To Defer

If you’re having trouble making your student loan repayments, deferment is a significantly better choice than being late or, far worse, defaulting on your loans because you can’t pay them.

“A deferment will not damage your credit like a default will, but if you default before talking to your lender you could forfeit your ability to defer,” Nitzsche said. “Student loan defaults become most serious after 90 days past due.”

A deferment or forbearance may give you some breathing room while you work to regain your financial footing. Both offer a temporary reprieve on student loan repayments, which is important since student loans are rarely dischargeable in bankruptcy. The key is deciding which option is right for you and understanding the primary differences between them.

In a nutshell, deferment and forbearance are similar in that they both allow you to put your student loan payments on hold, temporarily suspending your minimum monthly payment obligations. If you’ve suffered a job loss or other economic hardship, you may be eligible for a deferment or forbearance through your lender, though eligibility and terms will vary from lender to lender. In general, the time frames for temporary relief on student loans can range anywhere from a month or two to a year or longer.

The main difference between a deferment and forbearance is the interest. In the case of deferments, you may be able to save on interest depending on whether or not your loan qualifies as an eligible government-subsidized loan. If your loan is a subsidized government loan, the interest is subsidized at a much lower rate and in some cases, you may not be charged any interest at all while the loan is in deferment. For this reason, deferments are often harder to qualify for. With forbearance, even though you aren’t obligated to make the monthly payment, you will continue to accrue the full rate of interest on any outstanding loan balance.

If you want to see how your student loan repayments are affecting your credit scores, you can check your two free credit scores, updated monthly, on Credit.com.

Image: elenaleonova

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