Repaying Student Loans
Student Loans are a form of financial aid designed to assist students in covering the costs associated with attending college when personal resources, scholarships, and grants are not enough to cover the total cost. As a part of a financial aid package, student loans differ from the other components of financial aid such as grants and scholarships, as, rather obviously, student loans have to be repaid. However, if you do your research, you can find the student loan that is best for you and minimize the amount you will have in repaying student loans.
Types of Student Loans
There are essentially two kinds of student loans available: private student loans and federal student loans. Federal Student can be either subsidized or unsubsidized, depending upon financial need. To determine eligibility for federal student loans, students need to submit a FAFSA (Free Application for Federal Student Aid) so that their financial need can be determined. The calculated need figure will impact the amount and type of federal student loans awarded. If federal student loans are not enough to cover the cost of college, then students can turn to private student loans as a final source of funding. Students can apply for private student loans through private lenders, such as banks or credit unions, as well as through dedicated lending institutions, such as Sallie Mae.
- The interest rate on student loans could be at least 2% lower than the interest rate on conventional loans.
- All federal loans have a grace period after a student graduates until the repayment period begins. Many private loans will offer a grace period as well, but students should check the terms of the loan.
- Students have multiple options available to lengthen the period of the repayment. While that may decrease the amount of monthly repayment, it increases the total amount of interest to be paid on the principal.
- If students have multiple student loans, then they can consolidate those loans into one loan; however, federal loans and private loans cannot be consolidated together.
- If students come under financial hardship they may have deferment options available to them from their lender. Students should check with their lender for those options.
- For subsidized federal student loans, interest on the loan is paid by the U.S. government during the time students are in school, so they are only responsible for the interest accrued during their repayment period.
- A promissory note is signed as an agreement between the borrower and the lender, which then binds the two parties in the terms and conditions of the repayment process as agreed upon by both.
How To Pay Back Student Loans Faster
Student lenders often offer incentives to make their loan products stand out from the crowd. The industry calls these borrower benefits but they may also be called borrower rewards or incentives. While they can often save you lots of money over the life of a loan, you should consider them carefully to see if they will really benefit you.
Take Advantage of Borrower Benefits and Rewards
- Interest Rate Reduction. This is usually a percentage by which the interest rate on your loan will decrease after a certain number of on-time payments or enrolling in automatic payments.
- Principal Reduction. This is usually a percentage of the original principal balance of the loan that is deducted from the amount owed. It is earned after a certain number of on-time payments or sometimes upon your graduation.
- Waiver of Fees. This is when the fees related to your student loan, such as the origination fee, are not charged, lowering your total cost.
- Cash Rebate. This is when the borrower gets a fixed amount of money back (or it is applied to a payment) after a certain period of time or when certain conditions are met.
- Waiver of Final Payments. Under certain conditions, your final are last few payments may be waived.
- Automatic—you automatically receive the incentive or benefit without having to qualify.
- Earned—you must qualify for the reward. A common earned reward is an interest rate reduction for setting up automatic payments; another is an interest rate reduction for a pre-determined number of on-time payments. Note that “earned” benefits can sometimes be “un-earned” if you stop meeting the requirements. Ask your selected lender for details about borrower benefits, including requirements to qualify.
But remember to shop around! Not all benefits are included with all loans. Know what you’re entitled to before you borrow, and calculate your savings ahead of time.
Other Important Notes:
- Interest rate reductions are often more valuable than principal reductions. The reason: you usually get the benefit of the rate reduction each year, rather than just once. However, if you plan to repay the loan very soon, a principal reduction could be better, since its value is immediate.
- Read the fine print very carefully. Borrower rewards can sometimes have restrictions and limits. Talk to the lender for all the details. Ask specifically if there are any circumstances a lender is able to revoke your rewards.
- Hold up your end of the bargain. This is your money and it is your responsibility to make sure you comply with the requirements of earning the rewards. The most common requirements are automatic debit of your monthly payment and a certain number of on-time payments.
- Set up auto debit for your monthly payment. This is one of the most common requirements, and it’s an easy benefit to earn. Auto-debit saves you the hassle of having to remember to make payments, and it can also save you money.
- Make monthly payments on time. Understand how a lender defines “on time.” With some lenders, a payment that is even one day late may disqualify you from receiving any benefit that requires on-time payment.
5 Bonus Tips on Paying Back Faster
Debt is a burden that nobody wants to carry forever. But paying what you owe faster won’t just save you stress, it’ll save you money, too. So find some ambition and get savvy because you could have more cash to spend on the things you need or to save for the things you want. Here’s how to do it:
Commit to paying more. A mantra to remember: the longer it takes you to pay off your debt, the more it’s going to cost you. If your minimum payment is interest-only and you never pay down your principal, you could spend thousands without shrinking your debt at all. Also, compounding interest means each extra dollar you pay down now is a dollar plus interest that you don’t have to pay later. Paying an extra $10 now could save you $20 in the long run.
Pay off high-interest loans first. That usually means your private loans. With higher rates and strict repayment terms, private loans tend to cost more than their federal counterparts. The higher rate means you pay more interest and less principal, so the faster you get rid of them the better. Again, the solution is simple: pay your private loans first.
Capitalize on small savings like tax deductions. The federal government allows students to deduct up to $2,500 in interest paid on student loans each year. Fill out a 1040 or 1040A federal tax form to claim the deduction, but check with your tax preparer or visit the IRS website to make sure that you qualify.
Avoid new debt. Nothing makes it harder to pay your debt than increasing what you owe, especially if that new debt comes with a high interest rate. Credit cards are the biggest offender, so consider avoiding them by switching to debit. That way you won’t spend more than you have and you won’t have to choose between paying off your card and paying off your student loans.
Take advantage of your grace period. Just because you’re not yet obliged to pay your loan doesn’t mean you shouldn’t start planning for the day you are. Start putting money aside each month and get in the habit of saving. Then when you start paying, you’ll have a cushion of savings to fall back on if you find yourself in a hard financial situation. Or you can start off right by paying down a large chunk of your principal, saving you even more in interest you would have paid over the life of your loan.
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