Intro to Student Loans
They told you to pay attention in school, they told you to study hard, they told you to go to college, and they told you doing all of this would increase the chances of landing a great job. While this may be true, one thing people often leave out when preaching this is: once you do all of this, you'll likely be in enough debt to watch your paychecks disappear before your eyes like a David Blaine trick. The game is the game.
Before we begin finessin’, let’s run through an overview of student loans and the different types.
On a broad level, there are two types of student loans — federal and private. Though they serve the same purpose, there are key differences between them. Federal loans come from Uncle Sam ‘nem and usually offer lower interest rates and more flexible repayment plans. On the other hand, private loans come from banks and other financial institutions and aren’t quite as borrower-friendly.
Federal loans consist of five types — four direct loans and one indirect loan. Direct loans come directly from the U.S. Dept. of Education, and indirect loans come from your school but are funded by the government.
Direct subsidized loans: These are for the financially-challenged undergrad students. If you never had to cook food on a kerosene heater growing up, then chances are you don’t qualify for these.
Direct unsubsidized loans: These are available to undergrad, graduate and, professional students. You don’t have to have financial needs. Even Tanner from the private school in the suburbs is eligible.
Direct PLUS loans: These are available to graduate or professional students, as well as parents of undergrad students. The intent is to offset expenses not covered by other financial aid. Think of it as a “we can’t solve all your problems, but here goes a lil’ somethin’ for ya” fund.
Direct Consolidation loans: Consolidation loans allow you to combine all your federal loans into one loan, making it easier to keep up with them. I’m not sure what it is, but having one lump sum leave your paycheck every month is easier to deal with mentally than having multiple payments withdrawn.
Perkins Loan Program: Available to undergraduate and graduate students, these loans come directly from your school (you will also make the payments to your school). They’re based on financial need, so if you’ve never been so broke that you had to borrow gas money just so you could drive somewhere to borrow more money, you probably don’t qualify. You will make payments to your school.
Here are the differences between subsidized and unsubsidized loans:
Subsidized
- Based on financial need.
- Only available to undergrads.
- No interest charged while in school, during the grace period, or during payment postponement. (You may also be able to avoid interest under certain income-based repayment plans).
Unsubsidized
- Not based on financial need.
- Available to undergrad and graduate students.
- Interest is charged from the time the loan is disbursed.
Private loans are a lil’ bit trickier than federal loans. Applying for a federal loan is as simple as filling out the FAFSA, but the process for private loans varies by lender. You should always exhaust all of your federal student loan options before seeking a private student loan. Always.
Here are some things to note about private loans:
- Like with any lending decisions, a credit check is required when applying for a private loan. Considering most incoming undergrads aren’t old enough to have established credit, this is dumb as hell, but we all know how life works. 90% of private student loans have a cosigner. *Here* is a post in case you need a refresher on credit.
- Most have variable interest rates, meaning it fluctuates throughout the loan. One day it could be in your favor, the next day it could be a pain. It’s kinda like relationships. Don’t fall for the jig of a variable interest rate that starts low but slowly creeps up like a deadline. Stay woke, dawg.
Now, let’s get to some finessin’. For convenience sake, I’ll try to break this down into three distinct sections : future students/parents of future students, current students, and graduates. Each stage has distinct tips and tricks that will help you out.
Future students and parents of future students
It doesn’t matter if your parents are bus drivers, corporate executives, or gold medal athletes, your first priority should be completing the FAFSA. Even if you don’t qualify for the income-based aid, at least put yourself in a position to receive something. If not, you're leaving the chance for free money on the table. I’m sure this goes without saying, but I’m gonna say it anyway: a student loan is still a loan and must be paid back (with interest). Your goal should be to get as much money via scholarships and grants as possible. I won’t go into too much detail on scholarships because that’s a whole ‘nother topic, but there are plenty of free resources online to help with finding scholarships — including this simple tool.
Hopefully, the first section of this post was helpful, and you now know the difference between loan types. This will be important when determining which aid to accept and how much. It’s equally important in understanding your financial aid “award” letter.
Don’t let the name fool you. Your financial aid award is usually not much of an award. Schools typically combine your scholarship and grant money with loans to make your aid package look more significant. Don’t fall for that jig. Be sure to know just how much of your aid comes from loans.
Current students
School is stressful; there's no denying that. Considering the stress of balancing class, work, and social life, the last thing on a student's mind should be the debt waiting for them after graduation. Unfortunately, the game is the game, and this is a reality for many students. Especially senior year. As your college years start winding down — you know, you begin barely showing up to class (if you go at all), you find yourself switching from PBR and Busch Light to craft beers, and you often think to yourself, “damn, it’s about to get real” — there are some things you should begin to do:
- Know who you owe and how much. Seems obvious, I know, but you’d be surprised at how many people graduate and don’t know this information. Be sure to know who you owe because when the time comes to repay, you can damn sure believe they’ll know you.
- Know your grace period. Usually, you’ll have six months after you graduate before you begin payments (except PLUS loans, which starts when disbursed). With private loans, this could vary so double-check with your lender.
- Focus on what’s important. Trust me, you’ll have plenty of time after graduation to worry about debt and all’at, don’t spoil the last of those college golden years worrying about the inevitable. Use that energy for something worthwhile.
Graduates
Welp, the time has finally arrived. You came, you saw, and you [hopefully] conquered. No matter what you decided to do after school, there’s one common denominator — student loan debt. Just like the chances are high that a Whole Foods moving into your neighborhood signals gentrification, chances are also high that most of your peers have student loan debt as well. Here are a few tips:
1) Figure out the right repayment plan for YOU. The federal government offers eight types of repayment plans — including a standard, graduated and four income-based. The plan you choose can be changed at any time for free, so don't feel trapped with a choice. Below is a brief comparison of them:
— Standard (you’re automatically placed into this plan unless you opt out)
-Equal monthly payments for up to 10 years.
-Choose if you have a steady income and can afford monthly payments.
— Graduate
-Payments start low but increase over time. You’ll end up paying more monthly on the back-end of the loan.
-Choose if you can’t reasonably pay the amount from a standard plan, but you expect your income to increase over time.
— Income-based
-Payment amounts rise and fall with your income. You will have to recertify annually and get a new monthly payment total for the year.
-Choose if you’re in a profession that has fluctuating income. This could be for real estate people, lying used car salesmen, or your “entrepreneur” friend selling stock images on Gildan t-shirts.
Here is a repayment estimator provided by the U.S. Dept. of Education that helps you see how much you may pay monthly and overall.
2) Take advantage of your grace period. If you’re able to, during your grace period you should put aside however much you’ll eventually be paying back. This will help you get used to not having this money to spend.
3) Plan your attack strategy. You wouldn’t step in the ring against a prime Muhammad Ali without a strategy, would you? If you would, then godspeed. For the rest of us with some common sense, the answer is no. The same should go for paying off your student loans. Step into that financial slugfest with a strategy and don’t let Sallie Mae uppercut you and put you on a Worldstar video.
There are many strategies to consider when paying off your student loans as everybody’s situation is different. Below are two common examples (these apply to any debt, not just student loans):
— Debt Avalanche: This involves paying off loans with the highest interest rate first. This will save you the most money over time and allow you to pay off your loans the fastest.
— Debt Snowball: This involves paying off your smallest debt first, regardless of what the interest rate is. More times than not, people choose this strategy if they need moral victories. Sometimes it helps you mentally to see a debt disappear.
Now, if you choose one of these strategies, this doesn’t mean focus on one loan 100% and treat the others like a redheaded stepchild. Those low-interest loan payments don’t stop being due because you decided your strategy was to pay down the high-interest loans first, and those high balance loans don’t stop being due because you chose to pay off the smaller debt first. You’re still responsible for all your loans. This does mean, however, that if you have a few extra dollars every month, you should apply one of those strategies. It doesn’t have to be much, even paying an additional $12 on an $88 payment to make it an even $100 will save you a lot of money in the long run.
Unless you tell them otherwise, your lender will put any extra money you send in towards the balance of your next payment. You don’t want this; you want it applied to your principal balance. Request in writing to have any extra money you pay applied to your principal balance. Send in the letter via certified mail, get a return receipt, and keep a copy.
Loan Consolidations
Unfortunately, most folks are forced to take out multiple loans to cover their schooling expenses. Keeping up with these loans — their payment amounts, due dates, interest rates, etc. — can become a bigger hassle than driving in Atlanta during rush hour. This is where loan consolidation comes into play. Loan consolidation allows you to combine your multiple student loans into one single, bigger loan. Like most things in life, if it sounds too good to be true, it probably is. Loan consolidation isn’t always a walk in the park, there are pros and cons to doing this.
Pros:
- Less hassle. Dealing with debt is stressful enough, no need to add stress by trying to keep up with who you owe and how much. Combine all these debts into one and focus on what’s important — paying it off.
Note: if you have federal and private loans, I recommend you consolidate these separately. Keep federal loans together and private loans together.
- Lower monthly payments. Consolidating loans usually lengthens the life of the loan to 30 years, which in turn lowers your monthly payment.
- Renewed benefits. If you’ve already used up all your given deferment and forbearance time (more on these in next section), consolidating your student loans will reset these benefits, making them available again.
Cons:
- You may pay more long-term. Your monthly payments may be lower, but you may end up paying more in the long run due to interest. Pick your poison.
- You lose loan forgiveness credit. Public Service Loan Forgiveness (more on this to come) requires that you make 120 “qualifying” payments, and consolidating your current loans will cause this number to start over.
Consolidation notes:
- You need at least one loan in repayment or grace period.
- You can’t consolidate your private loans with your federal loans into a federal consolidation loan, but you can do vice versa. I don’t recommend it, though.
- If you ran off on the plug and your loans are in default, you must meet certain requirements before being able to consolidate loans.
Refinancing
On the surface, consolidation and refinancing are similar in that they take multiple loans and combine them into a single loan. Refinancing, however, involves taking out a loan to pay off your current student loans in hopes that the interest rate you get on your new loan is better than your current one.
For example, if someone owes $10,000 in student loans at a 6% interest rate, they may refinance and get a loan at 4% interest to pay off that $10,000 that’s remaining. You’ll still owe the same amount, just with less interest. This is especially helpful if your credit score has risen noticeably since you received the original loan and you’re now in a position to obtain a better interest rate. I’d recommend a mid-600’s credit score (at minimum) with a steady income before applying for refinancing. Don’t apply if your score is in the 500’s unless you want a humbling experience.
Nowadays, you have tons of companies begging you to let them refinance your student loans; there's no need to settle. When it comes to refinancing, applying with many different companies within a short period won't hurt your credit score because it's considered rate shopping. Always rate shop before settling for one company. A percentage point or two could save (or cost) you thousands in the long run.
As with consolidation, you give up certain benefits — like income-based plans, forgiveness programs, etc. — when you refinance your loans, but some companies are starting to add similar protections. Be sure to ask questions. Many apps offer these services right from your phone.
Deferment and Forbearance
We all know life tends to do what life does, and, well…lifes. I get it, you get it, and fortunately for us, Sallie Mae gets it. This is why deferments and forbearance are offered. These allow you to temporarily lower or stop your federal loan repayments when times get rough. A key difference between them is that during the deferment period, you’re not responsible for paying interest.
There are many types of deferments available so be sure to contact your lender about your situation and see if you’re eligible for one. I also highly recommend you exhaust your deferment options before looking into forbearance.
Loan Forgiveness
In certain situations, you can have your federal loans forgiven. The most common ways are through the Public Service Loan Forgiveness (PSLF) program, which is for government and non-profit workers, and through teacher loan forgiveness.
— Public Service Loan Forgiveness
Through the PSLF program, your loans are forgiven after you’ve made 120 qualifying payments under an income-based repayment plan. If you’re like me, you just thought to yourself, “Damn, 120 payments? The loan should be paid off by then!” but you’d be surprised.
A “qualifying payment” is a payment of the full amount due (no later than 15 days after the due date) while employed full-time. Payments while in school, during the grace period, and during deferment or forbearance don’t qualify. The payments also don’t have to be consecutive to count.
— Teacher Loan Forgiveness
Under the Teacher Loan Forgiveness Program (TLFP), you can have up to $17,500 of your loans forgiven if you teach for five complete and consecutive years. If you have a Perkins Loan, you could be eligible for loan cancellation for teaching full-time at a low-income school, or for teaching specific subjects. The minimum time required is only one full school year, but the longer you teach, the more of your debt that will be forgiven.
It’s a lot I could say about student loans. I could sit here all day writing about how they’re the worst thing since wet socks and Trump's presidency, but the reality is that they’re a reality. Complaining won’t make them go away and ignoring them won’t make them go away. Only those dead presidents will. The sooner you address them, the sooner they’ll be gone. We’re all in this together, fam. Like always, if you have questions about your particular situation, reach out to me for personalized advice. In the meantime, remember to drink more water, support local businesses and laugh a lil’ bit.
