The Definitive Guide to Student Loans

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These days, the majority of college students leave school (with or without a degree) with student loans. While you can take steps to reduce your need for student loans, you may not be able to avoid them.

And that’s OK, as long as you know what you’re getting into.

So whether you’re a student or a parent, this guide to student loans can help you learn about the types of student loans, the process of applying for student loans, dealing with student loans after graduation and more.

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Student Loans: Who Needs Them?

If you keep up on the news, you know that federal student loans are turning into something of an American crisis. According to the Chronicle of Higher Education and the American Student Assistance Organization, about 60 percent of students borrow to cover their college costs each year. In 2012, the average student loan balance across age groups was $24,301, with about 25 percent of borrowers owing more than $28,000.

The problem isn’t that people are borrowing. The problem is that they’re often borrowing beyond their ability to repay. According to a recent article from The Atlantic, nearly 13 percent of students who started paying their loans back in 2009 had defaulted within three years.

These statistics shouldn’t lead you to assume that student loans are a bad thing. But they should make you think twice about the student loans you, as a student or a parent, take out for college.

The key is to make sure you thoroughly understand each student loan before you sign on the dotted line.

Types of Student Loans

To better cater to the variety of needs out there, the federal government offers many types of student loans. There are also private loans, which can sometimes help fill gaps if you can’t get enough in federal loans to cover your schooling.

Before you take out any loans, be sure you understand how the loan works, including the interest rate, when repayment begins, and what your future repayment options will look like.

Private Student Loans

Private student loans are loans that you take out directly from a bank. Because they aren’t backed by the federal government, rates tend to be higher, and the loans tend to be less flexible.

Also, you may need good credit, or a co-signer with good credit, to get a private loan. Many federal loans don’t take credit into account, or do so only for those who have an adverse credit history, meaning you have an account more than 90 days late in the past five years.

Private loans often require you to make payments while you’re still in school and can come with variable interest rates of 18 percent or more. Depending on the loan, private student loans may not have other benefits that federal student loans do.

For instance, private loans may not offer repayment options, including deferment or forbearance, and they may have prepayment penalty fees.

In short, private student loans are rarely as good as federal student loans. You really have to shop your options here to make sure you aren’t signing up for debt you won’t be able to pay.

But if you need a couple grand to fill in the gaps (for instance, I used a private student loan to study abroad one semester), you can shop around for private loans.

Federal Student Loans

Federal student loans are made by the federal government, though they can come through a variety of servicers. Different servicers can offer slightly different products, but, for the most part, they all offer the same benefits.

Federal student loans feature low, government-controlled interest rates (though these rates are subject to change annually) and a variety of repayment options. Once you start paying off federal loans, you can also write off interest payments on your taxes.

The federal government offers a variety of student loans, some of which come with an annual or lifetime limit, and some of which are based on financial need. Federal student loans are written through one of two programs: The William D. Ford Federal Direct Loan Program (the larger of the two), and the Federal Perkins Loan Program.

Here are the basics of the types of loans available through these programs:

Direct Subsidized Loans: These loans are made based on financial need for eligible undergraduate expenses. The U.S. Department of Education pays the interest on these loans as long as you’re in school at least half-time, during a six-month grace period after you leave school (or drop to less than half-time enrollment), and during deferment periods.

The current interest rate on subsidized loans (for loans disbursed between July 1, 2013, and June 30, 2014) is 3.86 percent. The loans also require a 1.051 percent origination fee, which is deducted from each disbursement.

Direct Unsubsidized Loans: These loans are available to graduate and undergraduate students regardless of financial need; how much you can borrow depends on the whole of each school’s financial aid package. So if you get fewer scholarships at School A than School B, you would be eligible for more unsubsidized loans at School A.

With an unsubsidized loan, you are responsible for paying the loan’s interest. You aren’t required to pay the interest during school enrollment, your six-month grade period, or deferment/forbearance periods. But interest will continue to accrue and will be added to the principal of your loan.

(Below we’ll talk more about what this does to your loan amounts and total interest.)

Current interest rates (for loans disbursed between July 1, 2013, and June 30, 2014) for unsubsidized direct loans are 3.86 percent for undergraduate students and 5.41 percent for graduate students. This loan, too, requires a 1.051 percent fee, which is deducted from each disbursement.

Direct PLUS LoansThese loans are specifically for graduate and professional students or parents of dependent undergraduate students who are enrolled in school half-time. Unlike the other two Direct Loan options, which aren’t dependent on the student’s or parent’s credit history, the PLUS loan does take credit into account.

If you have an adverse credit history, which means payments 90 days or more late within the last five years, you may need to get an endorser (essentially a co-signer) or documentation that negates your negative credit report.

Also unlike the other Direct Loans, the PLUS loan enters repayment as soon as the loan is fully disbursed. Graduate and professional students can choose to defer payments as long as they are enrolled in school at least half-time and for a six-month grace period after this point.

Parents may request deferment if their child is enrolled half-time and for six months afterward. At no time can parents transfer the loan to the student. Though in some families, students eventually help make payments for PLUS loans, the parent who signed the promissory note is ultimately responsible for paying the loan.

As with the unsubsidized loan, any interest that is unpaid at the end of the deferment period will capitalize and be added to the balance of the loan.

The current interest rate for Direct PLUS loans is 6.41 percent, with a 4.204 percent loan origination fee, which is deducted from the loan disbursement.

Perkins LoansPerkins Loans are also federal loans, but they’re run through individual schools. These loans are only available to students with “exceptional financial need,” and charge 5 percent interest and no extra fees.

If you think you may be eligible for a Perkins loan, talk to your school’s financial aid officer.

Student Loan Limits

Student loan limits change from year to year and are different depending on what year of college a student is in. Typically, the further along in school a student is, the more loans the student can take out. Here are the current (as of August 2013) limits for federal student loans:

School Year
Dependent Students (except those whose parents can't get PLUS loans)
Independent Students (including dependent undergraduates whose parents can't get PLUS loans)
1st Year Undergraduate$5,500 Total; No more than $3,500 subsidized$9,500 Total: No more than $3,500 subsidized
2nd Year Undergraduate$6,500 Total; No more than $4,500 subsidized$10,500 Total; No more than $4,500 subsidized
3rd Year+ Undergraduate$7,500 Total; No more than $5,500 subsidized$12,500 Total; No more than $5,500 subsidized
Graduate/ProfessionalN/A $20,500 (all unsubsidized)
Aggregate Loan Limit$31,00 Total; No more than $23,000 subsidized$57,500 Total (undergraduates); No more than $23,000 subsidized

$138,500 (graduate/professional) Total; No more than $65,500 subsidized (includes all federal loans for undergraduate study, as well)

Using a Combination of Loans: Many students and their families require a combination of loans for schooling. Sometimes, for instance, parents want to be responsible for paying for part of the schooling, so they take out Parent PLUS loans.

Other times, a student may qualify for some subsidized loans (based on financial need), but not enough to cover the gap between college expenses and non-loan financial aid. In this case, students often wind up with a combination of subsidized and unsubsidized loans.

The table above tells you how much a student can take out in combination loans for each year of schooling, as well as for overall schooling, from undergraduate through to graduate education.

Other Common (and Not-So-Common) Financing Options

There are about as many ways to finance an education as there are to finance anything else. But that doesn’t mean that all options are excellent options. While federal student loans have gotten a bad reputation in recent years, they’re still typically the most flexible and lowest-interest option for financing an education.

Other ways to finance school-related expenses include home equity loans, credit cards, state financing options (which are often quite good and worth looking into), and peer-to-peer lending sites.

These options, with the exception of a home equity loan, typically carry a much higher interest rate than a student loan. Also, none of these options will offer the repayment flexibility of a student loan.

In nearly all cases, if you must get a loan for school, federal student loans are your best bet. Start there before looking into private loans or less orthodox manners of financing school.

Applying for Student Loans

To apply for private student loans, you’ll have to go to the lenders. Applying for these loans is similar to applying for any other loan, such as a car loan or unsecured personal loan, which is essentially what private student loans are.

Applying for federal student loans is a bit different. The process isn’t complicated, but you need to begin early. Here’s how you apply for federal student loans:

1. File your taxes. The government’s student loan application (the FAFSA) asks for detailed income information from the student and, if the student is a dependent, the student’s parents. You need to have your tax returns completed so that you have this information available.

If you’re filling out the FAFSA for the 2013-14 school year, you’ll need your 2012 tax return(s). If you electronically file your taxes, you may be able to automatically transfer tax information to your FAFSA.

2. Fill out the FAFSA. The Free Application for Federal Student Aid is your first step in applying for student loans. Because some grants and loans are allotted on a first-come, first-served basis, you’ll want to fill out the FAFSA as early as possible. (Here are the deadlines to file the FAFSA.)

You’ll have to fill out this form each year you’re applying for grants and/or loans, and you’ll have to have your completed income taxes in hand to fill out the form.

3. Review your Student Aid Report (SAR). This report should come to you within four weeks of filing your FAFSA, though if you file online, you’ll get it much sooner than that.

Your Student Aid Report is basically a way for you to double-check that all the information entered in your FAFSA is correct. And you will want to double-check. Getting something wrong on your FAFSA could have serious financial ramifications.

The SAR contains the number known as your Expected Family Contribution (EFC). We’ll talk more about this in a minute, but for now know that the EFC isn’t the dollar amount you’re expected to contribute for schooling, nor is it the amount of aid you’ll get. It’s a number the schools to which you’ve been accepted will use to determine your financial need.

It’s confusing, but we’ll straighten that out in a second.

SAR Example

Once you’re satisfied that everything on your SAR is correct, you wait again.

4. Review your award letter(s). When you fill out the FAFSA, you’ll tell the government to send your SAR to any schools in which you’re interested. (Usually, at this point, you will have been accepted, or are deep in the application process, at least.)

Each school will review your SAR and send you an award letter, detailing the type of aid you would get for that year if you went to that school. Comparing award letters is one way to choose between colleges, if you’re still deciding where to go.

Below, you’ll see a sample award letter for a student who qualifies for quite a bit of non-student-loan aid, like work study and a Pell Grant. But this student also has the option to fill in the gaps with student loans.

Award Letter

This same student could get wildly different award letters from different schools.

5. Make your choice and sign any promissory notes. You’re certainly not required to take all – or even any – of the student loans for which you’re eligible. Start by accepting any scholarships, grants, or work-study available to you. Then, see how much you’ll still need and whether you’ll need student loans.

When you’re accepting loans, always start with subsidized loans. (Shortly, we’ll show you how these loans save you a lot in the long run.) After that, take what you need in unsubsidized loans.

It’s tempting – and easy – to take the maximum loan amount just because you can. But it’s wiser to take only what you need in student loans, leaving you with a whole lot less to pay back after graduation.

Once you’ve decided how much you need, you’ll have to sign promissory notes for your loans. These notes make you responsible for paying off the loan, so be very sure that you understand all the terms and conditions before you sign.

Depending on your school, you’ll either adjust loan amounts (if necessary) and sign the promissory note online or through a paper note.

6. Apply for additional loans, if necessary. If you or your parents need to apply for additional Parent PLUS or private student loans, now is the time to do it.

Talk to your school’s student aid office about applying for a PLUS loan. You can also find out more here.

To apply for private loans, you’ll need to talk directly to lenders. Private student loans can be disbursed directly to the school (though this isn’t always the case), but they aren’t administered through the school’s financial aid office.

How Student Loan Eligibility is Calculated

At this point, you’re probably wondering how the school comes up with your aid package. Parts of your aid package, including school-based scholarships, may be merit-based. But how do schools determine who needs all those need-based grants, work-study opportunities, and loans?

Basically, student aid eligibility is calculated by your school’s financial aid office feeding a bunch of numbers into a complex equation. Here are the basics of how it works:

First, your school comes up with its Cost of Attendance (COA) for that year.

The COA includes tuition and fees; the cost of room and board (or estimated living expenses for students who live off campus); the cost of books, supplies, transportation, loan fees, and other expenses; any costs related to certain study abroad programs; disability-related costs; and an allowance for child care or other dependent care.

A school’s COA involves more than tuition because student aid can be used to pay for basic living expenses, especially for full-time students.

Next, the school looks at your Expected Family Contribution (EFC). This index number involves your family’s income, assets and benefits, as well as family size and how many family members will be in college or trade school during that school year.

If you want to know more about how the EFC is calculated, check out this worksheet, which goes into detail about the EFC calculation for the 2013-14 school year.

To determine financial need, the school subtracts your EFC from the school’s COA.

(So, Financial Need = Cost of Attendance – Expected Family Contribution)

This means that the more expensive the school, the higher your financial need will be, since your EFC doesn’t change, regardless of which school you apply to. Your financial need number will determine how much need-based aid you can get.

Need-based aid includes the Federal Pell Grant, Federal Supplemental Education Opportunity Grant, Federal Perkins Loan, and Federal Work-Study eligibility, as well as the Direct Subsidized Loan.

If you’ve been awarded some financial aid, including scholarships and grants, the school will then determine your non-need-based aid. Basically, the gap between the Cost of Attendance and your need-based aid is your non-need-based-aid, which includes the Direct Unsubsidized Loan, Federal PLUS Loan, and Teacher Education Access for College and Higher Education Grant.

Note: There are smart (and perfectly legal) ways to maximize your need-based aid. If you’re interested in these options, particularly if you’re dealing with lots of assets, check out this article on maximizing your financial aid opportunities.

Calculating the Future of Your Student Loans

If you’re tempted to take out the maximum student loans for which you’re eligible, take some time to figure out how much these loans may cost you.

Even if student loans are a necessary piece of getting a college education, you’ll want to avoid sticker shock by understanding what they’ll cost. You can check out student loan calculators from the Department of Education here.

But let’s look at a few examples, to give you an idea of the magnitude of what you might be signing up for.

Example One

Student loans disbursed between July 1, 2013, and June 30, 2014, will have a fixed interest rate of 3.86 percent. If you take out a $5,000 Subsidized Direct Loan, your future standard payment will be about $50.29 per month.

In this case, it will take you 10 years to pay off the loan, and you’ll pay about $1,034.86 in interest.

Example Two

Let’s say you take out that same $5,000 at 3.86 percent on an Unsubsidized Direct Loan. In this case, your unpaid interest will continue to accrue monthly and capitalize (be added to the principal) annually.

If you defer payments on this loan for 54 months (four years of school, plus your six-month, post-graduation grace period), when you enter repayment, your loan’s principal will be $5,943.

If it takes you 10 years to pay off the loan, at a standard payment, your payment will be about $60 a month. But you’ll pay $2,187 in interest over the life of the loan.

Example Three

Now take that same Unsubsidized Loan, and make interest payments during your deferment period (i.e. while you’re in school and during your grace period after school).

The interest payments would be about $16 per month. When you entered repayment, you’d start out with a $5,000 loan because none of the interest will capitalize.

In this situation, you’d pay $878 in interest during your 54-month deferment period, and your monthly payment after deferment would be $50 a month.

Now, the $10 a month savings isn’t much, but over the life of your loan, you would pay $1,924 in interest, saving about $263 over the life of your loan.

Sure, $263 isn’t all that much money. But multiply that by three or four loans of equal size over your college career, and you’re talking significant savings by simply making small interest payments while you’re in deferment.

The point here is that you should, A) understand exactly what you’re getting into when you take out a student loan and, B) understand the benefits of taking subsidized loans and paying accrued interest on your unsubsidized loans.

Before you sign a promissory note, run the numbers through a calculator (this one lets you track capitalization on unsubsidized loans) so that you’re aware of the commitment you’re making.

Keeping Track of the Paperwork

When you’re fresh from high school and tackling the world of lending for the first time, you’re probably not the most organized person. I know I wasn’t as a college freshman (or sophomore, or junior, or senior).

So figure out an organization system for all that student loan paperwork. Chances are good that a lot of your paperwork, including promissory notes, will be online.

You don’t have to go crazy with color-coding and special files. Just keep two folders – a physical one for actual paperwork and a digital one for computerized paperwork. Whenever you get anything student-loan related, put it into one of those folders.

Then, when you graduate, organize your paperwork so that you’ll know when you’ll start repaying your loans, how to repay them, and how much you’ll be paying.

My loan servicer’s information looks like this:

View Loan Details

What if You Lose Your Paperwork?

Lenders are generally pretty good at tracking you down when it’s time to start repaying your student loans. But you can run into trouble if you and/or your parents move.

After college, I moved two or three times within a year, and my parents, whose address I had used when I applied for all those loans, also moved. This made it difficult to get all the student loan mail together. I did eventually start repaying my loans, but figuring out when and how to do that was frustrating.

That’s why I wish I’d known about this nifty website: the National Student Loan Database.

If you suspect you’re missing some important student loan paperwork, or if you have no idea who is servicing your student loans, you can go here to figure it out.

You’ll need to use your Social Security number, last name, date of birth, and Department of Education PIN to access your student loans. If you forget your PIN, you can easily find your PIN or create a new one here.

Here’s what you’ll see when you access your loans. This is an outline of my student loans. (And, no, I won’t tell you how much I owe! Except the ones that have a $0 balance, because those zeros make me happy.)

Financial Aid Review

The above image is the first thing you should see when you access your student loan database. This is an overview of all your loans, including how much you qualified for (Loan Amount), how much you used (Disbursed Amount), how much you canceled, how much principal is outstanding, and how much interest is outstanding.

It also gives you the (probably very depressing) totals of your outstanding principal and interest.

To get more details on a particular loan, click on the blue number to the left of the loan. Then, you’ll get a screen that looks similar to this:

Loan Detail

As you can see, the loan detail gives you the servicer and also lets you know what your loan status is. As long as it says “grace period” for the current date, you don’t have to make payments. (Unless you’re required to make minimum interest payments during this period, but that’s pretty rare.)

You can contact the loan servicer to figure out when you’ll have to make payments, how much those payments will be, and any alternative payment options that might be available to you. With most servicers, you can go to the website and create an online account using your Social Security number and other identifying information. This is the quickest and easiest way to access more details on your loan.

If you’d like to know more about your loan’s interest rate, repayment terms, etc., try logging in to the servicer’s website. This information is usually easily accessible there. This is the information that my loan servicer shows about one of my loans.

(This particular servicer holds the majority of my many loans, and I make one monthly payment that’s automatically divided between them.)

View Loan Details

If you still can’t find the specific information you’re looking for with a federal loan servicer, give them a call. You may wait on hold for a while, but customer service is generally pretty good. (At least in my experience.)

Note: Private student loans do not show up in the National Student Loan Database. So it’s especially important that you keep track of private loans on your own. Again, lenders are good at tracking you down, but your life is easier if they don’t have to.

When Your Student Loan Moves

Sometimes, student loans will be shifted from one servicer to the next. Typically, this doesn’t change anything, although some servicers do offer some extra benefits, like reduced interest with a certain number of consecutive on-time payments.

If your loan moves to a new servicer, you’ll get a mailed notification, and sometimes an email notification, too.

Both of my loan servicers switched over the summer, and it was generally not too bad. However, I ended up locked out of my online account for one loan for several days, which meant that I made a payment a few days late. If this happens during a loan transfer, contact your new loan servicer as soon as possible. Let them know why your payment was late, and they’ll likely let you off the hook without any late fees.

Entrance and Exit Counseling for Student Loans

Before your loan is disbursed, you’re supposed to go through entrance counseling, which tells you all the terms and conditions of the loan, sample monthly payments and repayment options. Entrance counseling also talks you through the consequences of defaulting on your loan and goes over your rights and responsibilities as a borrower.

Exit counseling is similar, but it will talk you through the terms of your loan, including your standard payment and alternative payment options (like extended or graduated) that may be available to you.

Both entrance and exit counseling often occur online these days, with a short, interactive course that you have to go through before you can sign the promissory note or start repaying your loans. Some colleges offer more in-depth entrance and exit counseling programs, which may also talk about overall money management topics.

You’ll probably do exit counseling shortly before graduation, or shortly after you drop below half-time enrollment status, if you stop taking a full course load. It’s not a big deal and usually doesn’t take long. But it’s important to pay attention during exit counseling because it tells you what to expect with the future of your student loan.

Paying Back Your Loans

The thing about student loans is that you have to repay them – eventually. The terms of your loan will determine when you start repaying your loans.

With PLUS loans, you typically begin repayment as soon as the loan is disbursed in full, though these loans do have some deferment options. With Direct Subsidized and Unsubsidized loans, you can typically avoid any payments as long as you’re in school at least half-time and for six months afterward.

One thing to note: with most loans, if you drop below half-time enrollment for long enough to start repaying your loan, but then later go back to school at least half-time, you can put your loans back in deferment.

But you’ll have to contact your lender to do this. Lenders will automatically put your loan into repayment six months after you drop below half-time enrollment, but they won’t automatically put your loans back in deferment if you go back to school.

Making Payments During School

While the majority of federal student loans don’t require you to make payments while you’re in school at least half-time, it’s not a bad idea to make payments during school if you can. Even small payments can make a big difference, as you saw in the examples above.

If your loan doesn’t require you to make payments while you’re in school, you can simply make the payments when you can. So if you come into some money one month, you can kick some of it toward your student loan, without obligating yourself to continue paying the next month.

Federal Loan Repayment Options

Private student loans sometimes have flexible repayment options, but you’ll have to negotiate with your lender directly. Federal loans, on the other hand, come with a host of built-in repayment options. These repayment plans are meant to make it possible for former students to repay their loans without going bankrupt in the process.

Federal loan repayment plans include:

Standard Repayment: With this plan, you’ll pay off your loan within 10 years, making payments of at least $50 per month.

Graduated Repayment Plan: Operating under the idea that you’ll start out making less money but will earn more later, this plan starts with lower-than-standard payments, and gradually increases payments every two years. This plan still pays off your loans within 10 years.

Extended Repayment Plan: This plan allows for even smaller payments than the graduated repayment plan, and lets you pay off your loans over a period of up to 25 years.

Income-Based, Pay-as-You-Earn, Income-Contingent, and Income-Sensitive Plans: As you might guess, all of these plans are somehow based on your income. Each plan takes your income into account in a slightly different way, but if you aren’t earning much money, they often represent the most affordable repayment options. You can learn more about the specifics of these plans from the Department of Education website.

Deferment and Forbearance: If you’re in real financial trouble, or if you return to undergraduate or graduate school, you can put off payments with deferment or forbearance.

In general, if you can make standard payments, you should. Standard payments will help you pay off your loan more quickly and you’ll pay less interest over time. Typically, graduated payments are the next-best option, because they also pay off your loans relatively quickly.

Just to get an idea of how much you’ll be looking at monthly and interest-wise, let’s run a scenario to look at different student loan repayment terms.

The following chart is what Joe could pay under different student loan repayment terms. Joe has a total of $30,500 in student loans to repay (including capitalized interest on his unsubsidized loans), and his current Adjusted Gross Income is $35,000.

(Keep in mind that these are merely estimates and may be different according to your situation.)

 
Total Monthly Payments
Monthly Payment
Total Interest Paid
Total Paid
Standard Repayment120$307.35$6,382.02$36,882.02
Graduated Repayment120$171.80 (Starting)
$515.40 (Ending)
$7,959.68$38,459.68
Extended Fixed Repayment300$159.31$17,293.38$47,793.28
Income-Based Repayment153$228.00 (Starting)
$352.70 (Ending)
$10,305.19$45,305.19
Income-Contingent Repayment160$219.90 (Starting)
$273.81 (Ending)
$9,047.67$39,547.67
Pay-As-You-Earn192$152.04 (Starting)
$307.35 (Ending)
$12,185.12$42,685.12

As you can see, some loan repayment options let Joe pay a lot less on his student loans, which is much better than defaulting on his loans. But, the lowest-payment options also mean that Joe pays more interest; he’d pay nearly three times as much interest under the highest-interest-paid plan compared with the lowest-interest-paid plan.

You should know that just because you start out with one particular repayment plan doesn’t mean you have to stick with that plan. You can switch repayment plans at any time.

So if you can start out making standard or graduated payments, do it. Then, if you fall onto hard times later, you can adjust to a lower-payment plan. On the flip side, if you need to start out with lower payments, choose a plan you can afford. Later, if you’re earning more, you can switch back to a higher-payment plan that will pay off your loan more quickly.

Should You Consolidate Your Student Loans?

If you take out student loans all through college, you’ll likely graduate with a list of loans about as long as your arm. (For evidence, see my list of student loans – taken out over six years of college and not including a private loan – above.)

Because most students use a combination of loans, it’s not unusual to have loans with multiple servicers and for each servicer you work with to service multiple loans.

(For instance, I have one loan with American Education Services and five with FedLoan Servicing.)

This isn’t really a problem, but different loans with different repayment statuses, different interest rates and separate payments can get annoying.

Because of this, many students choose to consolidate their student loans. With consolidation, one new lender, which you may be able to choose, pays off the individual loans held by other lenders. Then, you have one, single student loan to repay.

Typically, consolidation loans come with a repayment term of up to 30 years, which means they have a lower monthly payment than the total payments you were making before. Plus, when you consolidate your loans, you only make one payment each month, which does simplify things.

Another advantage of consolidating your loan is that you get a fixed interest rate for the life of your loan. Most federal student loans have a capped variable interest rate. While your rate can’t exceed (currently) 8.25 percent, it may fluctuate from year to year. When you consolidate, you get a locked-in interest rate for your new consolidation loan.

The locked-in interest rate is a good thing if rates trend upward. You’ll save money because you’ll pay less in interest than you otherwise would have. But if interest rates trend down, you’ll be stuck with the higher interest rate.

Another potential problem with consolidation is that once your loan is consolidated, you may lose some benefits that individual loans would have had. For instance, you might lose the option for loan forgiveness that some of your loans carried.

Finally, consolidation loans will take longer to pay off, unless you make payments above and beyond the monthly minimum payment. The longer you take to pay off the loan, the more interest you’ll pay over the long run. And if you’re consolidating a lot of student loans, the difference in interest paid can be significant.

Whether you consolidate your student loans is really a personal choice. Look into interest rates and be sure that you understand what loan benefits you might be losing if you choose to consolidate your loans. Then, make the choice that’s the best fit for your financial situation.

Loan Forgiveness Programs

Individuals in certain fields may qualify for the Public Service Loan Forgiveness Program. The PSLF Program is meant to encourage people to enter into full-time public service jobs. Consider loan forgiveness a financial bonus of these often taxing and sometimes low-paying careers.

To qualify for the PSLF Program, you must first make 120 on-time, full, monthly payments on your Direct Student Loan. Those payments don’t need to be the full standard repayment amount (since that would have your loans paid off in 120 payments, anyway). They just need to be paid under a qualifying federal student loan repayment plan.

During the time you’re making these 120 payments, you must be working full-time at a public service organization. A “public service organization” is defined as “a federal, state, or local government agency, entity, or organization, or a not-for-profit organization that has been designated as tax-exempt by the Internal Revenue Service under Section 501(c)(3).”

The federal student aid website also says that non-tax-exempt employers may count if they qualify as a public service organization by providing one of the following public services: “emergency management, military service, public safety, or law enforcement services; public health services; public education or public library services; school library and other school-based services; public interest law services; early childhood education; public service for individuals with disabilities and the elderly.”

Obviously, it takes quite a bit of time to qualify for this loan forgiveness program. But you can start tracking your eligibility with this form as you’re making student loan payments.

Some private and public organizations have their own loan forgiveness programs for faithful employees, as well. Check with your employer to see if such programs exist at your place of work.

When You Can’t Pay Your Loans

According to recent statistics, around 7 million student loan borrowers are in default on a federal or private student loan, and about a third of Federal Direct Loan Program borrowers lower their payments through alternative loan repayment programs.

So if you get into a pinch and can’t make student loan payments, know that you’re not alone. Loan servicers deal with this every day, and they’ll work with you.

Next, you should know that you’re probably not getting out of repaying these loans. Unless you qualify for a loan forgiveness program or, heaven forbid, become permanently disabled, you will eventually have to pay back these loans. Unlike regular consumer debt, student loans can’t be discharged through bankruptcy.

So it’s in your best interest to figure out how to deal with your student loans as soon as possible.

The first step to take as soon as you realize you can’t manage a student loan payment (even if you can still make a partial payment) is to contact your lender. As I said, lenders work with heavily indebted former students every day.

They’ll be able to give you options, hopefully options that won’t result in hefty late fees and annoying debt collections calls.

Applying for Deferment or Forbearance

When you contact your lender, ask about deferment and forbearance options.

You’ll be able to put your loans back into deferment – the state they were in before you started repaying them – if you become unemployed, go into the military, attend graduate school, or pursue a degree even part-time.

During deferment, unsubsidized loans still accrue interest, but there’s no set time limit on deferment. As long as you meet the requirements, you can continue to defer payments.

If you can demonstrate financial hardship, your lender may forbear your loan payments. In this situation, you won’t have to make payments for up to 12 months (and if hardship continues, you can re-apply for forbearance), though interest will still accrue.

Other Options

If you don’t qualify for deferment or forbearance, or if you’ve used up your forbearance time, talk to your lender about more-affordable loan repayment options. These options could bump your monthly payment down to $10 a month, depending on your income, household size, and total debt load.

Another option if your loans are late is consolidation. Again, consolidation will pay off all your debts with one larger, longer-term debt. This can get your debts out of default, since it pays them off, and can give you a lower, more manageable payment.

One other option is to talk to your lender about loan rehabilitation. If you’re in default on your loan and consolidation isn’t the best option for you, your lender can help you set up a payment plan you can afford. Once you make nine months’ worth of on-time payments, the lender will clean your defaulted status off your credit history.

This is a great way to reboot your credit after you default on a student loan.

Student Loans and Taxes

The federal government offers a variety of education-related tax credits to students, including the American Opportunity Credit and the Lifetime Learning Credit. These credits, though, have to be taken while you, your spouse, or a dependent are in school.

When you’re done with school and are repaying federal student loans, you should be eligible for another tax benefit: the student loan interest deduction.

To qualify, you’ll have to meet all of these criteria:

  • You paid interest on a qualified student loan during the filing year.
  • You’re legally obligated to pay interest on that student loan. (i.e. Your parents can’t take a deduction for interest paid on a loan that’s in your name, even if they did make those payments.)
  • You’re not married, filing separately.
  • Your modified adjusted gross income is less than an amount that changes annually.
  • You and your spouse, if you’re filing jointly, aren’t claimed as dependents on another person’s return.

If you meet all these qualifications, you can deduct the amount of interest you paid on any qualifying student loans, even if you don’t itemize your taxes. Your student loan servicer should track how much you’ve paid in interest over the year, and will either mail you the necessary form or give you access to it through your online account.

The form for deducting student loan interest looks quite a bit like a W-2, with numbers in different boxes. If you have someone prepare your taxes for you, take these forms from all your student loans (and your spouse’s, if you’re married filing jointly) with your other tax forms.

If you’re preparing your own taxes, your tax form (or tax preparation program) will walk you through how to deduct student loan interest.

You’re paying student loan interest, so be sure you don’t miss this potentially valuable deduction!

Resources

If you still have questions about student loans, feel free to ask away in the comments section. We’ll do our best to answer all questions in a timely manner.

If you prefer to search out information on your own, the following resources might be of help to you:

Published or Updated: April 3, 2014
About Abby Hayes

Abby is a freelance copywriter and blogger who writes on everything from personal finance to health and wellness. She spends her spare time bargain hunting and meal planning for her family of three.

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