When it comes to student loans, there are a few common misunderstandings we frequently encounter. From the assumption that all loans are identical to confusion about pre-payment fees, here are four of the most common student loan repayment misconceptions
Misconception: Student loans are all the same.
Truth: Student loans are made by the federal government, as well as private lenders, and come with a wide variety of interest rates and terms.
Federal loans are made by the U.S. Department of Education. They have fixed interest rates that may be subsidized (paid by the government) while the student is in school. They offer several flexible repayment options, and in most cases, they don’t require a credit check or cosigner.
To look up information about the rates, terms and the servicer(s) of your federal loans, go to nslds.ed.gov. You would have originally applied for these loans by first completing the Free Application for Federal Student Aid (FAFSA) and then a Master Promissory Note (MPN).
Private loans are made by banks, credit unions, and financial institutions. They typically come with a choice of fixed or variable interest rates and there are usually several repayment options to choose from. Private loans require a credit check and may require a qualified cosigner. Most private loans come with no application, origination, or disbursement fees.
Private loans are often used to fill the gap when students need more assistance to meet college costs after financial aid is applied to their accounts. Information on your private loan rates and terms can be obtained from your private loan servicer, who can also offer information and support throughout the life of your loan.
It is important to know the types of loans you have, the terms of those loans, and the options available to make your repayment even smoother.
Tip: Always open and act upon communications received from your federal and private loan servicers. Remember: Terms and benefits will vary between federal and private loans.
Misconception: After you leave school, you are not allowed to combine your loans into one new loan.
Truth: Both federal and private loan programs offer loan consolidation or refinancing options.
Federal consolidation at a glance: The federal Direct Consolidation Loan program allows you to combine one or more federal student loans into one new loan. The interest rate of the new consolidation loan is the weighted average of all the original loans being consolidated, rounded up to the nearest one-eighth of one percent. No credit check is required. You can reduce monthly payments by extending the repayment term, but be aware this may increase your overall repayment costs.
Private loan refinancing at a glance: Private loan refinancing allows you to replace your existing private and/or federal student loans with a new private student loan under different terms. A credit check is required and your credit score and other factors will typically determine the interest rate on the new refinance loan. Because market conditions are currently so favorable, borrowers with high interest rate student loans may be able to refinance those loans and receive interest rates and terms that better suit their current and future needs.
How do you know which is right for you?
If you have student loans with high interest rates, refinancing with a private loan can be a great option, as you may save money over the life of your loans with a lower interest rate. But private loan refinancing isn’t right for everyone. If you already have low interest rates or federal loans that carry special repayment benefits and certain forgiveness or discharge programs, it might be best to explore federal loan consolidation. There are unique benefits to both, so be sure to do your research.
Misconception: There are no options to change or reduce your monthly payment on your student loans.
Truth: There are a variety of ways to reduce or alter your student loan payments.
Whether you have a federal or private loan, your loan servicer may be able to assist you with finding a payment plan that meets your individual financial circumstances. For example, federal student loans may allow you to have your monthly payments tied to your income or in some cases, may provide long-term forgiveness options. Federal loan repayment options also include extended repayment plans and federal loan consolidation that allow you to pay off your loan for up to 25 years.
For private loan borrowers looking to lower their monthly payments, some lenders allow you to refinance your loans with a repayment term of up to 25 years.
If at any time you have questions about your payments or have difficulty making payments, it’s important to discuss your options with your federal and private loan servicers.
Tip: With a shorter repayment term, you will lower your overall cost of borrowing, but you will have higher monthly payments. With a longer repayment term you will lower your monthly payment amount, but you will increase your overall cost of borrowing.
Misconception: Borrowers who pay their loans off faster are charged pre-payment fees.
Truth: In 2008, the federal government made it unlawful for any lender to impose a fee or penalty for making extra payments or for paying off the loan early.
If you have taken out any federal or private student loans since 2008 and want to pre-pay on your loans, you could possibly save significant amounts in interest costs, and you will not be charged any pre-payment fees or penalties. If you have any doubts about when you took out your loans and the terms of those loans be sure to read your loan agreements or check with your loan servicer. It never hurts to be 100 percent certain.
Tip: When making payments that exceed the amount due, be sure to indicate that any extra payment should be applied to your loan principal. Be sure to read your loan agreement to ensure this is the case.
Understanding how your loans work and the options available to you will help make your repayment process smoother, and also set you up for a sound and healthy financial future. If you’re still unsure of your options, don’t hesitate to reach out to your servicer or provider to help with navigating the process.
Anne Del Plato is the Regional Director for U-fi Student Loans and is an expert in many aspects of financial aid, student loans, and debt management. Anne’s experience includes positions in a number of areas of higher education finance including college financial aid offices, training and outreach development for a state financial aid agency, and most recently, as a Regional Director of Nelnet’s Partner Solutions team. Anne has spoken at numerous financial aid conferences across the Northeastern United States.