Expert Advice on Applying for, Managing and Paying Back College Loans
The average student loan balance has grown from an average of $15,000 in 2005 to nearly $30,000 in 2015. Prospective students and their parents can use this comprehensive guide to learn about student loans before joining the millions of Americans saddled with massive amounts of educational debt. This guide offers a deep-dive into federal and private loans, step-by-step instructions to apply for federal loans, expert advice for selecting the right loan, information about loan repayment options, help with loan forgiveness, and comparison tables for private and federal loans.
Types of Federal Student Loans Available
Federal student loans provide students and their parents the opportunity to borrow money to pay for a college education through federally supported lending programs. These loans offer a variety of benefits, including low interest rates and flexible repayment options. There are two federal loan programs: William D. Ford Federal Direct Loan Program and the Federal Perkins Loan Program. The table below outlines the major differences between each loan program.
|WILLIAM D. FORD FEDERAL LOAN PROGRAM||FEDERAL PERKINS LOAN PROGRAM|
|DIRECT SUBSIDIZED LOAN||DIRECT UNSUBSIDIZED LOAN||DIRECT PLUS LOAN||FEDERAL PERKINS LOAN|
|Lender||Federal Government||Federal Government||Federal Government||University or School|
|Loan Eligibility||Undergraduate students who are enrolled in classes at least half-time that demonstrate financial need.||Undergraduate, graduate and professional degree students who are enrolled in classes at least half-time. Do not need to demonstrate financial need.||Parents with a dependent enrolled in classes at the undergraduate level and graduate and professional degree students enrolled in classes at least half-time.||Undergraduate, graduate, and professional degree students attending an institution that participates in the Federal Perkins Loan Program. Students must be enrolled either part- or full-time and demonstrate significant financial need.|
|Loan requirements||First-time Direct Loan recipients must sign a Master Promissory note and complete an entrance counseling session.||First-time Direct Loan recipients must sign a Master Promissory note and complete an entrance counseling session.||Direct PLUS loan recipients must sign a Master Promissory Note and complete an entrance counseling session.||None|
|Interest rate||Loans disbursed between July 1, 2014 and July 1, 2015 have a 4.66% interest rate. Loans disbursed between July 1, 2015 and July 1, 2016 will have an interest rate of 4.29%.||Loans disbursed between July 1, 2014 and July 1, 2015 will have the following interest rates:*Undergraduate: 4.66%*Graduate: 6.21%Loans disbursed between July 1, 2015 and July 1, 2016 will have the following interest rates:*Undergraduate: 4.29%*Graduate: 5.84%||Loans disbursed between July 1, 2014 and July 1, 2015 have a 7.21% interest rate. Loans disbursed between July 1, 2015 and July 1, 2016 will have a 6.84% interest rate.||5%|
|Loan fees||Loans disbursed between October 1 and before October 1, 2015 have a 1.073% loan fee. Loans disbursed between October 1, 2015 and before October 1, 2016 will have a 1.068% loan fee.||Loans disbursed between October 1 and before October 1, 2015 have a 1.073% loan fee. Loans disbursed between October 1, 2015 and before October 1, 2016 will have a 1.068% loan fee.||Loans disbursed between October 1 and before October 1, 2015 have a 4.29% loan fee. Loans disbursed between October 1, 2015 and before October 1, 2016 will have a 4.27% loan fee.||No loan fees or charges|
|How much can be borrowed?||Students may borrow between $3,500 and $5,500 annually, depending on the grade level.||Between $3,500 and $12,500 annually depending on dependent’s status and parents’ eligibility for Direct PLUS Loans||Total amounts borrowed are capped at the max cost of attendance as determined by the university after other financial assistance is taken into consideration.||Borrowing limits depend on the student’s financial need and the funding available at the postsecondary institution*Undergraduate students have a total cap of $27,500 and may borrow up to $5,500 per year.*Graduate and professional degree students have a total cap of $60,000 and may borrow up to $8,000 per year.|
|When do loan payments begin?||Payments begin either when the student’s enrollment falls below half-time or 6 months after graduation.||Payments begin either when the student’s enrollment falls below half-time or 6 months after graduation.||Loan repayment begins when loan funds are disbursed.Graduate and professional degree students may defer payments for 6 months when enrolled at least half-time.Parent borrowers may request payment deferment while their dependent is enrolled at least half-time and for another 6 months after their dependent graduates or leaves school.||Students receive a 9-month grace period after leaving school, graduate or enroll in less than half-time.Students enrolled less than half-time should work with their institution to determine the length of the grace period.|
NOTE: Federal Family Education Loan Program (FFEL). The FFEL was a type of education lending program that provided four types of student loans: Stafford Loans, Unsubsidized Stafford Loans, Federal PLUS Loans, and Federal Consolidated Loans.
How to Apply for a Federal Student Loan
The federal financial aid process can take several weeks to complete and can be difficult for borrowers to navigate. The list below details the steps required to secure a federal financial aid, from filing a FAFSA® to accepting a financial aid package.
1. Complete and submit a current year FAFSA®
The Free Application for Federal Student Aid becomes available on January 1 for the following academic school year. Beginning on January 1, 2015, parents and students were able complete and submit a FAFSA® to receive federal aid for the 2015 – 2016 academic year (July 1, 2015 – June 30, 2016). The FAFSA® form may be submitted either electronically through StudentAid.Ed.Gov or via traditional paper format and mailed to the following address:
- Federal Student Aid Programs
- P.O. Box 7002
- Mt. Vernon, IL 62864-0071
Completing a FAFSA® is a straightforward process and takes between 20 and 30 minutes to finish. The filing requirements vary slightly if you are a dependent or independent student. Dependent students report both their and their parents’ information, while independent students only report their own information.Register for Federal Student Aid ID (FSA ID)
In order to sign and submit a FAFSA® electronically, borrowers need to register for a Federal Student Aid ID. Parents of dependent students need their own FSA ID to sign their child’s FAFSA® electronically. That FSA ID can be used by parents to sign all applications if they have more than one child attending college. To create an FSA ID, prospective borrowers can do so on the FAFSA® website and follow the prompts.Gather Required Documents
Prospective borrowers should gather the following information to complete a FAFSA®:
- Social Security Number (including parents’ SSNs, if dependent status)
- Alien Registration Number (for non-US citizens)
- Driver’s license
- Federal tax returns and information (this includes the most recent federal tax returns)
- Untaxed income records (e.g. child support, interest income)
- Investment records and bank statements (e.g. checking and savings accounts, investments, real estate holdings)
Create School Code List
FAFSA® information is sent directly to postsecondary institutions to determine the student’s financial aid eligibility and the types and amounts they may receive. When completing the FAFSA®, the school code for at least one institution must be included on the form. Students can list up to 10 schools on the online FAFSA® and up to four schools on a paper FAFSA®. The Department of Education provides a Federal School Code Search online that makes it easy to find a school’s code, view tuition details, and compare different universities.Complete FAFSA® form
Visit the FAFSA® site and click the “Start a New FAFSA®” button to begin. Follow the steps on the screen to enter the required information. There is a save option that allows for users to complete portions of the FAFSA®, save, and return later to complete the required information.
2.Review Your Student Aid Report
The Department of Education will send a Student Aid Report (SAR) between three days to three weeks after submitting a FAFSA®. For paper filers, the process will take longer because it typically takes 7-to-10 additional days from the date mailed to be processed. The Student Aid Report includes does not detail award amounts, but does reveal the Expected Family Contribution (EFC)—how much a family is expected to pay towards college expenses—and a Data Release Number (DRN). The DRN is used to allow universities to update or change information on the submitted FAFSA®.
It is important to review the SAR for accuracy and that it is complete. The universities listed on the FAFSA® use this information to determine student financial aid packages and, in some cases, an institution may ask parents or student borrowers to verify information on the FAFSA®. If no changes are required, keep the document for personal records.
3. Receive and Review Financial Aid Package
If the student has been accepted by a school listed on the FAFSA®, the financial aid office at that institution will send an aid offer (called an Award Letter). This letter includes information about the types and amounts of federal and non-federal funding the student may receive. Students and parents should review this information closely before making a decision about which loan to choose, if applicable.
4. Determine Net Price and Amount to Borrow
Prior to deciding on the amount of loan funding to accept, prospective borrowers should use the award letter to determine how much money they may need to borrow. To do so, start with the cost of attendance for each institution that’s listed on the aid offer. Next, subtract the amount of scholarship and grant funding awarded from the total cost of attendance figure. The remaining amount is the out-of-pocket cost that students may need to cover with savings or a student loan. Comparing the net price from multiple institutions allows students and their parents to have a realistic understanding of how much college will actually cost.
5. Accept the Award Letter
Accepting an award letter varies by university. Parents and student should review the type of federal student loan and its terms and conditions as listed on the award letter. If they have questions, contact the school’s financial aid office to discuss. Students do not have to accept the student loan or the amount stated. They can decline the loan or ask for a smaller amount to be financed. The award letter should detail the steps to do so and, if not, the university’s financial aid office can help. Accepting the award letter could involve submitting an additional online form or signing and mailing back a paper copy to the institution.
6.Sign Master Promissory Note
Accepting a student loan may require additional steps that are based on the type of loan to be disbursed. The university’s financial aid office will walk parents and students through the process of signing a Master Promissory Note (MPN). The MPN is a legal document that details the terms and conditions of the loan, information about interest rates, repayment plans, provisions for deferment and grace periods. By signing it, borrowers are agreeing to repay the loan based on the terms and conditions contained in the MPN. Most users choose to sign an online MPN, but they have the option of completing and signing a paper MPN. Parent borrowers signing for a Direct PLUS loan must use their own FSA ID and not their child’s to sign an MPN online.
7. Review Loan Disclosure Form
Near the time of the first loan disbursement, parent or student borrowers will receive a loan disclosure form that includes information on the loans the school plans to provide under the terms of the MPN. This information will include the loan amount, fees, expected payment dates and amounts. Be sure to review the disclosure form for accuracy and contact the financial aid office if there are any issues.
8.Complete Entrance Counseling
Entrance counseling is required for all students taking out either direct unsubsidized or direct subsidized loans. Graduate students or parents taking out a Direct PLUS loan must also complete entrance counseling. Federal Perkins Loan borrowers should check with their university’s financial office to review their entrance counseling requirements. Entrance counseling is a session that teaches borrowers about how Direct Loans work, how to manage educational expenses, rights and responsibilities as a borrower, and provide tips for paying for a college education.
The financial aid office will tell borrowers how to complete their entrance counseling. Some institutions may require an in-person counseling session, while others may use online training sessions.
You need to know
- You MUST repay student loansWhen signing an MPN, borrowers are agreeing to repay ALL loans listed under that MPN. Borrowers must repay that amount even if they do not finish their education, cannot find employment after graduation, or didn’t like the education provided at their chose institution.
- It’s extremely difficult to discharge federal student loansOnly in rare and very well-documented instances is it possible to discharge or have a federal student loan canceled. Federal student loans are not dischargeable through bankruptcy and the government can garnish wages to repay the loan.
FROM THE EXPERT:
Tips for Pursuing Student Loans
In his role, Charles Stein helps parents and students understand their financial aid options and is well-versed in the nuances of federal student loans.
What’s the biggest mistake students/parents make when choosing student loans?
Students and parents are often unaware that they should borrow the minimum amount needed. Because the loan must be repaid, minimizing the total debt accumulated and meeting the required monthly payments are very important factors to consider.
What should students and parents consider before selecting a student loan package?
Before selecting a student loan package, students and parents should consider cutting costs wherever possible. Sometimes, adjusting the family budget can be an effective way of managing spending and reducing the need for student loans. Consult with financial aid professionals at your intended college or university to learn about all of your packaging options. Also, create a solid plan for repaying the loan(s), even before repayment begins.
How can parents/students determine which type of student loan/financial aid to pursue?
It’s important to understand what the offer covers and what the total costs of the college are. You also need to know if your aid will be the same each year that you attend and maintain good academic standing. Check to see whether the award covers only tuition and fees, or also includes the costs of room and board; not all do.
Student Loan Tips
1. Understand your options.
Before you take out a loan, make sure you fully understand your options and responsibilities. A student loan can be a valuable tool to help you realize your educational and career dreams, however, it should be the last option you exercise. You should explore and use scholarships, grants, work-study, part-time jobs and family contributions first to finance your education.
2. Watch how much you borrow.
Don’t borrow more than you need or more than you expect to be able to repay. Develop a sound, and realistic, financial plan.
3. Pay on time.
Make your loan payments on time, and notify your lender or servicer when you move or change your address.
4. Work with your lender.
Contact your lender or servicer immediately if you start to have problems repaying your loan. They may be able to provide you with some financing options and give you information about deferments and forbearance.
Keep a record regarding your loan’s documents. Make copies of letters, canceled checks and any forms you sign.
Parents and student borrowers can use the resources below to learn more about the student loan process, the different types of loans available, review financial planning guides, and get help with filling out the FAFSA®.
The Consumer Financial Protection Bureau (CFPB) provides access to student financial guides, tools for comparing financial aid offers, and tips for choosing a student loan.
Federal Student Aid is an office of the US Department of Education and provides information on applying for college, details about various student loans, tips for filling out the FAFSA®, and consumer fact sheets.
The official site for FAFSA® includes information about deadlines and filing instructions, and is where prospective students and family members can submit the form.
Part of the Office of Federal Student Aid, StudentLoans.gov is an informational hub, providing students and parents like with details about undergraduate and graduate loans, advice for parents, and several repayment calculators.
Special Student Loan Forgiveness Programs
In certain situations, student loan borrowers can have their loans forgiven or discharged entirely. Their specific provisions vary, are based on the type of loan (e.g. Direct Loan, Federal Perkins Loan) and have strict rules for qualification. The Federal Government offers three forms of student loan forgiveness options: Teacher Loan Forgiveness, Public Service Loan Forgiveness and Perkins Loan Cancellation and Discharge.
Public Service Loan Forgiveness
The Public Service Loan Forgiveness Program (PSLF) was created to encourage students to enter and work in public service occupations. Through this program, students may qualify for the forgiveness of their William D. Ford Federal Direct Loans. The program revolves around service-oriented careers for individuals employed with government agencies or nonprofit organizations, in areas such as:
- Special education
- Law enforcement and corrections
- Military service
- Public health
- VISTA or Peace Corps
- Health care
|Eligible Loans||Direct Subsidized LoansDirect Unsubsidized LoansDirect PLUS LoansDirect Consolidation Loans|
|Borrower Eligibility||1. Borrowers must not be in default of their student loans requesting forgiveness2. Borrowers must be employed in a full-time public service occupation|
|Loan Repayment Qualifications||Borrowers must make 120 separate monthly loan payments after October 1, 2007 on the direct loans requesting forgiveness (payments do not need to be made consecutively)|
|Eligible Public Service Jobs||Government organization (local, federal, state, local, tribal)Public child or family service agencyNot-for-profit, tax-exempt organizationPrivate, not-for-profit organization (see service areas)|
|Private, Not-For Profit Service Areas||Military ServiceEmergency ManagementPublic Interest Law ServicesPublic SafetyPublic EducationPublic Library ServicesPublic Services for the Disabled and ElderlyPublic Health (Nurses, Health Care Practitioners, Health Care Support Occupations)Early Childhood EducationSchool-Based Services, including Library ServicesLaw Enforcement|
|Employment Qualifications||Must be employed full-time, defined as an annual average of 30 hours per week|
Perkins Loan Cancellation
Federal Perkins Loan borrowers may be eligible to have a portion or the entire loan amount canceled for working in certain employment areas. Borrowers with a Federal Perkins Loan can apply to the school that disbursed the loan or the school’s designated loan servicer. The table below is an example list (not exhaustive) of career areas that may be eligible for loan cancellation.
|Occupation||Loan Cancellation Policy|
|Special Education Teachers||100% cancellation of the loan over 5 years|
|Early Intervention Services||100% cancellation of the loan over 5 years|
|Law Enforcement or Corrections Officers||100% cancellation of the loan over 5 years|
|Head Start Teachers||100% loan cancellation based on 15% per academic year of service|
|Nurse or Medical Technician||100% cancellation of the loan over 5 years|
|Peace Corp or ACTION Volunteer||70% cancellation over 4 years|
|Librarian||100% cancellation of the loan over 5 years|
|Firefighter||100% cancellation of the loan over 5 years|
|Speech Language Pathologist||100% cancellation of the loan over 5 years|
|Teacher in Low-Income School||100% cancellation of the loan over 5 years|
Health Care Worker Loan Forgiveness
Health care professionals have a variety of specialized loan repayment and loan programs available to them. In addition to the Public Service Loan Forgiveness Program, health care professionals may be eligible for the following loan forgiveness programs:
The Faculty Loan Repayment Program provides recipients with a $40,000 payment for a two-year work commitment as a faculty member at an accredited and approved health professions institution.
The National Health Service Corps offers a loan repayment program that provides dental, medical and behavioral/mental health clinicians up to $50,000 to repay student loans in exchange for a two-year employment commitment at a low-income, high-need service area.
For qualified and eligible nurses, including registered nurses, nurse practitioners, and nursing faculty, the Nurse Corps Loan Repayment Program covers 60% of the nurse’s unpaid student loans for a two-year commitment and an additional 25% payment on their original loan balance for a third-year commitment to working in a Nurse Corps-eligible location.
Teacher Loan Forgiveness
There are two types of loan forgiveness programs and a specialized lending program available to teachers that can be used to discharge or avoid student loan debt.
The TEACH grant provides up to $4,000 in college tuition assistance for students planning to pursue a career in teaching. In exchange for funding, future teachers agree to a work commitment:
- In a high-need subject area of study
- At a school or educational agency that serves students in low-income areas
- For four academic years within eight years of completing an academic program of study
Teachers that fail to adhere to the grant’s regulations will have their grant funding converted to a Direct Unsubsidized Student Loan and will be responsible for repaying those funds with interest.
Teachers who have a loan from the Federal Perkins Loan Program may be eligible to have up to 100% of their loan cancelled for teaching in a full-time capacity in a low-income school or for teaching in specific subject areas.
For educators that teach full-time for five complete and consecutive academic years may be eligible to have up to $17,500 forgiven on their Direct Student Loans (subsidized and unsubsidized). Applicants must meet eligibility requirements, such as teaching in specific elementary and secondary schools in low-income areas.
Military Loan Benefits and Forgiveness
The US Department of Defense and US Department of Education provide a range of educational benefits to members of the US Armed Forces, including special loan interest rates, deferment programs, and loan forgiveness.
|Public Loan Forgiveness||Service members who have made 120 qualifying student loan payments after October 1, 2007 while in military service may qualify for the forgiveness of the loan’s remaining balance of a Federal Direct Loan.|
|Military Service Deferment||While serving in periods of active duty, such as national emergencies or war, service members may postpone their federal student loan repayments.|
|Deferment After Active Duty Service||Following a tour of active duty, service members may postpone the repayment of their student loans while they return to school.|
|0% Loan Interest Rates||Service members serving in hostile areas that qualify them for special pay do not have to pay interest on their Direct Loans for up to 60 months if the loans were made on or after October 1, 2008.|
|Department of Defense Loan Repayment||In some cases, the Department of Defense may pay a portion or the entire balance of a service member’s student loans.|
|Income-Based Repayment||Service members may access repayment plans that are based on their income and, in some cases, may qualify for plans with a zero payment amount.|
|Veterans Disability Discharge||Veterans with a service-connected disability may qualify for a complete discharge of the remaining balance of their student loans.|
|Service Members Civil Relief Act Interest Rate Cap||Service members serving on active duty may have the interest rate of their student loans capped at 6%, which applies to both private educational loans and loans secured prior to military service.|
What to Know About Public Service Loan Forgiveness
Students interested in the Public Service Loan Forgiveness Program and other loan cancellation programs should refer to Office of Federal Student Aid.
Forgiveness takes time. It takes at least 10 years to make the required 120 qualifying payments to apply for the PSLF.
- Tracking eligibility is vital.The Office of Student Federal Aid has created an Employment Certification Form for applicants to track their qualifying employment.
- Private loans are not eligible.The PSLF program only covers federal education loans.
- The program doesn’t start until 2017.The earliest borrowers can qualify for PSLF is 2017 and applications will be released at that time.
- Public service requirements.Borrowers need to be employed as a full-time employee at a qualifying public service organization while making each of their 120 required loan payments.
- Loan eligibility.Only loans under the William D. Ford Federal Direct Loan Program are eligible for PSLF forgiveness.
Help Beyond Federal Student Loans
What’s the Difference Between Federal and Private Student Loans?
When applying for financial aid, it is important to understand the different types of loans you may be offered. Generally, there are two types of student loans: federal student loans and private student loans. Federal student loans are loans that are issued and funded by the federal government, while private student loans are provided by non-federal lenders such as banks or credit unions.
With private loans, the lender works with the borrower to set the terms and conditions of the loan, including the total amount of the loan, interest rates, repayment schedule, and loan limits. Qualifying for a private loan is based on numerous factors, including credit history, whether or not the borrower has a co-signer, the location of the institution, and the academic program of study. Unlike federal student loans, private student loans have rigid repayment terms, limited ability to postpone or reduce repayment, and may have variable interest rates that can rise during the life of the loan and increase loan payments. The table below can be used to gain a better understanding of where private and federal student loans diverge.
|Federal Loans||Private Education Loans|
|Program Lender||US Department of Education||Banks, Credit Unions, Finance and Loan Companies|
|Borrower Eligibility||Undergraduate, graduate, professional degree students and their parents.||Students who are U.S. citizens or permanent residents.Some lending institutions may provide loans to international students attending college in the US.|
|Repayment Terms||Payments do not begin until students enroll less than half-time, graduate, or leave school.||Private lenders typically require payments while students attend school.|
|Interest Rates||Interest rates are fixed for the length of the loan.||Interest rates are based upon credit worthiness and the length of the loan. Private loans can have variable interest rates that can increase during the life of the loan.|
|Consolidation||Federal loans can be consolidated into a Direct Consolidation Loan.||Private educational loans are not eligible to be consolidated into a Direct Consolidation Loan.|
|Tax Deductible||Interest from federal student loans may be tax deductible.||Interest from private student loans is not tax deductible.|
|Credit Check||Credit checks are typically only required for PLUS Loans.||Private student loans require a credit check and credit record to borrow.|
|Subsidized Options||Undergraduate students with significant financial need can qualify for a subsidized loan where the government pays the loan’s interest while the student is in school.||Private student loans are not subsidized and the borrower is responsible for repaying the entire loan and interest.|
|Prepayment Penalty||There is no prepayment penalty for paying back federal student loans early.||Borrowers should check with their lender to see if there are prepayment penalties.|
|Repayment Options||Federal student loans offer multiple repayment options, including income-based repayment programs.||Repayment options vary by lender and multiple options may not exist.|
|Loan Forgiveness||Some loan forgiveness programs exist for federal student loans.||Private lenders typically do not offer loan forgiveness options.|
Private Student Loans: What You Need to Know
Parents and families should borrow responsibly for college expenses. Private loans are another funding vehicle that can be combined with scholarships, grants, work-study, and federal student loans to make college affordable. In turn, they may be attractive to students for a few reasons:
- They do not qualify for need-based financial aid programs.
- They need additional financial resources beyond federal financial aid to pay for college costs.
- They have special circumstances (work, family, medical issues) that create costs above the standard total cost of attendance.
If a student does need to obtain a private student loan, they should keep the following in mind:
Be sure to shop around.
Not all private loans are created equal and students should shop around for the best interest rate and loan terms (e.g. different lenders may have different loan origination fees).
“You’re unlikely to find a private student loan with a lower interest rate than the Direct Loans offered through the government. However, private loans can sometimes be found at lower interest rates than the Direct PLUS loans for parents,” reports Blotz.
You may need a co-signer.
To get the best interest rates, borrowers will need to pass a credit check. In some cases, students may need someone to co-sign to qualify for the loan. If the student defaults on the loan, the individual that co-signed is on the hook as well.
“You are likely to need a cosigner for the loan, even if you have a brief work history in high school,” says Blotz.
Interest rates may be variable.
Unlike the fixed rates offered by the federal government, private lenders may only offer variable interest rates on their loans. Variable rates can increase over the life of the loan, directly impacting the monthly repayment amount.
“Look beyond the interest rate,” Blotz recommends. “Be sure to know the terms of your private loans, as some will provide opportunities for co-signers to have their names dropped off after reaching a certain number of on-time payments.”
They have larger borrowing limits.
While some private lenders may restrict loans to the total cost of attendance minus federal financial aid, other lenders may not place a cap on student loans. Students should first maximize their federal financial aid package and not borrow more than they can repay in private loans.
They are difficult to discharge.
Just like federally backed loans, private lenders also receive loan default protection. Private student loans typically cannot be discharged in bankruptcy.
“These loans may not have the same repayment benefits (income-based repayment, deferment options and consolidation options) that the federal loans provide,” warns Blotz.
Be protected: Know the Interest Rate Formula
A loan’s interest rate is tied to the borrower’s credit history and credit score. Traditionally, the higher the credit score, the lower the interest rate. For potential private loan borrowers, knowing how their interest rates are determined is important. Key items to understand include the interest rate, annual percentage rate (APR), the LIBOR rate, and the prime rate.
- Interest rate.The interest rate simply represents what the lender is charging you to borrow money, typically expressed as a percentage (e.g. 6.84% of $50,000).
- Annual Percentage Rate.The APR represents the total cost of the loan, as it includes the additional fees that may be required to borrow money. In some cases, the APR could be higher than the interest rate.
- LIBOR.LIBOR is used to calculate interest rates on loans throughout the world based on five currencies: US dollar (USD), Japanese yen (JPY), Swiss franc (CHF), Euro (EUR), and pound sterling (GBP). LIBOR represents the interest rate at which lenders can borrow money from other banks. Private student loan interest rates are generally based on a 1- or 3-month average of the LIBOR rate.
- Prime Interest Rate.The Prime Interest Rate is a short-term interest rate that is commonly used by lending institutions as the rate they charge their creditworthy customers to borrow money. It is typically used by private lenders to determine student loan interest rates.
Interest rates on private student loans may be determined either by the LIBOR index or the prime interest rate. Student borrowers should do their research to determine which index provides the best rate before making a selection.
Help with Private Student Loans
Students can get assistance with and more information about private student loans through several organizations, including the following:
Consumer Financial Protection Bureau. The CFPB was established through the Dodd-Frank Act of 2010 and it is tasked with providing consumers clear guidance about financial products and services, including student loans.
Student Loan Borrower Assistance (SLBA). The SLBA is a program created by the National Consumer Law Center and focuses on helping borrowers understand their rights, provides advocacy services, and resources for dealing with student loan problems.
Private Loan Comparison Websites. Numerous websites provide ways to compare private loans, including interest rates and borrowing amounts.
Managing Student Loans after Graduation
Taking out a student loan means being comfortable with taking on and repaying a certain level of debt. That means being prepared, says Blotz. “Freshmen families,” he notes should understand and calculate the amount of loans they are taking out not only for the first year, but for the full four-year experience. I’ve seen families that have selected a school, only to be unable to pay the cost of the loan after the first semester or first year.”
The Department of Education offers several types of repayment plans for federal loans. When the time arrives to repay the loan(s), borrowers have the option to select a repayment plan. If they do not choose a repayment plan, the loan’s servicer will place the borrower into the Standard Repayment Plan (discussed below). However, it is important to note: borrowers can change repayment plans at any time. Contact the loan servicer to discuss repayment options and to make changes. Being able to change plans affords borrowers flexibility to establish a payment schedule that works for their monthly budget.
Each plan may have additional qualifications or eligibility criteria and borrowers are encouraged to review information from the Office of Federal Student Aid and to discuss plans with a financial aid
|LOAN TYPE||ELIGIBLE LOANS||PAYMENTS||REPAYMENT PERIOD|
|Standard Repayment Plan||Direct Loans (Subsidized and Unsubsidized) Federal Stafford Loans (Subsidized and Unsubsidized)PLUS loans||Fixed monthly amount of at least $50.||Up to 10 Years|
|Graduated Repayment Plan||Direct Loans (Subsidized and Unsubsidized) Federal Stafford Loans (Subsidized and Unsubsidized)PLUS loans||Payments begin low and increase every two years.||Up to 10 Years|
|Extended Repayment Plan||Direct Loans (Subsidized and Unsubsidized) Federal Stafford Loans (Subsidized and Unsubsidized)PLUS loans||Payments may be either a fixed or graduated amount but are typically lower than those in Standard or Graduated Repayment Plans.||Up to 25 Years|
|Income-Based Repayment Plan||Direct Loans (Subsidized and Unsubsidized) Federal Stafford Loans (Subsidized and Unsubsidized)PLUS loans made to students Consolidated loans that do not include PLUS or Direct loans made to parents||Payments adjust as income changes with maximum monthly payments dependent on a borrower’s discretionary income and typically ranges between 10% and 15%.||Up to 25 Years|
|Pay As You Earn Repayment Plan||Direct Loans (Subsidized and Unsubsidized) Direct PLUS loans made to students Consolidated loans that do not include PLUS or Direct loans made to parents||Payments adjust as income changes and maximum monthly payments are typically 10% of the borrower’s discretionary income.||Up to 20 Years|
|Income-Contingent Repayment Plan||Direct Loans (Subsidized and Unsubsidized) Direct PLUS loans made to students Direct Consolidation Loans||Payments adjust as income changes with maximum monthly payments of either 20% of the borrower’s discretionary income or what a borrower would pay on a fixed repayment plan over 12 years, adjusted for the borrower’s income level.||Up to 25 Years|
|Income-Sensitive Repayment Plan||Federal Stafford Loans (Subsidized and Unsubsidized) FFEL Plus Loans FFEL Consolidation Loans||Monthly payments are adjusted based on the borrower’s annual income.||Up to 10 Years|
Paying Student Loans
Loan servicers will provide borrowers with a repayment schedule that details when the first payment is due, the monthly amount due, and the frequency and total number of payments to be made.
Depending on the loan, repayments may begin after a grace period, which is a period of time after the student graduates, leaves school or their enrollment falls below half-time. It is important to remember that interest on the loan does accrue during the grace period.
|Loan Type||Grace Period|
|Direct Loans||Six months|
|PLUS Loans||No grace period|
|Perkins Loans||Varies; Depends on university or institution|
The amount of each monthly payment depends on the type of loan, the amount of money borrowed, the loan’s interest rate, and the repayment plan. Payments are made directly to the loan servicer and can be made electronically or via a paper check.
|Direct Loans Owned by Department of Education||Payments are made directly to the loan servicer|
|Federal Perkins Loan||The school may act as the loan servicer, but may outsource payment administration to a separate company|
The Department of Education provides several types of financial counseling to student loan borrowers at each stage of the loan’s life: entrance counseling (beginning); financial awareness counseling (middle); and exit counseling (end).
- Entrance Counseling.Entrance counseling is required before students can receive the first disbursement of a Direct Loan as an undergraduate or a Direct PLUS Loan as a graduate or professional degree student.
- Financial Awareness Counseling.Students can access financial awareness counseling at any time through StudentLoans.gov counseling portal.
- Exit Counseling.Exit counseling prepares students to manage their federal loan repayment process. It is required after a student graduates, leaves school, or their enrollment falls below half-time. Exit counseling can also be accessed online through the StudentLoans.gov counseling website.
What happens if you can’t pay?
If a borrower finds his or herself in a situation where they cannot pay their student loans, they may want to explore the following options.
- Deferment.Borrowers can receive a deferment under special circumstances that allows them to pause their loan payments temporarily. In short, a deferment is a period of time where payments of both the principal and interest of a loan may be suspended. Borrowers with Direct Loans must continue to make payments on interest that accrues during the deferment, while borrowers with a Perkins Loan or Direct Subsidized Loan will have interest payments made by the federal government.
- Forbearance.Forbearance is designed for individuals who cannot make scheduled payments but do not qualify for a student loan deferment. A forbearance allows borrowers to suspend or reduce monthly payments for a period up to 12 months. It is important to remember that interest continues to accrue (including on subsidized loans) during a forbearance period. Forbearance requests may be made directly to the loan servicer, which may grant one of two types of forbearances:
- Discretionary.Students may request a discretionary forbearance for either financial hardship or illness.
- Mandatory.For students that meet eligibility requirements, lenders must grant the forbearance. Example reasons include serving in a medical or dental residency or internship; and an activated member of the National Guard who is not eligible for a military deferment. A complete list of mandatory forbearance eligibility requirements is available at the Office of Federal Student Aid.
- Cancellation.In certain cases, a student loan may be discharged or canceled by the federal government. Cancellation regulations vary by loan type and eligibility requirements. Example cancellation conditions for Direct Loans include:
- Total and permanent disability
- Borrower’s death
- School falsely certifies the borrower’s loan eligibility
- Identify theft
- School closes
Avoid default at all costs
No singular reason for student loan default exists, according to Stein. In fact, many cases of default are due to administrative in nature, such as outdated contact information when a borrower changes residences or phone numbers, doesn’t alert the lender when problems to repay occur, or lack of knowledge about repayment options. If borrowers fail to make their payments on time, they risk going into default—which carries significant and very serious consequences.
- Loan Delinquency.A loan becomes delinquent the day after missing a payment. Loan delinquencies of at least 90 days are required to be reported to each of the three major credit bureaus.
- Loan in Default.Federal student loans go into default status when a borrower fails to make a payment for 270 days and for FFEL Program loans, default occurs when borrowers fail to make a payment for 330 days.
- Consequences of Default.The consequences are many and serious, including the following:
- The entire balance (unpaid) and interest becomes due immediately
- Loss of repayment plans, forbearance and deferment
- Loss of eligibility for federal student aid
- Account is sent to collection agency
- Default status is reported to credit bureaus which can negatively impact a borrower’s credit rating
- Federal and state tax refunds can be withheld for the government to recover outstanding loan debt
- The government can garnish wages from the borrower’s paycheck
- The holder of the loan can take legal action against the borrower
Student Loan Consolidation
For some student loan borrowers, loan consolidation is an option that can simplify the repayment process into a single loan and—in some cases—lower monthly payments by extending the repayment term. However, borrowers should be aware that the benefits of their original loan, such as interest rate discounts or rebates, could be lost when the loan is consolidated. There are several factors to consider before choosing to pursue a Direct Loan Consolidation. Below is an overview of the process, benefits, and explanation of how to consolidate student loans.
- What loans are eligible for consolidation?Nearly every type of federal student loan is eligible for loan consolidation. The list of loans below is not exhaustive and borrowers should check with the Office of Federal Student Aid to ensure their loan can be consolidated.
- Direct Unsubsidized Loans
- Direct Subsidized Loans
- Direct PLUS Loans
- Federal Perkins Loans
- Some existing consolidation loans
- Can a private loan be consolidated?No, private loans are not eligible for direct loan consolidation. Students borrowing from a private lender should speak to the lender regarding any loan consolidation programs they may offer.
How to consolidate federal student loans
Students can access the application for a Direct Loan Consolidation online through StudentLoans.gov. There is no fee to submit an application and it can be completed online or submitted through a paper version. The loan application process involves 12 steps:
1. Get Your Loan Information
Get a list of your federal loans from the Department of Education’s National Loan Data System via www.nslds.ed.gov or by calling 1-800-4-FED-AID.
2.Access the Application
Sign-in to StudentLoans.gov an access the Federal Direct Loan Application using your FSA ID.
3. Review Loans
Review and choose the federal loans to be consolidated.
4. Choose a Loan Servicer
Select a federal loan servicer that will process the consolidation and act as the loan servicer of the new consolidated loan.
5. Select a Repayment Plan
Review the repayment options and select the plan that fits your budget. If selecting an Income-Based Repayment Plan, Income-Contingent Repayment Plan, or Pay As You Earn Plan, you must furnish additional information about your income.
6. Review Terms and Conditions
After selecting a repayment plan, read and review the terms and conditions of the Direct Consolidation Loan.
7. Enter Reference and Personal Information
Next, complete the section asking for personal information and a list of references.
Finally, review the application, electronically sign it and submit the completed Federal Direct Consolidation Loan and Promissory Note. For paper copies, print out and mail it to the following address:
US Department of Education
Loan Consolidation Center
PO Box 242800
Louisville, Kentucky 40224-2800
9. Provide Additional Information, If Necessary
Depending on the repayment plan, the loan servicer may ask for additional income documentation.
10. Review Pay-Off Documents
The loan servicer will contact you in writing about loan payoff process prior to paying off the current loans.
11. Continue to Make Payments
It is important to continue making loan payments to the current loan servicers until the consolidated loan servicer informs you the current loans have been paid off.
12. Manage Your New Loan
After all active loans are consolidated, you can start making your payments to your new loan servicing company.
Benefits of loan consolidation
- Single loan with a single payment”
- Lower monthly payment
- Can consolidate a loan in default
- Fixed interest rate
- Repayment terms from 10 to 30 years
- Multiple repayment plans
- Multiple loan servicers
- No application fee
- No prepayment penalty
- Online and paper applications available
Dos and Don’ts of Student Loans
The biggest do says Stein is, “Read the fine print when applying for student loans. Whether the loans are funded by banks, private lenders or the federal government, it is critical the borrower understand the terms and conditions of the debt incurred.”
Do ask for financial aid.
Beyond loans, there are several other forms of financial aid, including scholarships, grants, and work-study. Exhaust all other avenues of funding before turning to loans.
Do have a budget.
Setting a budget can help students avoid the trap of student debt after graduating. Take the time to understand how much it really costs to attend college and account for items such as tuition, books, social activities, meals, utilities, health care, and transportation.
Do work with the financial aid office.
Financial aid officers are experts in student loans. Today, many colleges have student loan counselors on staff that can help families navigate the loan process. Avoid a funding crisis by speaking to financial aid representatives early in the process—they may even have additional resources at their disposal to help students secure the best financial aid package possible.
Do choose federal loans over private loans.
Federal student loans typically offer lower interest rates and better repayment terms than private student loans.
Conversely, the biggest don’t Stein notes is, “Don’t ignore letters, phone calls or emails from lenders and guarantee agencies (agencies that pays the loan for borrowers in default). These groups keep students informed with the most up to date information regarding their borrowing status and can be valuable resources for managing costs, even when hard times arise.”
Don’t borrow more than you need.
The easiest way to get into debt after graduation? Borrow more in student loans than absolutely necessary.
Don’t forget to compare options.
Because of the different types of student loans (subsidized, unsubsidized, PLUS, private), be sure to compare the positives and drawbacks of each loan before making a decision.
Don’t spend money foolishly.
Universities typically apply loan money toward tuition, fees, and room and board. Any remaining money is disbursed to the student for other expenses. Students should be careful how they spend this money, keeping a close tab on their budget for their college education and avoid spending the money on non-college related items.
Student Loan Glossary
Navigating the student loan and financial aid process can be challenging because borrowers may be introduced to an array of unfamiliar terminology. The glossary below introduces common terms that borrowers should understand when working with financial aid officers and student loan lenders.
AccrueTo accumulate interest on a student loan.
Annual Loan Limit.The maximum amount of federal student loans a student is eligible for each academic year.
Award Letter.The letter you school provides that outlines your financial aid package, including state, college, federal and private student aid.
Borrower.The individual who agreed to and signed for the terms outlined in the promissory note and is responsible for paying back the loan.
Consolidation.Combining one or more student loans into a new student loan.
Debt-to-Income Ratio.A ratio determined by the borrower’s total income compared against their total income. A lower debt-to-income ratio is preferred by lenders.
Default.The loan moves into default status when a borrower fails to repay the loan per the terms of the Master Promissory Note.
Deferment.A federal loan benefit that allows students to temporarily defer making payments. During this period, interest is not charged on subsidized loans, but is charged on PLUS and unsubsidized loans.
Delinquency.When a student loan payment is missed, the loan is placed into delinquent status and the student loan lender may report that delinquency to national credit bureaus.
Endorser.Another person who agrees to co-sign on the loan and make payments if the student cannot.
Free Application for Federal Student Aid (FAFSA®).The form that must be completed each year to determine a student’s eligibility for federal student aid.
Financial Aid Package.The total amount and types of non-federal and federal aid a university or school offers a student to pay for their education.
Grace Period.A period of time where a student is not required to make student loan payments. The grace period typically begins when a student leaves school, graduates or drops below minimum enrollment requirements. The amount of time typically lasts between six and nine months.
Loan Discharge.The process of canceling a loan and removing the borrower’s obligation to repay the loan when there is still an outstanding balance. Discharging federal student loans only occurs in extremely rare circumstances.
Loan Fee.Also known as an “origination fee,” loan fees are a charge determined by the total amount the student borrows.
Loan Period.The period of time during the academic year the loan will cover.
Loan Servicer.A financial institution that handles federal loan payments.
Master Promissory Note (MPN).The legal document that is signed by the borrower and outlines the borrower’s promise to repay the loan, and outlines the terms and conditions of the loan and includes a statement of borrower’s rights.
Principal.The total loan amount with capitalized interest a borrower must repay.
Repayment Period.The length of time a borrower agrees to repay the loan and any interest.
Repayment Plan.The terms of repayment as agreed upon between borrower and the lending institution that determines the amount of each payment and the total number of payments required to repay the loan.
Subsidized Loan.A federal student loan where the borrower is not responsible for repaying interest while in school, deferment, or grace status.
Unsubsidized Loan.A federal student loan where the borrower is responsible for paying interest regardless of the loan’s status.
Meet the Experts
Charles Stein Program Coordinator, University of Houston
Charles is a native Houstonian with 4 years of experience in student financial aid. After serving in the U.S. Navy, Charles earned a B.A. in Communications from the University of Houston and will complete his MBA in December of 2015 from the Bauer College of Business. He works full time as a program coordinator in the Office of Scholarships and Financial Aid at the University of Houston.
Blaine Blontz Financial Aid Counselor, Financial Aid Coach, LLC
Blaine is a financial aid consultant and founder of Financial Aid Coach, LLC. Prior to creating Financial Aid Coach, Blaine worked in the financial-aid industry as a counselor for several years at schools including Millersville University, where he completed a degree in education, and La Salle University, where he graduated with his MBA in Finance. At Financial Aid Coach he works to navigate families through the financial aid process.
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