As the cost of college continues to rise, so does the average level of student loan debt. In 2015, this figure sat at a little more than $35,000. Plenty of students need to borrow at least some form of financial aid to attend college, but there are several options to learn about when it comes to loans. In a world where more than 40% of borrowers don’t make payments on their loans, student loan forgiveness is also a hot topic. With all the discussion surrounding student loans, it’s no wonder that you might be confused about the process. Take a look at our breakdown of private and federal student loans, how to get them, how to understand student loan consolidation and ways to pay off your debt once college is over.
Comparing the Top Student Loan Lenders
While many banks and credit unions offer student loans, not all offer the same incentives. Here are some of the biggest heavy hitters in the student loan world.
Common Bond was founded by three graduate students who wanted to create an easier way for students to manage loans. The company currently specializes in loan refinancing, with rates that start as low as 2.14% APR. Lending is only available to MBA students, with rates starting at 6.23% APR.
LendKey is an online market that lets you compare private loans from a selection of community banks and credit unions. It doesn’t offer financing, but it’s a good tool to use as you search for loans with favorable lending terms.
Earnest is another online company that offers refinancing options if you already have student loans to refinance. Current variable rates start at 2.75% APR with auto-pay, with fixed rates at 3.75% APR with auto-pay.
SoFi offers loan refinancing options and parent loans. It’s one of a handful of lenders in business that can refinance and consolidate both federal and private loans.
Credible is another comparison site that allows you to see fees and rates from a variety of lenders. You can also compare refinancing options and search for private student loans.
SimpleTuition lets you compare private loan options to find the right one for your needs. It also serves as a refinancing resource.
Alternative Student Loan Lenders for Students
Private student loans make up a big portion of student funding. It can be a bit harder to compare full loan details from bank to bank because most lenders don’t disclose this information until you complete an application. Here are some of the top lenders for this type of personal funding.
As the 13th largest retail bank in the U.S., Citizens Bank student loans are for both student and parent borrowers. Available student loans include fixed or variable interest rates, and you can choose to make interest-free payments while you’re still in school, reducing the amount you owe.
Wells Fargo provides both federal and private student loans. Some of the perks offered with Wells Fargo student loans include no application, origination or early repayment fees, a six-month grace period after leaving school and opportunities for interest rate discounts.
Discover Student Loans
Discover student loans are appealing with their 1% cash reward on each new student loan you take out when you have a GPA of 3.0 or better. Additional incentives include zero fees, in-school or deferred repayment options and U.S.-based loan specialists.
A household name in the student loan universe, Sallie Mae has offered loans for over 40 years while servicing over 30 millions Americans. Advertised interest rates for Sallie Mae student loans are variable APRs that range from 2.5%–9.59% and fixed APRs that range from 5.74%–11.85%, as of August 2016.
SunTrust offers loans to undergraduates, graduate students and parents. Variable interest rates for SunTrust student loans are 3.491%–8.936% APR, with fixed rates falling between 4.351%–10.15% APR as of August 2016. Loan repayment terms are for 7, 10 or 15 years.
PNC has been in the business of banking for over 160 years. If you’re looking for a PNC student loan, you can expect no application or origination fees, flexible rate structures and a co-signer release option after 48 consecutive on-time monthly payments.
Navient is one of the few loan providers chosen to service federal loans from the U.S. Department of Education. You might find that you have a Navient student loan after graduation; this simply means that Navient acts as the loan servicer on behalf of the federal government.
How to Pay Off Student Loans
With borrowers facing thousands of dollars of debt after college, payoff can sometimes seem insurmountable. Some people prefer to put student loans on the back burner and make only the minimum payments, but if you can afford to pay more, it’s a good idea to make extra payments in order to pay off student loans fast. Student loan interest rates do add up over time, and the longer it takes you to pay off the loan, the more you pay in interest.
While it might seem like a no-brainer, exhausting all other sources of funding before applying for a student loan eliminates the amount you pay after graduation. Scholarships, grants and work-study programs all reduce the number of loans you have to take out, which gives you more freedom when it comes time to repay your student loan debt. In addition, looking at student loan debt relief programs or forgiveness programs through careers in certain areas such as public service can help if you need ways to get a handle on your loan debt.
Student Loan Repayment Calculator
Many students leave college without having any idea how much debt they have. With the average student loan debt at more than $35,000, many people are surprised at how high their monthly payments are. Using a repayment calculator can help you budget accordingly, and it also gives you a good look at how long it may take you to repay your loans.
Student Loan Interest 101
The student loan interest rate is the fee that the lender charges you for taking out the loan, and it’s a percentage of the loan amount that you have to pay back on top of the principal amount. The interest compounds over time, which means if you have a $10,000 loan with a 7% interest rate and a five-year term, you don’t just pay back $10,700. Instead, if you make just minimum payments, you pay a total of $11,880. This is why interest rates are so important — with a 1% drop and an interest rate of 6%, you pay $11,599, saving $281. Try to get the lowest rate you can before signing for a loan. Student loans without a cosigner generally have higher interest rates, so getting a parent or other adult with good credit to cosign for you can help get a favorable interest rate.
Once you enter student loan repayment, you can lower your loan’s interest rate. Consolidate student loans at a lower interest rate to benefit from making one payment at a reduced rate, or look for a student loan interest deduction through incentives such as automatic payments. Doing everything you can to get the lowest rate possible really pays off in the long run.
Types of Student Loans
Student loans break down into two groups: private loans and federal loans. Federal student loans are those funded by the government, while private loans are available from a wide selection of banks, credit unions and other lenders. Generally, federal student loan interest rates are lower than private loans, so you should exhaust all federal resources before looking for private aid. Federal student loans include direct subsidized loans, direct unsubsidized loans, federal Perkins loans and direct PLUS loans (for graduate students and parents).
Private Student Loans 101
While federal loan rates are standard across the board in a given year, private loans vary widely from lender to lender, which is why it’s important to do careful research before choosing a servicer. Loan interest rates, origination fees, term lengths and perks like future rate deductions should all influence your choice in lenders. Because most young students don’t have a substantial credit history, lenders suggest applying for a private loan with a cosigner. For example, if you’re interested in a Wells Fargo private student loan, you may find that a cosigner improves your chances of getting approved and can help you qualify for a lower interest rate.
Private Student Loan Consolidation
Consolidating private student loans is one of the first things you should research as you start to pay back your loans if you’re a recent graduate. In most cases, private loans cannot be consolidated with federal loans, but they can be consolidated with other private loans. If you have multiple loans with varying interest rates, combining these loans into one balance with one payment may be advantageous. Just be careful as you’re shopping the interest rates — you don’t want to consolidate a low-interest loan into one with a higher rate.
Private Student Loan Forgiveness
While there are several forgiveness programs in place for those with federal student loans, private loan holders currently have no such options. If you’re struggling to pay your private loans, reach out to your lender to see if you can negotiate a different repayment schedule. If high interest rates are causing you to pay a premium, shop around to see if you can refinance these student loans for a lower payment.
Federal Student Loans 101
Federal student loans are offered as part of your financial aid package. To apply for federal aid, first go to www.studentloans.gov to fill out a Free Application for Federal Student Aid, or FAFSA. Most schools require your FAFSA before offering any student aid package. After filling out a FAFSA, student loans are offered based on financial need. These federal loans break down into several categories.
Perkins Student Loan
The Perkins loan is one of the top federal loans available because it offers a fixed interest rate at 5%. This loan is available to students who demonstrate the most financial need. If you receive this loan, the school serves as your lender. Eligible students can receive up to $5,500, with an undergraduate borrowing maximum of $27,500.
Direct Subsidized Loans
Also known as a Stafford Loan, the direct subsidized loan is one of the most popular student loans available. Qualifying students with financial need receive this federal loan. The word “subsidized” means that the government pays interest on the loan while you’re in school. The school determines how much you can borrow as part of its financial aid package. Interest rates reset every year but are fixed for the life of your loan. The current 2016–2017 APR for an undergraduate direct subsidized loan is 3.76%.
Direct Unsubsidized Loans
Direct unsubsidized loans are similar to their subsidized cousins, except that the government doesn’t pay interest while you’re in school; instead, the interest accumulates and is capitalized with the total loan amount. You don’t have to demonstrate financial need to receive one of these loans. The interest rate for 2016–2017 is a fixed APR of 3.76%.
VSAC Student Loans
When the federal government offers a subsidized or unsubsidized loan, it provides the money to you through one of its preferred servicers. The servicer holds the loan, and when you begin repayment, you make all of your payments to this servicer. Popular federal loan servicers include VSAC, Nelnet, Navient Solutions and MOHELA. Because these federal loans offer aid on the basis of financial need and often don’t take your credit score or income into account, these servicers may offer student loans for bad credit.
Obama Student Loan Forgiveness
With the rising number of students with extensive student loan debt, federal student loan forgiveness has become a hot-button issue. While President Obama has made it easier for students to repay their federal loans, there’s no widespread “Obama student loan forgiveness.” Instead, several income-based repayment plans exist that allow you to make monthly payments based on your total income. These programs forgive the remaining balance of your loan after 20 or 25 years. Additionally, if you work in certain areas, such as public service, you may qualify to have your loans forgiven after 10 years of repayment. You can find out more about federal student loan forgiveness at studentloans.gov.
How Do Student Loans Work?
Your particular financial aid package spells out the federal loans you receive for the year. If necessary, you then apply for private loans to make up the difference between your financial aid amount and the cost of school tuition. International student loans are available for foreign students, although many times a U.S. citizen or permanent resident is required to co-sign for the loan.
After you finish school, it’s time to start repaying your loans. Many loans offer at least a six-month grace period in the hopes that you can find employment before you begin to make monthly payments. If you find that your monthly payment is too high, you may apply for an income based student loan repayment plan, which caps federal loan payments based on your income. If you can’t pay your loans due to unemployment or some other hardship, you may qualify for a student loan deferment, which allows you to postpone payments for a set amount of time.
Be careful when taking this approach; because your interest continues to accrue while you aren’t making payments, you might end up with a much higher balance in the long run. In fact, such deferments are part of the student loan bubble, which economists fear may hurt the economy. As of August 2016, more than 40% of borrowers of federal loans are in deferment, default or delinquency on more than $200 billion of loans.
How to Apply for Student Loans
To apply for federal loans, you first fill out the FAFSA. Your school also puts together a financial aid package that demonstrates what federal loans you may receive; the amount may or may not cover your full tuition. You can then shop around for private loans if necessary. Many private lenders offer online loan applications for convenience, and you can keep track of all federal loans online at the National Student Loan Data System (NSLDS) at nslds.ed.gov.
List of Popular Student Loan Providers
● Great Lakes Student Loans
● Nelnet Student Loans
● Citibank Student Loans
● Chase Student loans
● Aspire Student Loans
● Bank of America Student Loans
● Sofi Student Loans
● Capital One Student Loans
● Student Loan Hero
● Stafford Student Loans
Student Debt Trap
What you don’t know can hurt you. American borrowers owe a record $1.2 trillion in student loan debt, a number that has tripled in the last ten years, according to Sallie Mae. Within those numbers, nearly one million retirees are saddled with $18 billion in outstanding student loans, a dollar amount that has risen 600 percent in the last decade.
Average student loan debt grows every year. Graduates today walk away from school owing about $35,000. At least 23 percent of American adults have some education debt, including debt for their spouse or partner, or a child or grandchild. The numbers are higher for households headed by young adults – more than 40 percent carry student loan debt.
Millions of people owe but did not complete a degree program. People who take on student loans but do not complete their degree are more likely to fall behind on payments, according to a survey by the Federal Reserve.
1. You Can’t Bankrupt Student Loans
While it’s possible to have a student loan discharged in bankruptcy, it’s extremely difficult and rarely happens. In general, student loans must be repaid even if the borrower does not complete the program, cannot find a job or is in some way dissatisfied with the education purchased with the funds. Exceptions are made for borrowers who become totally and permanently disabled or who die.
To bankrupt a student loan, the borrower must prove to the court that the loans cause undue hardship. This is quite difficult. Repayment must prevent the borrower from maintaining a “minimal” standard of living; there must be evidence that the hardship will continue for “a significant portion” of the repayment period; the borrower must have made good faith efforts to repay the loan, for a minimum of five years. If any one of those conditions cannot be met, the loan must be repaid.
Far more likely is an offer for deferment or forbearance. Payments are suspended, but will eventually resume. On some types of loans, the government will pay the interest charges during a deferment. During forbearance, the interest continues to accrue.
Additionally, per the Fair Credit Reporting Act (FCRA), most derogatory information remains on your credit reports for between seven and 10 years, depending on the item. But the one item that is not addressed in the FCRA is the student loan. The amount of time a defaulted student loan can remain on a credit report is instead found in the Higher Education Act, which says that student loans can remain on your credit reports until they’ve been paid.
2. Student Loans Can Prevent You From Buying a Home
Getting a mortgage depends on many factors. If you’re planning on buying a home and have outstanding student loans, there are two ways student loans come into play when you’re applying for a mortgage.
First, payment history. The mortgage lender is not likely to approve an application from a borrower whose credit report shows late payments. Some lenders will not allow more than one 30-day late payment during the past year. Few, if any, lenders will approve an application from someone who has paid a bill 60, 90 or more days late. So if the borrower has struggled at all with payments on the student loan, mortgage lenders might turn away.
Second, debt ratio. To qualify for a mortgage, your new mortgage payment cannot exceed a certain percentage of your income (usually around 28 percent). Furthermore, the total of all of your debt payments, including the new loan, cannot exceed a certain percentage (usually 36 to 40 percent). So a borrower who earns $40,000 per year might be approved for a mortgage if the payment, including taxes and homeowners insurance, does not exceed about $933 AND if the borrower’s total debt payments, including the mortgage and any credit cards, student loans, auto loan and other monthly obligations do not exceed $1,333. That’s not much wiggle room. Since the average student loan payment is over $600 per month, many borrowers will be excluded from even a modest mortgage if it hinges on his or her debt ratio.
3. Co-Signers Suffer Just as Much or More Than Primary Borrowers
Co-signing means taking full financial responsibility for a loan in the event the primary borrower defaults. At the time the loan is needed, the co-signer wants to help. The harsh reality is that if the borrower can’t qualify for a loan, it’s much smarter to help him improve his own credit standing than to co-sign for the loan. None of us wants to be saddled with the financial obligations of someone we tried to help with education financing. But that is the door we open when we co-sign.
Think the student loan will fade into memory when you’re old enough? Think again. Many well-meaning parents and grandparents discover that unmanageable student loan debt follows them into retirement, offering no reprieve to older Americans who have stopped working and begun to live on a limited fixed retirement income. Hundreds of thousands of retirees have their social security checks garnished to repay student loans in default.
Even with the best intentions, co-signing is a bad idea. If the borrower defaults, both signers’ credit suffers equally. Since the repayment period on student loans usually ranges from ten to twenty years or even longer, the risk remains for a very long time.
Avoiding Student Loans
Today’s students are tasked with the steep challenge of getting an education without an unmanageable price tag. Parents today can set up pre-tax accounts for children’s education. Students must apply maximum effort to finding grants, scholarships and other school funding. The trick is to avoid the student loan trap. Knowledge is the first step.
Here’s the issue. The CARD Act prevents someone under 21 from getting a credit card, but there is no law preventing an 18 year old from getting into student loan debt. If an 18 year old isn’t responsible enough to open a credit card, how are they responsible enough to decide that $20,000 per year for the next four years is a smart financial decision?
The challenge is, having a fully successful credit talk with college-bound high school kids is like trying to explain to a non-parent how it is to have an infant… it’s next to impossible. That certainly doesn’t mean you throw up your arms and leave your 18-year-old to learn about credit through trial and error.
There are some angles for getting your message across, successfully. Here are my suggestions.
Show, Don’t Just Tell
I think trying to tell young kids that they should avoid credit cards is about as effective as telling them not to drink. In fact, I would suggest giving your kids a credit card a year or two before they’re packing for college. It would certainly grab their attention and it gives you a controlled environment in which to teach them the right and wrong way to manage the card. It’s not unlike a learner’s permit for a credit card.
Share Your Mistakes
I’m not so far removed from that group that I don’t remember how I was. I didn’t want to listen to anyone, especially people coming to talk about a boring topic like credit reports and credit scores. I certainly didn’t care about my credit when I got to college, which is probably why I cheerfully filled out and returned that student credit card application waiting for me in my student mailbox.
I know a $300 credit limit isn’t much but I sure did some damage! Thankfully, I was responsible enough to make the minimum payments. By the time I graduated, I had about $1,700 in credit card debt, which in the grand scheme of things isn’t a lot unless you’re unemployed and living at home with your parents. Brutal!
Bring Out the Job Card
I’ve been taking the “some employers look at credit reports” angle lately. It’s 100% true and it’s heavy artillery. Nothing shuts up a room full of high school kids faster than telling them that their impressive (and expensive) college degrees can be somewhat negated by a poor credit report caused by not paying their utility bills at the frat house.
Take It Seriously
I know what some of you are thinking: Are you serious? Not only am I very serious, I believe parents who pretend that their kids aren’t going to try new things in college have their heads in the sand, which is dangerous. Avoiding the credit card talk is no different than avoiding other critical topics like unprotected sex, “no means no”, drugs, tattoos, and drinking and driving.
Don’t get me wrong: you don’t have to be Cliff Huxtable to have this discussion. And you certainly don’t have to convey your thoughts in a way that would win you an Emmy award. There is no script. There are no “best practices.” Nobody knows the best way to convince your kids that using credit while away at college is perfectly fine — if you use it responsibly.
Just don’t let them walk out that door without making an effort.
With the high cost of a college education, most students graduate with at least some student loan debt. Shopping around to consolidate your loans isn’t something you should ignore; consolidating not only gives you the convenience of one monthly payment, but it also gives you a chance to get a lower interest rate, which can reduce your loan payments over time. Doing your research on how to save money both before and after receiving aid is a smart way to take out only those loans you can afford and keep yourself financially sound.