How To Pay Back Student Loans Faster
Take Advantage of Borrower Benefits and Rewards
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.
Examples of benefits:
- 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.
These benefits are either automatic or they are earned:
- 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.
Eligibility for Borrower Rewards
To qualify for borrower rewards, you may have to meet criteria specified by the lender. Some examples of these requirements are:
- A certain number of consecutive, on-time payments
- Automatic direct debit of your monthly payment from a checking or savings account
Check with each lender to see how and if you qualify for borrower rewards offered.
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.
Student Loan Interest Deduction
When filing your income taxes with the federal government each year, be sure to check for qualifying educational deductions. If you took out a loan specifically to pay for college or other educational expenses, then you may have what is called a qualified student loan, which can entitle you to a student loan interest deduction of up to $2,500, or the amount of interest paid if less.
These deductions do not need to be itemized on the Form 1040 Schedule A since they are considered an adjustment
to your income. You may be eligible to claim this deduction if:
- You are considered legally obligated to pay interest on a student loan that qualifies.
- You paid interest on a qualified student loan in that tax year.
- Your modified adjusted gross income is less than the annual specified amount.
- You are not filing as married separately, and someone else is not claiming you, and/or your spouse if filing jointly, as dependents.
If during the year, you paid $600 or more in interest on a qualified student loan, whomever you paid the interest to will send you a 1090-E form detailing the amount paid.
To learn more about this and more possible educational deductions through the IRS, see Tax Benefits for Education, Publication 970, or the Form 1040 Instructions to determine your eligibility.
Here are some potential pitfalls:
- Failure to continuously pay on time
- Discontinuing the use of automatic payments from a checking or savings account for the monthly payment
- Not understanding the definition of “on-time” payment
- Cancellation of borrower benefits by the lender or the sale of the loan to another lender
- Failure to continue to meet the requirements for the borrower benefits means you may owe the lender the amount saved from using the benefits
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