Each year, more and more Americans choose to attend college, and subsequently, our nation continues to see student loan debt climb (now surpassing credit card and auto loan totals). In effect, searching for strategic repayment savings is no longer “just” smart – it’s essential. Choosing the best avenue for repayment has grown more difficult, thanks to the Federal Direct Consolidation Loan Program and advantageous rates for those eligible to refinance.
Many do not realize the opportunity for prudent decisions on student loans even while attending school. To lay a foundation for understanding these complexities, one should be able to answer these questions about his/her loans:
Subsidized Student Loans and Interest
Did you know that your loans could be charging you interest, and even worse, compounding that interest before you start making payments? If your loans are subsidized, the government will make your interest payments for you while you are still in school. On the other hand, if your student loans are unsubsidized, this means that your interest is accruing from the date the loan is taken. You have the option to make payments beginning immediately but are not required to do so. If your loans are unsubsidized and you elect to not make payments towards your accrued interest, this amount may be capitalized (added to the principal balance), compounding from the date payments began.
Pay Off Student Loans or Get Student Loan Debt Forgiven
Federal student loans have many flexible repayment programs. Borrowers may be eligible for repayment plans such as income-based repayment which caps your payments at 15% of discretionary income or the public service loan forgiveness program. The public service loan forgiveness program allows individuals who are employed by a government or not-for-profit organization to have their loans forgiven after 120 payments. (Federal Loan Repayment Programs are not limited to the options mentioned. Check to make sure you qualify and pay attention to the requirements throughout your involvement in the program.)
These repayment options are possible by consolidating through the Federal Direct Consolidation Loan program. Everyone may not qualify for these repayment methods. For individuals who do not qualify, consolidation itself may allow for a lower monthly payment.
Not to be confused with student loan refinancing, borrowers who consolidate are not looking to save money on the interest payments made over the life of the loan. Instead, payments are stretched out over a longer repayment period with an interest rate reflective of the weighted average (rounded to the nearest 1/8th) of all the individual loans consolidated.
Pay Off Debt Faster with Lower Interest Rates
If your circumstances allow and you want to pay off student loans in a short period of time, then refinancing might be a better option. Refinancing (again, not to be confused with consolidation) is performed through a private company where your eligibility will be determined by your credit worthiness.
One negative side effect to refinancing is permanently losing access to federal forgiveness programs. Once you refinance through a private lender, you are held to the less-flexible rules associated with private lending.
Sometimes people who are not eligible for refinancing can have their interest rates lowered if they set up an automatic withdrawal repayment schedule.
Simply knowing a few small details about your loans could save you thousands of dollars. If you use that extra savings wisely, it can be used to meet additional financial goals. It is worth talking to a fee-only financial advisor to find out.
Date Published: July 13, 2016
Author: Chad R. McPherson
Phone: (812) 602-5980