The Definitive Guide To Student Loan Debt
Welcome to the Definitive Guide To Student Loan Debt! This is the most detailed resource available on how to take out student loans "the right way", and how to pay them off "the best way".
Why did I write this guide?
I hate student loan debt – I hate it with a passion. However, for most people, they will need it to get the education they need to be successful. But just because you need something doesn’t mean you have to be ignorant about how it works.
That is my goal – to show you how to get into a student loan smart, and how to get out of a student loan with as little pain as possible. Read these student loan success stories for motivation.
Who is this guide for?
This is a guide, and the purpose of the guide is to educate you and guide you. It is NOT a system and it will not help you magically pay for school or get out of debt. It will, however, take you through the process from start to finish put knowledge in your head, and give you tools to battle the student loan machine.
If you're not quite sure where to start or what to do, consider hiring a CFA to help you with your student loans. We recommend The Student Loan Planner to help you put together a solid financial plan for your student loan debt. Check out The Student Loan Planner here.
You can also opt into our free student loan email training course.
How to use this guide:
Each chapter is a standalone mini-guide that can be read in isolation, but to get the most of the book it would make sense to read it all the way through at least once, and then return to it as a reference resource when needed.
Chapter 1: What You Need To Know About Student Loans
Getting a student loan should be a difficult decision for people, but it is usually not. A student loan is like every other kind of debt in many ways, but there are subtle differences that make it more dangerous than most debt. It is important to really take the decision of getting a student loan with the same level of care that you would with a car loan or a mortgage.
We recommend really understanding the ROI of your college education before you embark on taking out any student loan debt.
Is this something you really want to be paying for 10 years or more?
1. STUDENT LOAN DEBT IS DEBT
With all debt, you should really understand what you are getting into. First, a student loan is just that: a loan. This means that you will owe someone money. In some cases it is a bank, in others it could be the US Government. Either way, you must pay it back. Second, as with all debt, it accrues interest.
This means that you not only have to pay back what you borrow, but you have to pay back more than you borrow, and that amount increases the longer you borrow. Think of it like a reverse savings account, where instead of earning money, you are accruing more debt.
Plus, having student loan debt can negatively impact your debt-to-income ratio, which could prevent you from buying a house, leasing a car, or even renting an apartment.
2. UNDERSTAND THE COLLATERAL
So, what are you borrowing against? Most of the debt you are used to is secured against something – you get a car loan and you are borrowing against your car; a mortgage is a loan against your house. If you don’t pay these types of loans, they simply repossess your car or house. With a student loan, you are borrowing against your personal future. It is assumed that by getting an education, you will earn more money. With that additional money, you should have no problem paying off the student loan.
That is a pretty big gamble for banks, or even the government to take. Remember, these folks aren’t here to better your life, they are here to better themselves. So, to prevent you from skipping out on your student loans, they made them nearly impossible to get rid of. By this, I mean that a student loan has a lot of restrictions that make it nearly impossible to discharge in bankruptcy. You pretty much have to die or be permanently disabled to get out of paying your student loan. If you can’t afford it, and try to skip out on paying it, they will garnish your wages. Like I mentioned above, you borrowed against your future earnings with a student loan, so that is what they will come after if you don’t pay.
3. READ THE FACTS
It is also important to look at the facts and figures going into a student loan. To start, you usually must sign a Master Promissory Note (MPN), which is a legal document in which you promise to repay your loan and any accrued interest and fees. This is usually available through your school’s financial aid office, but it is also available from the Department of Education. If you choose to go with a private lender, you must usually sign an additional promissory note. This note should also explain the terms and conditions of your loan. In most cases, you only need to sign one MPN, and it will be good for the duration of your study at the school.
Understanding The Details Of Student Loans
→ INTEREST RATE
The interest rate of a loan is how much it will cost you to borrow the money as a percent of the loan. It is calculated 2 ways: simple or compound.
Simple interest takes your loan amount (say $10,000), and calculates the interest 1 time. If your interest rate is 5%, your total interest on the loan will be $500. Compound interest, which is much more common for student loans, charges interest for the duration of the loan, calculated annually. This is where it gets scary. If you borrow the same amount ($10,000), at the same rate (5%), but it compounds annually and you make the minimum payments (which would be about $106/mo), your total interest paid over the course of the loan jumps to $2,728.
It is also important to note that you begin paying interest on the day you start to borrow the money, not just once repayment starts. This is usually the beginning of the quarter or semester. Most student loans let you defer the interest payments until you graduate, and then add it into your total loan amount, but you also have the option of paying the interest as it accrues while you are in school, which can save you a little bit of money down the road.
It is also important to note that federal student loan rates are set by the government, meaning that the rate can go up or down over time. However, with Federal loans, the rate you get when you take it out is the rate you have for the entire life of the loan, I will highlight the differences between federal and private, and subsidized versus unsubsidized a little later.
Also, don't over-emphasize the interest rate. The interest rate on student loan debt doesn't matter as much as people would think.
→ BORROWER REWARDS
Along with the interest rate, borrowers should carefully look at the rewards that are offered with their student loan. This doesn’t usually apply until repayment, but it can save some money by offering incentives such as interest rate reductions or cash-back for doing certain actions. These actions could be making one-time payments, signing up for paperless statement, or enrolling in the loan servicer’s automatic debit program.
You can find all the different Federal loan servicers here.
→ FEES
Currently, all federal student loan programs have a 1% fee that covers origination costs and the potential for default. The loan fee is usually deducted from the loan disbursement. As a result, it is extremely important that the financial aid office submit the amount to the lender that includes this fee, so that you pay the correct amount to the school. Most schools are aware of this and do this for you.
→ BORROWING LIMITS
There are limits to how much you can borrow from the federal government, both annually and in total over the course of your life. The actual amount you can borrow depends on the year you are in school. It goes up with time in school, since it is believed that your risk of finishing school drops with each additional year you are in. Once again, you are borrowing against your future earnings, so lenders calculate risk based on school completion (freshman are the most likely to drop out, followed by sophomores, etc.). Furthermore, there are limits on how much of your debt can be subsidized by the government.
It is important to note that these limits apply only to federal Direct Loans. It is also important to note that graduate and professional students enrolled in health care programs (such as becoming a doctor) may receive additional loan amounts beyond these limits (learn about HEAL loans here). Being a doctor is expensive!
Finally, you can see that going to graduate school gets you the highest limit, as this type of education usually has a good payoff, and the borrowers who pursue this type of education usually have the ability to pay back more debt.
Also, make sure you understand the differences between subsidized and unsubsidized student loans.
Federal Student Loan Borrowing Limits
** These amounts subject to change **
Dependent Undergraduate Student | Independent Undergraduate Student | Graduate and Professional Degrees | |
|---|---|---|---|
First Year | $5,500 (no more than $3,500 may be subsidized) | $9,500 (no more than $3,500 may be subsidized) | $20,500 |
Second Year | $6,500 (no more than $4,500 may be subsidized) | $10,500 (no more than $4,500 may be subsidized) | $20,500 |
Third Year and Beyond | $7,500 (no more than $5,500 may be subsidized) | $12,500 (no more than $5,500 may be subsidized) | $20,500 |
Maximum Borrowing Amount | $31,000 (no more than $23,000 of this amount may be subsidized) | $57,500 (no more than $23,000 of this amount may be subsidized) | $138,500 (no more than $65,500 of this amount may be subsidized) |
→ DISBURSEMENT POLICY
Generally, student loan payments are paid directly to the school, at which point they cover all tuition and fees, then room and board payable to the school, and finally, anything left over, is paid to the borrower to cover the cost of books, etc. If you live off-campus, the school will take the tuition out, and then you can use the remainder to pay your living expenses. If you are a first-year student, and a first time borrower, there are usually more restrictions in place – such as not being able to withdraw any excess funds until at least 30 days have passed since enrollment.
Many private student loans do offer the option of being paid directly to the borrower. In this case, it is important that you coordinate your payments with the university, so that you can make all of your payments on time, and not face fees from either the bank or the school.
→ REPAYMENT POLICY
For most loans, you do not have to repay any portion of the principal or interest while you are in school, and usually for a 6-month grace period after you graduate or leave school.
Federal student loan programs offer several different repayment plans that allow you to pay off your loan over periods ranging from 10 to 25 years. You usually receive more detailed information from your servicer once you have graduated or have left school. If you take out a private loan, you really want to be aware of what repayment options the lender offers, as it may differ from federal loan programs.
→ CANCELLATION POLICY
As I stated at the very beginning, student loans generally cannot be “cancelled” or discharged. However, if you have applied for a loan and have not drawn on it (i.e. you haven’t paid the school any money from the loan), you can usually call the lender or servicer and cancel the loan without risk.
In circumstances where your student loans are cancelled or discharged, you will likely owe taxes on the student loan debt forgiven.
Chapter 1 Summary
- Student loans are debt, just like a car loan or mortgage
- YOU are the collateral for this debt, and your future earnings are what will pay it back.
- The interest rates on student loans can vary, so make sure you read the fine print.
- But lenders do give borrowers incentives, such as discounts for signing up for direct debit
- Make sure you understand the Federal borrowing limits
- Student loans cannot usually be discharged or cancelled
Chapter 2: The Main Types Of Student Loans
There are several different types of student loans.
First, you have Federal student loans. These are the loans issued by the government through the Department of Education. There are multiple types of Federal student loans (and multiple repayment plans to go with each type). These loans are handled by Federal loan servicing companies, who are contracted by the Department of Education.
Then, you have private student loans. These are student loans issued by banks and credit unions. These loans don't offer as many "perks" as Federal loans, but they may offer better interest rates and other terms. You can learn about the different private student loan lenders here.
As it breaks down, there is currently (in 2022) about $1.8 trillion in student loan debt, as reported by the Federal Reserve. The U.S. Department of Education's loan portfolio is current at about $1.56 trillion. That means there is about $200 billion in private student loans.
Federal Student Loans and FAFSA
If you want to take out Federal Student Loans, you need to fill out the FAFSA (Free Application for Federal Student Aid). This application must be completed every year, starting in the last year of high school until there is no longer a POTENTIAL need for aid. You must start in the last year of high school because the application typically has a deadline in March or April of the year financial aid will be needed. For example, if you are going to want financial aid in the Fall semester, you must apply in Fall to Spring of the year before.
See the FAFSA deadlines here >>
As a side note, many colleges give out their need-based financial aid based on the FAFSA application. The sooner you submit the FAFSA, the higher your chance of getting financial aid.
I also emphasize that the application must be filled out each year you may want or need aid. It is simply not enough to fill out the application the first year. You must fill it out each year as your income and student status changes. I also strongly encourage you to fill it our regardless of your current need, as you may want to apply for aid as a graduate student. By filling it out each year, it gives the lender a clearer picture of your educational and financial history, which makes the lending process easier.
To qualify for a Federal student loan, a borrower must meet residency requirements, attend an eligible school or institution, and have not been convicted of a crime. It is important to note that Federal student loans are based on need, and while the FAFSA does ask for parental financial information, the ability to get student loans is not hindered by that information. However, it may impact other financial aid awards.
If you have concerns about your financial aid award, here are the steps to appealing a financial aid award.
Private Student Loans and Credit Scores
Private loans differ from Federal student loans because they do not require the completion of the FAFSA. Instead, they are more like traditional loans, in that you fill out a loan application, and you are qualified based on your credit history and ability to pay back the loan.
Also, since it is usually a student applying for the loan, it may require a co-signer, such as a parent, to be approved. In this case, the parent would be just as responsible as the student for paying back the loan. Although it is a private student loan, it still carries with it the same restrictions as a Federal student loan in terms of being discharged. It does allow for higher borrowing limits and has no income restrictions.
To get the best rates, and maybe not have the need for a cosigner, a student needs to have a high credit score and income. Here's some more tips on how to get a private student loan with no cosigner.
To check your credit score, use a free tool like Credit Karma to know where you stand.
Related: The Best Private Student Loans
The Types Of Federal Student Loans
There is currently one Federal student loan programs available to borrowers: William D. Ford Federal Direct Loan (Direct Loan) Program. There used to be a Federal Family Education Loan Program (FFEL or FFELP), but that program was discontinued in 2009.
Under the Direct Loan program, there are four types of loans:
Direct Subsidized Loan
Direct Subsidized Loans are for undergraduate students who demonstrate financial need. The interest rate on these student loans is currently 4.99% as of 2023. With the subsidized loan, the student is not usually charged interest on the loan during certain periods, such as during school and during the grace period.
Direct Unsubsidized Loan
Direct Unsubsidized Loans are for undergraduate and graduate students, but financial need is not required. The current interest rates are 4.99% for undergraduate students, and 6.54% for graduate and professional students. The student is responsible for interest during all periods, and it will accrue even when in school.
Direct PLUS Loan
Direct PLUS Loans are for parents of dependent undergraduate students and for graduate or professional students. Financial need is not required to get a PLUS loan. Student must be either a dependent undergraduate student for whom a parent is taking out a Direct PLUS Loan or a graduate or professional student who is receiving a Direct PLUS Loan. The current interest rate is 7.54%. Unlike other Federal loans, with PLUS loans, the borrower cannot have a negative credit history. The borrower is responsible for interest during all periods. PLUS loans also have limited repayment options compared to other Direct Loan types.
A note to parents - we never recommend parents borrow to pay for their children's education. Here's why.
Direct Consolidation Loan
Direct Consolidation Loans allow you to combine all of your eligible Federal student loans into a single loan with a single loan servicer. This is a great way to make payments easier after graduation - and it's free. Don't fall for student loan consolidation scams.
Federal Perkins Loan
Federal Perkins Loans are for undergraduate and graduate students. For these loans, eligibility depends on student’s financial need and availability of funds at the college, based on the student's FAFSA answers. The college’s financial aid office is the determining factor in Perkins Loans. The current interest rate is 5%. Unlike other Federal loans, the college is the lender for Perkins Loans, and all payments will be made to the college.
Federal Family Education Loans (FFEL)
An older loan program called the FFEL (Federal Family Education Loan) program no longer issues new loans. However, if you have FFEL loans, you might be subject to certain restrictions on what repayment plans you can qualify for. Make sure you read the plan carefully to see if you qualify.
Here's our full guide on how to handle your old FFEL loans.
Types Of Private Student Loans
There are two main types of private student loans.
There are private student loans for students going to school - which are similar to Federal student loans. There are also private student loans for refinancing, which are for graduates who want to change their student loan debt terms by getting a new loan (similar to refinancing a mortgage on a house).
The terms and conditions of private loans vary widely across different lenders. You can learn about all the major private student loan lenders on our list of the best student loan rates.
For all types of private loans (both in school and refinancing), we recommend looking at Credible. Credible is a service that compares all of the major student loan companies and helps find the best rate and terms for your situation. It's a very quick process, and you can see what works best for you.
Chapter 2 Summary
- Most student loans are Federal student loans
- Federal student loans require that the FAFSA be filled out each year
- Private student loans make their decisions based on your credit history
- The best types of Federal student loans are Subsidized Stafford loans
Chapter 3: Finding The Best Student Loan Options
So, now that you have all the information on the various types of student loans, you need to ask yourself if they are worth it. To break it down, think about what the collateral of the student loan is: your future earnings.
Just like a car loan is a backed by a physical car, and a home loan is backed by your house, a student loan is backed by your earnings.
So, if you are thinking about getting a student loan, you should think about what your earnings will be in the job you want and how much it will cost to get there.
For example, if you want to be a K-12 teacher, the current starting salary nationwide for teachers with no experience is $36,762. How much education can you afford to pay for to make that much money? To be safe, you should keep your total student loan debt below the minimum amount you would make on your first year of work. So, if you want to be a teacher, don’t go into more than $36,000 in debt.
Why do I choose that amount? You should never have to repay more than 10% of your income for student loan debt. Most student loan repayment programs are repaid over 10 years, so if you earned $36,762 for 10 years, your 10 year earnings would be $367,620. 10% of that would be your first year’s salary, or $36,762.
If you had to borrow $50,000 to become a teacher that makes $36,000, it would not be worth it. You will be paying too much on your student loans, and you will be struggling to make ends meet. Furthermore, your earning potential compared to what you spent doesn’t make sense.
How To Calculate The ROI On Your Student Loans
Let's look at the numbers. It's important to calculate the Return On Investment of your student loans. To exaggerate a bit - would you take out $250,000 in student loans to get an art degree and earn just $15,000 per year? No, of course not - but that's easy to see how it doesn't make sense.
Here's the formula that you can use to see if taking on student loans is worth it:
Amount Of Student Loans < First Year Salary
This formula isn't 100% accurate, but it's close and gives you a good estimate on the maximum you should spend.
Here's some examples, according to the National Association of Colleges and Employers:
- Engineering has a starting salary of $64,891. That means that engineers shouldn't typically exceed $64,981 in debt.
- Meanwhile, education (i.e. teachers) have a starting salary of $34,891. That means that teachers should spend more than that in student loan debt.
Finding Salary Information
When doing your ROI calculation, you can find salary information in a lot of places. While the average engineer starts at $64,891, different types of engineers and different parts of the country will pay differently. Some good starting points are:
- Glassdoor - You can enter different jobs at companies and see salary ranges.
- Salary.com - Allows you to search for jobs and get estimated salaries.
- NACE Salary Survey - A survey done by many different colleges across the country.
Ways To Offset The Amount Of Student Loans Needed
Remember, you don't have to borrow 100% of the cost of your education. There are ways to lower the amount you need to borrow.
First, you can apply for grants and scholarships. This is overlooked by 90% of college students. That means, for those that do try hard, there is lot's of money available to help pay for school. Even if you can only get scholarships for 50% of the cost of tuition - that's 50% you don't have to borrow. Read our other guide on How To Find College Scholarships.
Second, you can work during school to offset the cost. Beyond the money, employers have cited that graduates who've worked during school are more desirable and have better skills for the workplace. The reason? Communication and problem solving are what employers want, and it's simply not taught in school. Don't shy away from working - you'll be glad you did after graduation.
What's The Best Option For Me?
This is a tough call, but if you have to take out a student loan, you should definitely stick to Federal student loans.
For parents reading this: Parents should NEVER take out a loan to pay for their children's education. There are many options to help pay for college, but parents can't get a loan for retirement. Unless parents can pay cash for their children's education, they shouldn't be contributing money they can't afford.
If you follow the ROI calculation, even with the borrowing limits, Federal student loans are your best choice because:
- They have the best interest rates
- They have the fewest borrower restrictions
- There are many programs to get them discharged in the future
- There are multiple student loan forgiveness programs that allow them to be forgiven after a certain period of repayment
When applying to school, you need to balance the cost and the benefit. Here's a great guide to how to figure out where to apply to college: Crafting a College List - Finding Academic And Financial Fit.
Chapter 3 Summary
- Student loans AREN’T always worth it!
- You need to do a ROI (Return on Investment) calculation when deciding your education expenses
- The best student loans are Stafford Subsidized and Unsubsidized Loans
- It’s always better to work while in school and try to avoid debt
Chapter 4: Student Loan Repayment Plans
Once you graduate, it’s time to start thinking about your student loan repayment options. Within 6 months of graduating, your student loan servicer should contact you via mail and let you know how to being making payments.
If, for some reason, you don’t know who owns your student loans, you can contact your school’s financial aid office, or use this service provided by the U.S. Department of Education: National Student Loan Data System. If you have private student loans, you can find your lender by looking on your credit report. You can get one free credit report per year at AnnualCreditReport.com.
Beware: If you don’t make any choices regarding your student loan debt repayment, you will simply default into the standard repayment plan. If this plan is affordable for you, I highly recommend that you stick with it. However, if you can’t afford it, you should look into these other student loan repayment options. A lot of borrowers never change their repayment plan, then go into default because they can't afford the payments. If you can't afford your loan payments on the standard plan, change your repayment plan to one of the income based plans listed below.
To change your student loan repayment plan, you simply need to call your lender or login to StudentAid.gov. There are a lot of "student aid" companies out there that will try to scam you and want you to pay hundreds or thousands of dollars to make this change for you. You don't need to pay - it's free! Just call your lender.
Standard Repayment Plan
The standard repayment plan is the most similar to a traditional loan repayment. You will make equal payments on your student loan for up to 10 years. The minimum payment is at least $50 per month. The standard repayment plan is available for all student loan types.
Graduated Repayment Plan
The graduated repayment plan is just like it sounds – you pay a lower payment up front and it slowly grows over time. This is the ideal plan if you have a low income now, but expect it to increase in the next several years. Under this plan, your payments will start low, and increase every two years – and the loan is still paid back in 10 years. The highest payment will never be more than 3x the lowest payment. This repayment plan is also available for all student loan types and is still considered to be one of the standard repayment plan options.
Extended Repayment Plan
The extended repayment plan is designed to lower your payments by allowing you to pay over a longer period of time – up to 25 years. To qualify for the extended program, you typically have to have over $30,000 in outstanding student loan debt, and not be able to make payments under the standard repayment plan. With this plan, you may also be able to qualify for graduated payments, as well as traditional fixed payments. This repayment plan is available for all student loan types.
Income Based Repayment Plan (IBR)
The Income-Based Repayment Plan is designed to lower your monthly payments to help you if you have a financial hardship. To qualify for income-based repayment, you have to meet the following criteria: The amount you would normally pay on the standard repayment plan exceeds 15% of the difference between your Adjusted Gross Income (AGI) and 150% of the poverty line.
It’s a very odd calculation, but you can figure it out with this calculator and a copy of your previous year’s tax return. With IBR, your payment amount may increase or decrease each year, based on your adjusted gross income. Also, once you initially qualify for IBR, you can continue using this plan until your student loan debt is paid off. This repayment plan is available to all student loan types except PLUS Loans made to parents.
Pay As You Earn Repayment Plan (PAYE)
The Pay As You Earn repayment plan option is designed to lower your monthly payments to help you if you have a financial hardship. This plan is only available to borrowers who took out a loan after October 1, 2007. This program uses the same calculation as the IBR repayment plan above, except your payment must exceed 10% of the difference between your AGI and 150% of the poverty line.
The difference with this program is that you can include the total of all your loans as part of that calculation. However, this program isn’t available for holders of FFEL Program Loans and PLUS Loans made to parents. To find out whether you qualify, you can check out this calculator.
You might also find this guide helpful: IBR vs. PAYE - Understanding The Difference
Revised Pay As You Earn Repayment Plan (RePAYE)
The RePAYE option is designed to be an extension of the PAYE repayment plan, which will lower your monthly payments based on your income. Unlike PAYE, this option is available to all Direct Loan borrowers, regardless of loan origination date. This program uses the same calculation as the IBR repayment plan above, except your payment must exceed 10% of the difference between your AGI and 150% of the poverty line.
One of the great perks of the RePAYE program is that it offers a student loan interest subsidy.
The RePAYE option is available for all federal student loans except Parent PLUS, FFEL Program Loans, and Perkins loans. To find out whether you qualify, you can check out this calculator.
Income-Contingent Repayment Plan (ICR)
This is a repayment plan that is specifically for Direct Loan programs. It is designed for borrowers that need lower payments that the standard repayment plan, but don’t qualify for IBR or Pay As You Earn (PAYE). With this plan, you will make payments for up to 25 years, and your monthly payments will be based on your adjusted gross income, family size, and the total amount of your loans. Your payment will be the lesser of:
1) the amount you would have paid if you repaid your loan in 12 years multiplied by an income factor
2) 20% of your monthly discretionary income.
A big benefit of the income-contingent repayment plan is the 10% capitalization benefit. If your monthly payment is less that the amount of interest that accrues, the interest is added to your principal until it is 10% higher than your original loan balance. Then, any loan amount that remains after 25 years is forgiven. However, you may owe taxes on the amount of student loan debt that is forgiven.
Income-Sensitive Repayment Plan
The income-sensitive repayment plan is designed for FFEL loan programs, such as Federal Stafford Loans, PLUS Loans, and consolidation loans. Under this plan, your payments will increase or decrease based on your annual income. Payments will be made for a maximum of 10 years, at which point they may be forgiven. However, you may owe taxes on the amount that is forgiven. Each lender’s formula for calculating monthly payments varies, so check with your lender.
A Note About Income-Driven Repayment Plans
If you're planning to take advantage of an income-driven repayment plan, that's great if it makes sense for your budget and finances. However, don't expect to be able to spend much outside your loans, and don't think about paying extra if you're going to go for forgiveness.
First, income-driven repayment plans are the main programs to get student loan forgiveness. If that's your plan, you shouldn't plan on paying more even if you think it will make an impact on your student loan debt. Paying extra puts your loans into pay ahead status, which could harm your chances of forgiveness.
Also, if you're planning on buying a house in the future, it's extremely difficult to purchase a house while on an income driven repayment plan because of the mortgage and lending requirements around your student loan debt. Lenders won't typically use the amount of your monthly payment. Instead, they will rely on a calculation, which will increase your debt-to-income ratio.
It is possible to buy a house with student loans, but just much more challenging if you're on an income-driven repayment plan.
Chapter 4 Summary
- If you don’t elect a repayment plan, you will be entered into the Standard Repayment Plan
- You can elect for the graduated repayment plan and extended repayment plan without having to show any proof of financial hardship
- If you are having a financial hardship, you can apply for income-based repayment, Pay As You Earn repayment, contingent repayment, and income-sensitive repayment
- If any part of your student loan is forgiven due to your repayment plan, you may have to pay taxes on the amount of the loan forgiven
Chapter 5: Student Loan Deferment And Forbearance
Student loan deferment allows you to postpone payments on your student loans. Most loans automatically come with a 6 month grace period after you graduation (to allow graduating students time to find a job). This is the rule for most Federal student loans, including Stafford Loans, Direct Loans, PLUS Loans, Graduate PLUS Loans, and Federal Consolidation Loans. If you have a subsidized loan, interest doesn’t accrue during deferment. If you have an unsubsidized loan, interest does accrue.
If student loan deferment sounds like an option for you, there are many programs available you may qualify for. Some of the programs also coincide with student loan forgiveness programs. For example, the Peace Corps – not only do you qualify for deferment, but parts of your loan can be forgiven all together.
Student loan deferment is only a temporary solution, so make sure that you are still making arrangements to pay back your loan. Remember, if you have a federal loan, it cannot be eliminated through bankruptcy. You will still be responsible for the loan until it is paid in full.
Student Loan Deferment Options
Program Name | Time Limit | Restrictions |
|---|---|---|
Action Programs Deferment | 36 Months |
|
Armed Forces Deferment | 36 Months |
|
Economic Hardship Deferment | 36 Months & Must Reapply Annually |
|
Graduate Fellowship Deferment Program | No Limit |
|
In-School Deferment Program | No Limit |
|
Internship/Residency Deferment Program | No Limit |
|
Parental Leave Deferment | 6 Months |
|
Peace Corps Deferment | 36 Months |
|
Post-Active Duty Student Deferment | 13 Months |
|
Military Service Deferment | No Limit |
|
Tax Exempt Organization Volunteer Deferment | 36 Months |
|
Teacher Shortage Area Deferment | 36 Months |
|
Temporary Total Disability Deferment | 36 Months & Must Reapply Every 6 Months |
|
Unemployment Deferment | 36 Months & Must Reapply Every 6 Months |
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Working Mother Deferment | 12 Months |
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PLUS Borrower with Dependent Student Deferment | No Limit |
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How To Apply For Deferment Programs
If you want to apply for any of the student loan deferment programs listed, it's important that you follow the proper steps to ensure that your loan deferment is processed correctly and quickly.
All of the deferment programs require a written application - calling your lender will not help you with the process, although they may be a good resource to check to see if you qualify.
All deferment programs are subject to your lender's approval. However, remember that your Federal loan holder is still bound by the laws and programs of the United States. They will not prevent you from getting a deferment you rightfully qualify for. However, if you don't qualify, or you don't submit the proper documentation, they do not have to grant the deferment.
Steps To Apply:
- Download the appropriate deferment request form
- Carefully read the entire application. Remember, some deferment applications require documentation (such as military orders) or signatures from authorized officials (such as a school's financial aid officer)
- Complete the form with all information required
- Mail the completed request to your loan holder via certified mail. This allows you to track and ensure that your lender signed for the letter.
Final Thought On Deferment Programs
Remember, student loan deferment programs are designed to be TEMPORARY solutions to your student loan hardship. Most of the programs have limits, and those that do not are limited by the time you're in school or deployed in the military.
Deferments can also be expensive for borrowers. Unless you have a subsidized loan, the interest is still accruing and you'll be responsible for it after the deferment period is over.
A better option than student loan deferment is to apply for an income-based repayment plan. That would allow you to make some progress on your loans while still keeping your payment amount reasonable for your situation.
Student loan deferment is only a temporary solution!
Student Loan Forbearance
Forbearance is where the student loan holder gives you permission to stop making payments for a set period of time. Unlike deferment, this is not for a qualifying reason, but rather for a hardship that prevents you from making payments. Deferments are directly tied to the student loan program, or terms of the private student loan, where student loan forbearance is an agreement between you and the lender.
Unlike deferment, interest always accrues during a forbearance (interest accrues in deferment as well, but with subsidized loans, the Federal government pays the interest). Forbearances are usually granted for up to one year at a time.
Forbearances can sometimes be easier to obtain than a deferment, depending on the student loan type. The reason for this is because they are a direct negotiation with the lender, rather than qualifying for specific terms.
Forbearances may be granted for a number of reasons, including:
- Poor health preventing work
- Inability to pay within the maximum repayment terms
- Monthly payments totaling more than 20% of a borrower’s monthly income
If you are interested in pursuing forbearance, you need to contact your lender directly and explain to them your situation.
Chapter 5 Summary
- Federal Student Loans automatically come with a 6 month deferment period after graduation
- If you have a subsidized loan, interest does NOT accrue during deferment. If you have an unsubsidized loan, interest does accrue during deferment.
- There are a lot of deferment programs available, so make sure you check to see if you qualify
Chapter 6: Student Loan Forgiveness
There are many ways to get student loan forgiveness, and it should be another option for you to consider, since it is free money. Under certain circumstances, all or part of your student loan can be canceled in a process called student loan forgiveness. To qualify, you must perform volunteer work, perform military service, practice medicine in specific communities, or meet other criteria.
There are several types of programs that fall into the student loan forgiveness bucket:
- There are traditional student loan forgiveness programs like Public Service Loan Forgiveness that forgive your debt
- There are student loan repayment assistance programs that help you pay for some of your debt
- There are student loan cancellation and discharge programs that cancel your debt, such as total and permanent disability discharge (which we talk about in the next chapter)
- There are student loan forgiveness programs attached to student loan repayment programs, such as Income Based Repayment
The reason it's important to know the difference of what type of program you're participating in is that each type of program has different tax applications for it. Some offer tax free student loan forgiveness and tax free money, while other programs will cancel your debt and treat it as taxable income.
Here's a full guide to state taxes and student loan forgiveness.
It’s currently estimated that over 50% of student loan borrowers qualify for some type of student loan forgiveness program. Take a look at the programs below and see if you qualify.
Student Loan Forgiveness Programs
Student loan forgiveness programs are ones that provide loan forgiveness for doing specific tasks.
Public Service Loan Forgiveness
The #1 way to currently get student loan forgiveness is to work in public service for 10 years. President Obama announced the PSLF – Public Service Loan Forgiveness Program, which will grant student loan forgiveness on qualifying loans after 120 payments (10 years).
The great thing about public service is that the definition is very broad. Qualifying employment is any employment with a federal, state, or local government agency, entity, or organization or a not-for-profit organization that has been designated as tax-exempt by the Internal Revenue Service (IRS) under Section 501(c)(3) of the Internal Revenue Code (IRC). The type or nature of employment with the organization does not matter for PSLF purposes.
It's important to note that you must work for the actual non-profit firm. Some non-profits (such as hospitals, governments, and higher education facilities) sub-contract workers for certain tasks. These subcontractors do not qualify for PSLF since they do not work for the actual non-profit.
Some common jobs that qualify include:
- Government Workers (Federal, State, Local)
- Emergency management
- Military service
- Public safety or law enforcement services
- Public health services
- Teachers
- Public education or public library services
- School library and other school-based services
- Public interest law services
- Early childhood education
- Public service for individuals with disabilities and the elderly
Check out this guide to the full list of PSLF eligible jobs.
To recap, PSLF has four main requirements to qualify:
- Have Direct Student Loans
- Be on a qualifying repayment plan (IBR, PAYE, RePAYE, ICR)
- Certify your employment and submit the form to your loan servicer
- Do this for 120 individual payments
Note: each month of the Covid-19 deferment counts as a month of qualifying payments, as long as you certify your employment. Learn more about the Covid-19 student loan assistance programs here.
However, over the last few years, the PSLF program has been heavily criticized for failing to be run properly. Multiple instances of oversight have found people who were supposed to get student loan forgiveness, but their loan servicer failed. Furthermore, many borrowers have complained the program's requirements were too strict.
As such, two "reforms" have been announced that borrowers can take advantage of. They are designed to address situations where the borrower may have had the wrong repayment plan or wrong loan type. However, there has been a lot of confusion about these reforms.
TEPSLF - Temporary Expanded PSLF
TEPSLF fixes issues with the WRONG REPAYMENT PLAN.
TEPSLF allows for borrowers who made payments under the WRONG repayment plan (such as the graduated or extended plan), but otherwise would have met the PSLF criteria above, get relief.
The program requires you switch to the correct repayment plan type and then apply for relief under TEPSLF. See the guide here: Temporary Expanded PSLF.
Biden Waiver
The Biden Waiver fixes issues with the WRONG LOAN TYPE.
In October 2021, President Biden announced a waiver program that will allow borrowers with the WRONG loan type (such as FFEL or Perkins) to switch to the correct loan type (Direct) and then get the previous payments made to count.
This waiver requires borrowers to consolidate their old loans by October 31, 2022 in order to qualify.
Learn more about the Biden PSLF Waiver and what to do with your old FFEL loans here.
Volunteer Work Loan Forgiveness Options
While some volunteer work can be a huge life commitment, organizations such as VISTA all you to have a semblance of life while volunteering. They also offer money to be used towards your student loan debt, which is great!
Peace Corps: If you volunteer for the Peace Corps, you can get partial cancellation of Perkins Loans based on the number of years of service. Currently, you get 15% per year, with a max of 70%.
Teacher Student Loan Forgiveness
If you teach full-time for five complete and consecutive academic years in certain elementary and secondary schools and educational service agencies that serve low-income families, and meet other qualifications, you may be eligible for forgiveness of up to a combined total of $17,500 on your Direct or Stafford Loans.
If you have Perkins Loans, you might be able to qualify for 100% discharge of your student loan debt if you teach in a qualifying elementary or secondary school.
For a full list of the requirements on teacher loan forgiveness, check out this link.
For a list of the Teacher Shortage Areas that qualify, check out this report from the Department of Education.
Student Loan Repayment Assistance Programs
Student loan repayment assistance programs are programs that give you a certain amount of money towards your student loans for completing certain requirements. For example, nursing student loan forgiveness programs typically fall into this bucket.
There are a variety of student loan repayment assistance programs available.
Federal Student Loan Repayment Assistance Programs
The main bucket for student loan repayment assistance at the Federal level is for volunteer work.
The two main programs available are:
Americorps – If you serve for 12 months, you can receive $4,725 towards your student loans.
Volunteers in Service to America (VISTA) – If you volunteer for 1,700 hours, you can receive $4,725 towards your student loans.
State-Based Repayment Assistance Programs
There are many state-based student loan repayment assistance programs. Forty-five states and the District of Columbia all have special student loan forgiveness programs for residents of their states.Many of the programs are in public service fields, such as health care, teaching, dentistry, legal, and more.
Check out the full list of student loan forgiveness programs by state here.
Student Loan Forgiveness With Your Repayment Plan
There are several repayment plans that offer student loan forgiveness as part of the income-based repayment plan. If you are enrolled in these plans, you'll get loan forgiveness at the end of the term.
Income-Based Repayment (IBR): If you have loans from before July 1, 2014, you will make payments for 25 years, and at that point, your loans will be forgiven. If you have loans after July 1, 2014, you will get forgiveness after 20 years.
Pay-As-You-Earn (PAYE): With PAYE, you will not pay more than 10% of your discretionary income, and your loan will also be forgiven after 20 years.
Revised Pay-As-You-Earn (RePAYE): This repayment plan still caps your payment at 10% of your discretionary income, and the loan will be forgiven after 20 years. However, there are more people eligible with this plan than under PAYE, but other changes around interest payments also occur.
Income Contingent Repayment (ICR): With the ICR plan, your loans will be forgiven at the end of 25 years.
Tax Implications Of Student Loan Forgiveness
Depending on the type of loan forgiveness you receive, you may owe taxes on the amount of student loan debt forgiven.
Public Service Loan Forgiveness (PSLF), Teacher Loan Forgiveness, law school loan repayment assistance programs and the National Health Service Corps Loan Repayment Program are not taxable. Many of the state-based programs are typically not subject to state income tax, but may be subject to Federal income tax.
The forgiveness of the remaining balance under IBR, PAYE, RePAYE, and ICR after 20 or 25 years in repayment is considered taxable income. However, President Trump has allowed loan forgiveness under these programs to be tax-free through 2025.
For loan forgiveness that is considered taxable income, your lender will issue you a 1099-C for Discharged Debt. You need to report this amount on your tax return. Since it will increase your taxable income, you will have to pay taxes on this forgiveness.
Note: Some states may also levy state income taxes on student loan forgiveness, even on programs like PSLF that are tax-free federally. See this guide to State Taxes on Student Loan Forgiveness.
Chapter 6 Summary
- There are many different programs that allow you to get your student loans repaid at no cost to you, other than service time
- Beyond the Federal Student Loan Forgiveness Programs, there are many state programs that also offer student loan forgiveness programs
- It’s estimated that over 50% of student loan borrowers qualify for some type of student loan forgiveness program, so make sure that you check for eligibility
- Student loan forgiveness is tax-free through December 31, 2025.
Chapter 7: Other Ways To Discharge Or Cancel A Student Loan
Similar to student loan forgiveness, there are ways to cancel or discharge your student loan debt. However, these scenarios are typically rare, and many involve unique situations. Some of these situations may require consulting a student loan lawyer, in which case, make sure you do your due diligence before signing any contracts.
In almost all cases, these discharge and cancellation options will result in the amount discharged being considered taxable income. However, given the circumstances of the discharge, borrowers may be considered insolvent, in which case, the tax burden would also be discharged. These are very technical issues and an accountant or tax attorney should be consulted.
Total And Permanent Disability Discharge
Total and Permanent Disability Discharge (TPD) relieves you of having to pay back your student loans if you are totally and permanently disabled.
You must show that you are disabled in one of three ways:
- If you are a veteran, you can submit documentation from the U.S. Department of Veterans Affairs (VA) showing that the VA has determined that you are unemployable due to a service-connected disability.
- If you are receiving Social Security Disability Insurance (SSDI) or Supplemental Security Income (SSI) benefits, you can submit a Social Security Administration (SSA) notice of award for SSDI or SSI benefits stating that your next scheduled disability review will be within five to seven years from the date of your most recent SSA disability determination.
- You can submit certification from a physician that you are totally and permanently disabled. Your physician must certify that you are unable to engage in any substantial gainful activity by reason of a medically determinable physical or mental impairment that can be expected to result in death, Has lasted for a continuous period of not less than 60 months, or can be expected to last for a continuous period of not less than 60 months.
You can apply for TPD at a website the Department of Education created here: DisabilityDischarge.com
Death Discharge
If the borrower dies, then the federal student loans will be discharged. If you are a parent PLUS loan borrower, then the loan may be discharged if you die, or if the student on whose behalf you obtained the loan dies.
To qualify for the discharge, you must submit the Death Certificate to your loan holder.
Closed School Discharge
You may be eligible for a 100% discharge of your Direct Loans, Federal Family Education Loan (FFEL) Program loans, or Federal Perkins Loans under either of these circumstances:
- Your school closes while you're enrolled, and you do not complete your program because of the closure. If you were on an approved leave of absence, you are considered to have been enrolled at the school.
- Your school closes within 120 days after you withdraw.
It's important to note that, if you are able to transfer your credits or complete your degree at another school or by comparable means, then you do not qualify for a closed school discharge. Also, you are not eligible if you have completed all the coursework for the program, even if you have not received a diploma or certificate.
False Certification Of Student Eligibility Discharge
This typically happens with identity theft issues, but it can also occur if the school financial aid office made a mistake.
You can get your loan discharged if one of the following scenarios occurs:
- Your school falsely certified your eligibility to receive the loan based on your ability to benefit from its training, and you did not meet the ability to benefit student eligibility requirements.
- The school signed your name on the application or promissory note without your authorization or the school endorsed your loan check or signed your authorization for electronic funds transfer without your knowledge, unless the proceeds of the loan were delivered to you or applied to charges owed by you to the school.
- Your loan was falsely certified because you were a victim of identity theft.
- The school certified your eligibility, but because of a physical or mental condition, age, criminal record, or other reason you are disqualified from employment in the occupation in which you were being trained.
To receive your discharge, you will have to provide proof that a false certification occurred. For identity theft, you could produce a police report, for example. We break down exactly what to do if someone took out student loans in your name.
Unpaid Refund Discharge
This is very rare, but you may be eligible for a discharge of your Direct Loan or FFEL Program loan if you withdrew from school, but the school didn’t pay a refund that it owed to the U.S. Department of Education or to the lender, as appropriate. Only the amount of the refund would be discharged.
Bankruptcy Discharge
It is very rare to get your student loans discharged in bankruptcy because a student loan's collateral is your future earnings. To qualify for a discharge, you essentially have to prove that your future earnings will never allow you to pay back the loan.
If you file Chapter 7 or Chapter 13 bankruptcy, you may have your loan discharged in bankruptcy only if the bankruptcy court finds that repayment would impose undue hardship on you and your dependents. This must be decided in an adversary proceeding in bankruptcy court. Your creditors may be present to challenge the request. The court uses this three-part test to determine hardship:
- If you are forced to repay the loan, you would not be able to maintain a minimal standard of living.
- There is evidence that this hardship will continue for a significant portion of the loan repayment period.
- You made good-faith efforts to repay the loan before filing bankruptcy (usually this means you have been in repayment for a minimum of five years).
See this full guide to getting your student loans discharged in bankruptcy.
Borrower Defense To Repayment Discharge
Borrower Defense is one of the newest forms of student loan discharges, and all of the details haven't been completely finalized by the Department of Education. This form of discharge is designed to protect student loan borrowers from predatory and misleading school admissions and financial aid offices.
You may be eligible for a borrower defense to repayment discharge of the federal Direct Loans you took out to attend a school if that school committed fraud by doing something or failing to do something, misrepresented its services, or otherwise violated applicable state law related to your loans or the educational services you paid for. This can apply to you regardless of whether your school closed or you are otherwise eligible for a loan discharge under other applicable laws. The law requires borrowers to submit a claim in order to receive debt relief.
You can read the steps required for a Borrower Defense To Repayment Discharge here.
If you have a specific question about the discharge of your loan because you went to Corinthian, Everest, Heald, or WyoTech, go here.
Chapter 7 Summary
- There are other, uncommon ways, to get your student loan debt cancelled
- You can request a forbearance to not pay your student loans for a limited period of time
- You can also get your student loans cancelled if the borrower dies, or becomes permanently disabled
- There are certain, limited, circumstances where a student loan borrower can have their student loans discharged in bankruptcy
Chapter 8: Student Loan Refinancing And Consolidation
If you have multiple student loans, you have likely considered student loan consolidation or student loan refinancing. Many places use those terms interchangeably, but it's important for you to know and understand the differences between them.
Student Loan Consolidation: When you consolidate your Federal student loans, you are merging your Federal loans to get one bill and your interest rate becomes the weighted average of your original loans. If you don't change your repayment term, you'll pay exactly the same as you would have with your individual loans. The goal of student loan consolidation is convenience.
Student Loan Refinancing: Refinancing means that you merge your Federal and private loans into one single payment, but you get offered a new interest rate as well — one that can be significantly lower than your current terms. However, the process is different than consolidation, in that you take out a new loan that pays off your old loans. This new loan is always offered through a private lender.
To summarize:
Student Loan Consolidation = Federal Loans Only & For Convenience
Student Loan Refinancing = Federal & Private Loans, Could Save You Money
How To Consolidate Your Federal Student Loans
If you want to consolidate your Federal student loans, it's FREE! You simply apply for it here: StudentAid.gov.
Student loan consolidation will take all your Federal student loans, and combine them into a new Federal Consolidation Loan.
There are a lot of companies out there that attempt to make you pay for student loan consolidation. You should never pay for student loan consolidation, and there are many student loan scams involving student loan consolidation.
Remember, student loan consolidation is FREE! However, before you attempt it for free, make sure you fully understand that doing something incorrectly can cause you student loan consolidation problems.
How To Refinance Your Student Loans
Student loan refinancing is the process of getting a new student loan that pays off your other student loans. Then, you can just make payments on this new student loan going forward.
Student loan refinancing can be a really great tool, especially for private student loans. You typically shouldn't refinance Federal student loans, except in one specific circumstance.
Finding The Best Loan When Student Loan Refinancing
There are three main factors to consider when refinancing your student loans:
- The Right Lender (different lenders offer different perks and charge different fees)
- The Loan Term (private refinancing loan terms can vary from 1 year to 30 years)
- The Interest Rate (this is how much interest you'll pay)
Let's look at these factors a little more in-depth.
Finding The Right Student Loan Refinancing Lender
There are a lot of student loan refinancing lenders, and we've reviewed every single lender on our Student Loan Lender List. Each lender offers different perks, charges different fees, and more.
Make sure to look at the benefits offered by each lender. As a result of all the recent competition in the industry, benefits have become a huge selling point. You should look for benefits that are important to you. For example, some lenders offer cosigner release. Others offer cash back rewards. And some lenders even offer programs to help you network and find jobs in your industry.
Speaking of cosigners, it's important to note that cosigners are as liable for the loan as borrowers are. This is true even in the case of death or disability. As a result, if you cosign a private student loan, it is strongly advised that you take out a term life insurance policy on the student, with the cosigner being the beneficiary. That way, should anything happen to the student; the proceeds from the life insurance policy can be used to pay off the student loan debt. Otherwise, the cosigner could be liable for the debt until it is paid off. However, some lenders offer the perk of cosigner release after making a certain number of payments.
Choosing The Best Loan Term
Most student loan borrowers are given a 10 or 15 year term length to repay their student loans. When you originally take out a private or federal student loan you aren’t able to pick your term length. Most term lengths are generic and the same for every borrower. But by refinancing your student loans, you have the option to select a new term length for the repayment of your loan.
Each student loan refinance lender has a unique set of term lengths available. In general, you will be able to pick from 5 year, 10 year, 15 year, 20 year, and 25 year term lengths for the repayment of your loan. Some student loan refinance lenders even offer 8 year and 12 year repayment terms. Each term length will have a different rate and monthly payment. As a rule of thumb, the shorter the term length, the lower the rate and the higher the monthly payment.
Find a term length that best matches your ability to repay,
Getting The Best Interest Rate
If you have federal student loans you have a fixed interest rate. If you have private student loans you may have a variable or fixed interest rate. Fixed interest rates do not change over the course of the loan. In contrast, variable interest rates will change over the life of the loan. Variable rates will move up and down with market interest rates. Most lenders base their variable rates off the one or three month LIBOR. If interest rates go higher, your variable rate will go higher too. If interest rates go down, your variable interest rate will also go down.
Today, interest rates are extremely low and those borrowers with variable rates are benefiting.
The Best Way To Compare Refinancing Lenders
With all of these different options, it can be tough to compare different lenders. That's why we recommend Credible. Credible is a partner platform that compares upwards of eight different student loan lenders to find you the best rate, fees, and perks. What's great about Credible is that it can get you a 95% accurate rate quote in minutes, without having to do a hard credit check.
If you're looking to see if student loan refinancing makes sense for you, try Credible right now. You'll know in minutes if you can save money by refinancing your student loans. As a bonus, College Investor readers will get up to a $1,000 giftcard when they close a loan with Credible!
Why You Should Rarely Refinance Your Federal Student Loans
When it comes to Federal loans, however, you typically shouldn't refinance them. The reason is, beyond the interest rate and payment, Federal student loans have a ton of perks and options to help borrowers.
First, if you're payment is too high, you could qualify for income based repayment. This will lower your student loan debt to less than 15% of your discretionary income (or 10% for PAYE and RePAYE plans). That means, regardless of what your loan amount or credit score is, you'll get a lower payment. That isn't the case with private student loans.
Second, these income-based repayment plans also include student loan forgiveness at the end of 20 or 25 years. That means, not only can you get a lower payment, but your loan could be forgiven after a period of time.
Finally, Federal student loans qualify for Public Service Loan Forgiveness, or PSLF. If you work for a non-profit or the government, you can get loan forgiveness after just 10 years. That's a huge perk.
The only situation it really makes sense to refinance your Federal student loans is if you can make payments under the Standard 10-Year Repayment Plan, don't plan on taking advantage of any forgiveness programs, and don't foresee any financial hardships occurring in the future that could lower your income.
Chapter 8 Summary
- Student loan consolidation is when you combine your Federal student loans into one loan
- Student loan refinancing is when you get a new private loan to replace all your other loans (both Federal and private)
- Make sure you shop around for your student loan refinancing with a service like Credible
- It typically doesn't make sense to refinance your Federal loans into private student loans
Chapter 9: Student Loan Default And Rehabilitation
If you haven’t kept current with your student loan debt, you could be in default. Your student loans are placed in default if you haven’t made a payment on them in over 270 days. When your loans go into default, they typically transfer over from a student loan servicing company to a collection agency. With Federal student loans, there is a very specific process and collection agency that follows up.
Important Update: President Biden announced the Fresh Start program to help borrowers who were in default at the start of the pandemic in March 2020 get out of delinquency and default. Learn the steps you need to take for this special program here: Fresh Start Program.
The Consequences Of Student Loan Default
When your student loans are in default, there are a lot of consequences.
First, your credit score will be ruined. It will take years to get that score back, but in the short term, it’s going to be low. You can check your credit score any time using a free service like Credit Karma, which also has great tools for managing your debt.
Second, your defaulted loan is typically assigned to a student loan collection agency which is responsible for recovering as much of the debt as possible. Your debt can be recovered in several ways, including wage garnishments, tax refund offsets, even Social Security garnishments. When you have student loan debt and any kind of income, the government will take some of it to repay the loans.
If you are seeing a Tax Topic or Error Code on your tax refund, you might be having your tax refund garnished to pay back your student loan debt.
Understanding Your Rights In Collections
When you're in default, your loan is actually in collections. The Department of Education has typically assigned your loan to a collection agency to try and recoup some of the debt.
As such, you have rights similar to what you would experience with any other debt:
- The debt collector cannot do early morning, late night, repeated or continuous phone calls
- The debt collector cannot call you at work if you tell them not to
- The debt collector cannot inform friends, family, or coworkers about the debt
- The debt collector must send written notice of the debt
- The debt collector must honor your request for no further contact
- The debt collector must verify all disputed debts
If you think that your rights have been violated by a debt collector for your student loans, you should speak to a student loan lawyer that can validate your case. Please be aware that a reputable student loan debt lawyer will focus on the collection aspect. A lawyer simply can't make your debt go away, but they can make sure that proper steps were followed to collect the debt.
The Process To Rehabilitate Your Student Loans
Student loan rehabilitation is the process where you can get your Federal student loans out of collections and be able to get on a repayment plan that works for you.
The first thing you need to do is re-track down your student loans. Many people in default have simply lost contact with their lenders or given up trying to keep tabs on the loans. If you have Federal student loans, you can track down defaulted loans through a system called MyEdDebt maintained by the U.S. Department of Education. You can access it here: https://www.myeddebt.com/.
Once you find your debts, you typically have three options:
- Pay Off The Loan: One option for getting out of default is repaying your defaulted student loan in full. This typically isn’t an option for anyone, or else the loan wouldn’t have gone into default. However, it does exist.
- Loan Consolidation: You also have an option for getting out of default through loan consolidation.
- Loan Rehabilitation: Another option for getting your loan out of default is loan rehabilitation. To rehabilitate your Direct Loan or FFEL Program loan, you and the Department of Education must agree on a reasonable and affordable payment plan. (Remember, contact your school for your Perkins Loan)
Once your student loan is rehabilitated, you may regain eligibility for benefits that were available on your loan before you defaulted. Those benefits may include deferment, forbearance, a choice of repayment plans, loan forgiveness, and eligibility for additional federal student aid. Some of these benefits may be available sooner than others.
How To Handle Private Loans In Default
If you have private loans in default, you have much fewer options to get back on track. First, you should make sure to check the validity of the debt. Private loans are much less tracked than Federal loans, so you should really make sure you're only addressing what you personally owe.
The best way to handle private loans is to attempt to negotiate a settlement with your lender. You can do this yourself, you can pay a student loan lawyer for help, or you can use a credit counselor for help. The latter two options are better if you're uncomfortable dealing with companies or don't know the best course of action.
Debt Reduction Scams Impacting Borrowers In Default
It's important to note here that most student loan scams affect borrowers in default because the borrowers are hoping for a magic bullet to solve their debt problems.
Be very careful in working with any law firm. Make sure that you ask them exactly what steps they are going to take in fighting your debt. A lot of people get burned dealing with law firms trying to get their student loan debt dismissed.
Make sure the firm you're working with NEVER does the following:
- Ask you to stop making payments on the debt
- Ask you to make payments to them "instead" of the debt
Both of these are big red flags that they are NOT trying to help you, and focused on other priorities. Most people don't ever need a student loan lawyer unless you're struggling to get out of default, or you are being sued by your private lender.
A good student loan lawyer will do the following:
- Validate that the debts are legitimate (which you likely know to be the case)
- Validate that they haven't violated any debt collection laws (which you could sue them for violating)
You might still be able to get a settlement on your private student loans, but I would ask the attorney that you keep all money yourself and only pay for the attorney's fees. When you have a settlement, you can figure out your own financing for the balance owed on the debt.
If you believe you were scammed by a student loan company, here's what steps you can take to protect yourself and potentially get a refund.
Chapter 9 Summary
- If you don't pay your student loan for 270 days, it goes into default
- In default, your lender can garnish your wages, offset your tax return, and more to get paid
- You can get out of default via Student Loan Rehabilitation
- Be careful dealing with student loan lawyers and avoid student loan scams
Chapter 10: Final Reminders For Student Loan Borrowers
Student loans are like any other debt out there – you owe money, and you must pay it back. Unlike other forms of debt, however, the ways to discharge student loan debt are few and far between. Since the collateral for the student loan is your income, it is expected that you will eventually be able to repay the loan over time.
Student Loan Debt Collateral = Your Future Income
With that in mind, I wanted to share with you my top tools for getting out of student loan debt.
Top Tools For Getting Out Of Student Loan Debt
Getting A Student Loan
If you still have questions about your student loans after reading this guide, the U.S. Department of Education has a great resource page on student loans. It’s called StudentAid.Gov, and it has all of the information you could ever need about your student loans and repayment programs.
To get a Federal student loan, you must fill out the FAFSA every year. You can apply for the FAFSA here: https://www.fafsa.ed.gov/
If you are looking at private student loan options, we recommend Credible, where you can quickly compare your student loan options.
Finding Your Existing Student Loans
If you've lost track of your existing student loans, it happens.
If you have Federal Student Loans, you can access the National Student Loan Data System and locate all of the student loans you may have: StudentAid.gov.
If you have private student loans, you can look on your credit report. You can get a free copy of your credit report every year at AnnualCreditReport.com.
Staying Financially Organized
Once you have student loans, you need to keep track of your student loan debt and any other financial accounts that you may have. Personal Capital is a great free financial program that you can use to track all of your banking accounts, and also your student loan debt. By keeping track of everything online for free, you don’t have to worry if you move and lose track of your student loan servicer.
Refinancing Your Student Loans
When comparing lenders, it's always important to know all the facts. That's why we have one of the most comprehensive databases of student loan refinancing lenders for you to review. When checking out the tool, make sure you look at all our lender reviews as well. When you're ready, use a tool like Credible to compare the best rates and fees.
Getting Help
There are a few ways we can help,
- If you want customized assistance for your situation, we partner with a third party company that can offers DIY assistance. Check out Chipper here.
- Check out our Student Loan Debt Forum. It won't be personalized help, but maybe your question has already been answered: Student Loan Debt Forums.
- Read all the free resources we have on student loans. Your question has likely been answered, but you'll have to sort through it yourself: Student Loan Debt Homepage.
Conclusion
If you’ve made it this far, I assume that you’re now well versed in what it takes to be smart about your student loan debt. Hopefully you’ve not only selected the best student loan program for your needs, but you’ve also figured out a great repayment plan that keeps it affordable for you while getting out of debt. Even better, maybe you’re one of the 50%+ of borrowers who qualifies for student loan forgiveness. Regardless, I hope you found this guide useful for you.
If you’re not quite to a certain part of this guide, that’s okay. You’re simply future-proofing yourself when it comes to paying back your student loans. Simply bookmark this guide to help you select the best program when the time comes.
Finally, remember that getting out of student loans is just the first step in starting your financial life off right. Once you’re paying back your student loan debt and have a good paying job, it’s time to start investing in your future. That’s what we’re all about here – getting out of student loan debt and getting started investing in your future. If you want to learn more, I encourage you to sign up below and join 30,000+ others who are already taking control of their financial future:
