From Private to Federal Loans: Here’s Everything You Should Know About Student Loans Including Forgiveness
by Kaitlyn Ranze
The impact of student loans is so devastating, Steve from Blue’s Clues came out of retirement to console millenials over it. After all, as of last year, the average American student graduated with $38,792 in debt and the country’s total outstanding loan balance is now at an all-time high of almost 1.7 trillion dollars. Unfortunately, one out of every seven adults has some sort of education-related credit problem.
Whether you’re the loved one paying down these loans or still searching for the best options to pay for education yourself, let’s break it down!
What is a Student Loan?
Student loans are a necessary evil for most college students. Used to pay tuition, books, and other expenses while studying, a student loan is borrowed money disbursed either by your school’s financial aid office or a private lender. Both insitutions help pay for school with the expectation that you’ll pay that money back in the future. Luckily, there are ways to offset how much student debt you take on and how you manage the loans. We’ll get into that later, but first, let’s break down the basics.
A student loan is like a student credit that must be repaid after the student’s education is complete. The thing is, there are terms (fees) that you have to pay and often they start piling up as soon as you take out the loan – not when you graduate.
What to know before accepting any student loans
First, there are two student loan types: federal student loans and private student loans. Here’s how they stack up.
Federal student loans
In an effort to make college more affordable, the federal government offers students loans disbursed through university and college financial aid offices.As a result, more than 85 percent of undergraduates receive federal student aid, according to the Department of Education.
Federal student loans typically offer lower interest rates.
According to Education Data, the average federal loan interest rate since 2006 is 6.05% and undergraduate interest rate 2.75%. As opposed to the overall average private student loan, interest rates generally range from 6% to 7%, reaching as high as 12.99%. This can and will save you oodles if you can secure the private loans through your FAFSA application.
Hold up. Not sure how interest rates impact student loans?
What’re interests rates
Well, an interest rate is what you pay over the life of the loan. Think about it as a percentage of the balance that you owe each month.
According to Investopedia, “The interest rate is the amount a lender charges a borrower and is a percentage of the principal—the amount loaned.”
Let’s work out some math as an example:
If Joe borrows $5,000 for a semester of classes (the principal) and pays 6% interest over a 10-year term, he’ll have paid $1,661.23 in interest alone, plus the $5,000 principal. Drop the interest to 3% and it’s $793.64. In these cases, it’s clear that a lower interest rate saves you in the long run. The thing is, not all student loans have fixed interest rates.
Fixed, adjustable, and graduated repayment terms in student loans
Fixed-rate student loans
Fixed student loans have a fixed interest rate that remains the same throughout the whole term or time period you are repaying the loan, until you pay off the loan in full. The student loan terms for these can range anywhere from 10 years to 30 years depending on what type of student loans you take out.
Adjustable-rate student loans
Adjustable student loans, on the other hand, have a payment that will fluctuate through time as interest rates change. What could save you today (because interest rates are down right now) might cost you later as interest rates rise.
Graduated student loan repayments
Graduated student loans start off with a lower payment that increases over time, assuming that your pay will gradually increase as well as what the lender assumes as your ability to pay off the student loans.
But that’s not all you need to know.
Unsubsidized versus subsidized federal student loans
With an unsubsidized student loan, interest begins accruing as soon as the loan is disbursed. That means the loan you take out freshman year starts accruing interest immediately, while you’re still in school. With a federal subsidized student loan interest is paid by the Education Department. That’s why it’s best to exhaust any subsidized loans you’re offered before taking out unsubsidized loans.
Your interest rate will depend not only on which type of loan you take out but also when during college (undergraduate versus graduate) you take them. It also matters whether or not it’s subsidized by the government or unsubsidized.
Make sure you understand how interestinterests rates affect both long-term and short-term costs before signing on that dotted line. After all, fixed student loan repayments after you graduate average $393 a month and can impact your long-term financial goals like home buying.
Need help calculating interest? Nav.it has built-in calculators to help you estimate the costs of the loan and how quickly you can pay them off.
But interest isn’t the only thing to consider before signing up for federal student loans.
Federal student loans may also charge origination fees.
Federal loans typically are the best, easiest option in terms of percentage rates, but they’re are other things to consider.
Meet the origination fee of federal student loans.
Your lender, including the federal government, may charge an origination fee for processing your loan. This means the amount you may receive at the beginning of the semester may be slightly lower than the amount you accept.
Origination fees aren’t one-time fees either. Every semester that you add a new loan to your student debt balance, you pay a new origination fee.
To summarize, this means you’re responsible for the principal amount you borrow, also the interests, AND the origination fees. It’s beginning to add up, right?
What if you go the private route for your student loans?
Private student loans
Private student loans are offered by private-sector lenders like Sallie Mae, Discover, and Earnest to supplement not replace federal student loans.
Why would you need a private student loan if the government is willing to carry some of the costs?
Federal lenders have limits on how much you can take out. While costs of colleges continue to climb, students and borrowers take out a loan with a private lender because they don’t have access to enough or any federal loans or they made a mistake with their FAFSA.
Applying for private student loans
You can apply for private college loans directly from each lender’s website. Be sure you apply for loans only after you’ve made your decision on school and know how much you need to borrow.
What to know about private student loans
Many private lenders don’t actually charge origination fees. Instead, look for “application fees” and “disbursement fees”. The fees, likely based on a percentage of the total loan amount, will be set in your promissory note – your student loan contract. Disbursement and application fees are also typically deducted from your loan before it’s sent to your bank account at the beginning of the semester, so budget accordingly.
To reiterate a previous point, private student loans will likely cost you more than federal student loans. Why? Interest rates. Even though private may not charge fees, private lenders tend to recoup their costs by charging more in interest rates, currently averaging 6-7% percent but can go as high as 12%.
Co-signers for a private student loan
Private student loans may also require someone to co-sign your loans. Though private student loans are available without a co-signer, most students don’t have the credit history needed to qualify. Federal loans typically don’t require co-signers.
How to weigh your student loan options:
When you receive a quote from a private student lender, they’ll provide you with an interest rate and an annual percentage rate, or APR. The APR includes the interest rate and any fees assessed by your lender, expressed as a yearly rate. This makes it easier to compare quotes across lenders giving you a better idea of how much you would pay in fees by looking at your APR
Alternatives to student loans
Scholarships are payments awarded to students based on academic achievements or other requirements set by the scholarship sponsor. Some of the most well-known are based on athletic achievements, but businesses and non-profits often dole out scholarships.
Some of the best ways to find scholarships
Contact Your School
The financial aid counselor in your university or college will have a list of awards associated with your campus. If you are still a high school student, you can schedule an appointment with the guidance counselor.
Look into Scholarships from the Employer of Your Parents
Most of today’s large companies provide their employees with tuition reimbursement programs, and scholarships for the children of employees are also very common. Ask your parents to know if these programs are available in their workplace.
3. Use the Internet to Your Advantage
Make the most out of your tablet, laptop or smartphone and start searching online. Check out sites like FastWeb that let you search for scholarships based on region, interests, and course of study.
There’s no such thing as free lunch or college tuition with your employer.
Be aware that each company’s tuition assistance policies are a little different. While some employers are willing to reimburse costs for any course you take, some may only pay for courses relevant to your job. Your employer might also have a hard limit on the costs they will cover, the number of classes employees take, or have a set of guidelines regarding online vs. in-person classes.
Also, look into whether your company is paying for the class no matter how well you perform in it, whether you are required to stay with the company for a set period of time after you complete the course, and whether your employer will pay for it or reimburse you.
What about student loan forgiveness, cancellation, or discharge?
Student loan Forgiveness or Cancellation
If you’re no longer required to make payments on your loans due to your job, this is generally called forgiveness or cancellation.
What’s the tea on federal student loan forgiveness?
We’re not public policy experts, but after a year of empty promises from the government, we’re not counting on widespread relief from student loans.
All is not lost for everyone. You may be eligible for special programs for student loan forgiveness if you’re a teacher or public service worker. Take for example Teacher Loan Forgiveness Program.
If you teach full-time for five complete and consecutive academic years in a low-income school, you may be eligible for forgiveness of up to $17,500 on your Direct Loan or FFEL Program loans.
Public Service Loan Program
Certain fields like social workers or anyone working at government organizations (U.S. federal, state, or local) are eligible for forgiveness or cancellation through programs like the Public Service Loan Forgiveness Program (PSLF). Sign me up, right? Well, not so fast. The PSLF forgives the remaining balance on your Federal Direct Loans after 120 qualifying payments (estimated over 10 years). Work for a not-for-profit organization that’s tax-exempt? You may also qualify.
The thing is, student loan forgiveness or cancellation is not automatic, so you have to apply for student loan forgiveness after 10 years of student loan payments.
There are other certain tricky conditions like your loans being direct versus a Perkins or Family Federal Education Loan (FFEL) loan.
Student Loan Discharge
If you’re no longer required to make payments on your loans due to other circumstances, such as a total and permanent disability or the closure of the school where you received your loans, this is generally called discharge.
Total Permanent Disability discharge of student loans
In most cases, to qualify for a TPD discharge, you must complete and submit a TPD discharge application, along with documentation showing that you meet our requirements for being considered totally and permanently disabled, to the servicer that assists with the discharge of the loans.
Can you file for bankruptcy with student loans?
Under bankruptcy law, student loan debt is dischargeable in two ways:
Either a student debtor successfully argues that their student loan creates an “undue hardship” or they argue that their student loans wasn’t an “educational benefit” as defined by section 523(a)(8) of the bankruptcy code. In these cases, the debts can be discharged.
Coping with your student loans: Consolidation and Refinancing
What does refinancing your student loan mean?
With student loan consolidation, the total balance of your loans becomes a single new loan with a different payment amount and repayment plan.
Student loan refinancing allows you to refinance your student loans into a new student loan with a lower rate of interest.
More specifically, refinancing your student loan is the process of obtaining a new loan with different repayment terms (interest rate, loan term, minimum payment). You can refinance federal and/or private student loans by getting a new loan from a different lender to pay off your old student loan.
Nav.It translation: Refinancing means that you, as the borrower, are now responsible to repay the new lender and hopefully, at a better interest rate.
Why would you want to refinance your student loan?
Sofie speaks from experience, having paid off $120k in student loans partially through a refinance.
She explains, “Refinancing allows you to adjust your repayment terms with a new lender, which means the interest rate, loan term, and minimum monthly payment requirement may change. The biggest advantage of refinancing your loan is getting a lower interest rate because that can save you a lot of money in the long term!”
Types of repayment plans
There are two main types of student loan repayment plans: income-based and standard. With an income-based student loan repayment plan, your student loan payments will be 10 to 20 percent of your discretionary income (your adjusted gross income minus 150 percent of the poverty guideline for your family size and state). With a student loan standard repayment plan, student loan payments will not exceed 10 percent of your discretionary income.
Are student loans worth it?
That depends on who you ask, when you take them, and what type of degree you’re getting. Students must weigh future salary and career prospects against debt and lost earnings while in school to decide whether a degree is worth the cost.
Education Professor Susan Dynarski explains that while 18% of borrowers with more than $100,000 in student loan debt default on their loans, they’re still only half as likely as those with lower amounts of student loan debt.
Why is that?
Dynarski attributes this phenomenon to borrowers who drop out of two- or four-year schools without finishing their degree. Students that fail to graduate amass smaller debts, but are unable to pay them off as they struggle to find lucrative employment.
Before taking on student debt
Before taking student loans, know that degrees are one of the biggest investments you’ll make, next to houses in expense. So whether you’re new to student borrowing or student loan repayments have kept you up at night, student loans are a necessary evil.
And student loans aren’t something you want to take lightly because student loan debt can stay with you for decades. Still, finding student loans intimidating? Drop a line to a money coach at Nav.it.