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Student Loan Debt

Responsible Borrowing Video

Borrowing Wisely

Attending college is an investment in your future. For many students, part of that investment involves taking out a student loan to meet educational costs. What do you need to consider when borrowing money for college? Make it your goal to finish college owing as little money as you can. Remember, a college education increases your earning power, but don’t jeopardize your future by over borrowing. 

Federal Subsidized and Unsubsidized Loans are considered financial aid, just like a Federal Pell Grant. The difference between a grant and a loan is that you have to repay a student loan. Consider the following tips to help you avoid or at least minimize student loan debt:

  • Explore all options for financing college including available grants, scholarships, and institutional aid. A Federal grant is money that does not have to be repaid and is based on financial need. To apply for a Federal grant, complete the Free Application for Federal Student Aid (FAFSA). There are four types of Federal grants:
  • Federal Pell Grant
  • Federal Supplemental Educational Opportunity Grant (FSEOG)
  • Teacher Education Assistance for College and Higher Education (TEACH) Grant
  • Iraq and Afghanistan Service Grant (IASG)

   
Financial aid in the form of a
scholarship is money that does not have to be repaid. Receiving a scholarship will help reduce the cost of your education.  Scholarships may be offered by schools, employers, individual companies, communities, religious groups, or various organizations. Scholarships may be merit-based. A merit-based scholarship can be earned by meeting certain standards set by the scholarship-giver, which may include academic achievement, special talents, and other interests. Some scholarships are based on 
financial need. Many scholarships are geared toward a particular group of people. For instance, there are scholarships for military families, single parents, or students majoring in specific degrees.

  • Before borrowing, read and understand the terms and conditions of your loan.
  • Borrow only what you need!  You do not have to borrow the maximum amount each year you are in school. Borrow responsibly so you will be able to repay your student loan without giving up other necessities, like housing and transportation. Use a repayment estimator to help you determine what your monthly payment might be once you finish college. 
  • Plan to graduate on time. Not graduating on time can add up to a lot of student loan debt. Consider taking more classes each semester than the minimum required to be considered a full-time student. The sooner you earn your degree, the sooner you can start job hunting, and the less money you will need to borrow. 

Becoming a Student Loan Expert

Once you borrow your first Direct Loan, you should make yourself a student loan expert. Follow these ten steps to ensure that you are knowledgeable about your debt:

1. Keep track of each loan – Know the type of loan, whether it is a Federal Subsidized Loan or Federal Unsubsidized Loan, the loan servicer of each loan, the loan amounts, when payments are due, and what repayment options are available to help you make your payments. Set up an account on www.NSLDS.ed.gov (NSLDS) to see a current record of all of your loans, who services them, and the total amount of debt you owe.

2. Know your grace period – Different loans have different grace periods. For example, Federal Subsidized Loans and Federal Unsubsidized Loans have a six-month grace period that begins immediately after leaving school before your first payment is due. Grace periods are specific to each loan. If you borrow a Federal Perkins Loan, you will have a nine-month grace period for this loan. 

3. Stay in touch – If you move, change your telephone number or email address, or change your name, update your loan servicer with this information. Also, open and read each piece of mail you receive even if you don’t recognize the return address. 

4. Pick the right repayment option – Federal student loans have various repayment options. Learn about them and carefully select the option that best suits your situation. You can change your repayment plan if your current plan is not working for you. 

5. Don’t panic – If you are experiencing problems making payments, talk to your loan servicer about options. Check into a deferment or forbearance to see if you qualify. 

6. Stay out of trouble – Don’t ignore your student loans. Not making your student loan payments can lead to delinquency and, potentially, default. Once you default on your student loan, your wages and taxes can be garnished, the total amount you owe will increase due to collection costs, and your credit will be negatively affected. 

7. Lower the principal – If you can afford to make more than the minimum payment, do so to reduce the principal amount of your student loan. You can save thousands of dollars. Make sure your loan servicer knows that the additional payment is to be applied to the principal and not applied to advance the payments. Keep a copy of all correspondence you have with your loan servicer regarding payments.

8. Pay off the most expensive loan first – If you are paying off multiple loans, consider paying extra on the loan with the highest interest rate. Adding $10 to a monthly payment will help you pay ahead of schedule and ultimately pay off the loan early.

9. Consolidate or don’t consolidate Consolidation combines multiple loans into one loan for a single monthly payment and one fixed interest rate. If you are considering consolidation, please review the pros and cons of consolidation in the chart below. 

10. Explore loan forgiveness – Federal student loans may qualify for forgiveness under various programs, including Teacher Loan Forgiveness, Public Service Loan Forgiveness, or volunteer programs such as AmeriCorps.

Consolidation Chart

PROS

CONS

Multiple Federal student loans are combined into one loan with one monthly payment. This makes the repayment process easier.

If you consolidate your loans during the grace period, you will begin repayment immediately. You may lose the remainder of your grace period and possible interest benefits on a subsidized loan.

Consolidation provides access to multiple repayment plans. The terms of a repayment plan depend on the balance of the loan, which is higher on a consolidation loan.

The longer the repayment period on your consolidation loan, the more interest you will pay which will increase the amount paid over the life of the loan.

Monthly payments are lower for a consolidation loan because the repayment period is longer.

Variable interest rates change annually. If you consolidate your variable interest rate loans and then the interest rates drop, you will still be locked into the higher fixed interest rate for the life of the loan.

Consolidating variable interest rate loans when the interest rate is low can save money.

You may not be eligible to receive the same deferments on your consolidation loan that you were eligible for on your original loans.

Consolidating an 8.5% fixed rate PLUS loan reduces the interest rate by .25% because the interest rate cap on a consolidation loan is 8.25%.

You may lose any borrower benefits that you are receiving on your loans from your current loan servicer. Borrower benefits may include interest rate discounts, principal rebates, or some loan cancellation benefits offered under non-consolidated repayment plans.

Consolidation resets the 3-year clock on certain deferments and forbearances. A consolidation loan is a new loan with its own new set of deferments and forbearances.

You can only consolidate once.

Consolidating your loans allows you to switch loan servicers. You may be able to find a loan servicer with better borrower benefits.

Private education loans are not eligible to be consolidated into a Direct Consolidation loan.

You can consolidate your FFEL Program loans into a Direct Consolidation loan. This may allow you to have different options for repaying your loan and different forgiveness programs.

 

If your loan is in default, you may be able to consolidate your loan after making satisfactory repayment arrangements with the holder of your defaulted loan. If you consolidate those loans, benefits that were lost when your loan was placed into default are reinstated. These benefits include deferment, forbearance and eligibility to apply for additional Federal financial aid.

 

Repayment Strategies

There are several repayment plans available for Federal student loans. The availability of some repayment plans may vary depending on your outstanding loan balance, type of loan, and repayment term remaining. You can change your repayment plan at any time. You may qualify for any of the following repayment plans:

Overview of Student Loan Repayment Plans:

Repayment

Eligible Loans

Monthly Payment

Quick Comparison Plan and Time Frame

Standard Repayment Plan

  • Direct Subsidized and Unsubsidized Loans

 

  • Subsidized and Unsubsidized Federal Stafford Loans

 

  • all PLUS loans

Payments are a fixed amount of at least $50 per month.

 

Up to 10 years

You’ll pay less interest for your loan over time under this plan than you would under other plans.

Graduated Repayment Plan

  • Direct Subsidized and Unsubsidized Loans

 

  • Subsidized and Unsubsidized Federal Stafford Loans

 

  • all PLUS loans

Payments are lower at first and then increase, usually every two years.

 

Up to 10 years

You’ll pay more for your loan over time than under the10-10-year standard plan.

Extended  Repayment Plan

  • Direct Subsidized and Unsubsidized Loans

 

  • Subsidized and Unsubsidized Federal Stafford Loans

 

  • all PLUS loans

Payments may be fixed or graduated.

 

Up to 25 years

  • Your monthly payments would be lower than the       10-year standard plan.

 

  • If you are a direct Loan borrower,​ you must have more than $30,000 in outstanding Direct Loans. 

  • FFEL borrower, you must have more than $30,000 in outstanding FFEL Program loans.

 

For example, if you have

$35,000 in outstanding FFEL Program loans, and

$10,000 in Direct Loans, you can use the extended repayment plan for your FFEL Program loans, but not for your Direct Loans.

 

  • For both programs you must also be a “new borrower” as of Oct. 7, 1998.

 

  • You’ll pay more for your loan over time than under the 10-year standard plan.

Income-Based Repayment Plan (IBR)

  • Direct Subsidized and Unsubsidized Loans

 

  • Subsidized and Unsubsidized Federal Stafford Loans

 

  • all PLUS loans made to students

 

  • Consolidation Loans (Direct or FFEL) that do not include Direct or FFEL PLUS loans made to parents

  • Your maximum monthly payments will be 15 percent of discretionary income, the difference between your adjusted gross income and 150 percent of the poverty guideline for your family size and state of residence (other conditions apply).

 

  • Your payments change as your income changes.

 

Up to 25 years

  • Your must have a partial financial hardship.

 

  • Your monthly payments will be lower than payments under the 10-year standard plan.

 

  • You’ll pay more for your loan over time than you would under the 10-year standard plan.

 

  • If you have not repaid your loan in full after making the equivalent of 25 years of qualifying monthly payments, any outstanding balance on your loan will be forgiven.

 

  • You may have to pay income tax on any amount that is forgiven.

Pay As You Earn Repayment Plan

  • Direct Subsidized and Unsubsidized Loans

 

  • Direct PLUS loans made to students

 

  • Direct Consolidation Loans that do not include (Direct or FFEL) PLUS loans made to parents

  • Your maximum monthly payments will be 10 percent of discretionary income, the difference between your adjusted gross income and 150 percent of the poverty guideline for your family size and state of residence (other conditions apply).

 

  • Your payments change as your income changes

 

Up to 20 years

  • You must be a new borrower on or after Oct. 1, 2007, and must have received a disbursement of a Direct Loan on or after Oct. 1, 2011.

 

  • You must have a partial financial hardship.

 

  • Your monthly payments will be lower than payments under the 10-year standard plan.

 

  • You’ll pay more for your loan over time than you would under the 10-year standard plan.

 

  • If you have not repaid your loan in full after you made the equivalent of 20 years of qualifying monthly payments, any outstanding balance on your loan will be forgiven.

 

  • You may have to pay income tax on any amount that is forgiven.

Income-Contingent Repayment Plan

  • Direct Subsidized and Unsubsidized Loans

 

  • Direct PLUS Loans made to students

 

  • Direct Consolidation Loans

  • Payments are calculated each year and are based on your adjusted gross income, family size, and the total amount of your Direct Loans.

 

  • Your payments change as your income changes.

 

Up to 25 years

  • You’ll pay more for your loan over time than under the 10-year standard plan.

 

  • If you do not repay your loan after making the equivalent of 25 years of qualifying monthly payments, the unpaid portion will be forgiven.

 

  • You may have to pay income tax on the amount that is forgiven.

Income-Sensitive Repayment Plan

  • Subsidized and Unsubsidized Federal Stafford Loans

 

  • FFEL PLUS Loans

 

  • FFEL Consolidation Loans

  • Your monthly payment is based on annual income.

 

  • Your payments change as your income changes.

 

Up to 10 years

  • You’ll pay more for your loan over time than under the 10-year standard plan.

 

  • Each lender’s formula for determining the monthly payment amount under this plan can vary.

Chart adapted from Studentaid.ed.gov