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College Students and Recent Grads

FedLoan Consolidation or Refinancing: Which Is Best for Your Student Loans?

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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If your FedLoan Servicing repayment isn’t going as you had hoped, you might be staring at two seemingly similar options: Both FedLoan consolidation and private loan refinancing would consolidate or group your federal education debt, making for a more straightforward repayment.

But that’s where similarities between consolidation and refinancing end. If you’re unsure about which to go with, read on for the details.

What to know about FedLoan consolidation

Consolidation involves taking out a direct consolidation loan to repay your original federal student loan debt, and it could solve a number of problems.

Most notably, you could make a single monthly payment to one servicer instead of a handful of them (if you have multiple federal loans serviced by various companies). Although that won’t save you any money, it could bring you much appreciated simplicity.

Through federal loan consolidation, you could also expect the following benefits:

  • Choose your new loan servicer, whether that’s FedLoan or a competitor.
  • Become eligible or retain eligibility for Income-Driven Repayment (IDR) plans and Public Service Loan Forgiveness (PSLF).
  • Lower your monthly payment by switching from the 10-year standard repayment plan to an IDR plan.
  • Lock in a fixed interest rate (if any of your older federal loans were tagged with a variable rate).

The benefits aren’t bereft of fine print, however. When you consolidate loans you’ve already started repaying, for example, you reset the clock on any progress toward forgiveness via IDR or PSLF. Also, none of your private loan debt (if you have any) can be combined via a direct consolidation loan.

How to undertake FedLoan consolidation

If the pros outweigh the cons in your case, file your FedLoan consolidation application at StudentLoans.gov. According to the website, most applicants are able to complete the necessary forms in less than 30 minutes.

If you elect to keep FedLoan as your servicer, you can track your application progress via your MyFedLoan account. A resolution should arrive within four to six weeks.

FedLoan Servicing

What to know about student loan refinancing

When you consolidate your federal debt, your new loan’s rate will be a weighted average of your previous federal loans’ rates, rounded up to the nearest one-eighth of 1%.

Via student loan refinancing, however, you could reduce the collective interest rate of your federal debt — and (unlike with consolidation) your private student loans, too — potentially cutting it by whole percentage points.

That’s the greatest difference between FedLoan consolidation and private refinancing — and it explains why many creditworthy borrowers save hundreds even thousands of dollars on interest when working with a private lender.

Say you have four federal loans with FedLoan Servicing worth $35,000 accruing interest at an average rate of 7.00%. Now say you have sterling credit and stable income (or a cosigner who does). By refinancing to a rate of 5.00%, you’d save $4,218 on interest over the next decade.

To be eligible for such savings, however, you — and your cosigner, if you have one — must submit to a credit check. Only applicants with strong credit gain access to the lowest rates advertised by competing lenders. This stands in contrast to consolidation, which has no such credit requirements, making it a more accessible option.

If you have the finances to qualify for refinancing, you could enjoy other benefits besides a lower interest rate, including:

  • Leaving the federal student loan system behind and starting fresh with a top-rated private lender of your choice
  • Selecting fixed, variable or hybrid interest rates
  • Lowering your monthly payment in exchange for lengthening your repayment term and paying more interest overall
  • Releasing the cosigner on your undergraduate private student loans

The cons, however, are just as consequential. In exchange for the perks of private refinancing, you’ll lose access to all federal loan protections. This includes mandatory forbearance (should you need to pause your payments), IDR programs and forgiveness programs like PSLF.

Because refinancing is irreversible once you sign your loan agreement, it’s wise to weigh these plusses and minuses in advance.

How to refinance your FedLoan debt

If you elect to refinance, you can initiate the process by shopping around for the  best possible loan terms. You might also delay your search to improve your credit or find a cosigner who can help you qualify for the very lowest rates.

Once you’ve selected a refinancing lender — whether it be a bank, credit union or online-only lender — it would pay off your FedLoan (and any other eligible education debt). Then your lender would issue you the newly refinanced loan as a fresh start on your repayment.

Try crunching some numbers on our student loan refinancing calculator to estimate your savings (or cost), plus your new monthly payment, when comparing lenders’ quotes.

Should you pick FedLoan consolidation or FedLoan refinancing?

If you have poor credit and no cosigner in sight, you might already have your answer. Consolidation won’t save you money, but it will simplify your repayment, and it’s accessible to all federal loan borrowers.

With strong credit, you might also have the option of refinancing on the table. Whether it’s right for you, however, is another story.

As you’ll see, picking between consolidation and refinancing for your FedLoan debt (or any other loans, for that matter) isn’t just about what you’ll get. It’s about what you’re willing to give up.

This chart might help you as you consider which strategy is best for your situation:

What’s your repayment goal?Do you need federal protections?Your better option is probably ...
Switch to a single monthly payment (for your federal loans only)YesConsolidation
Switch to a single monthly payment (for both federal and private loans)NoRefinancing
Reduce your interest rateNoRefinancing
Work with a new loan servicerYesConsolidation
Work with a new lenderNoRefinancing
Choose a variable interest rateNoRefinancing
Lower your monthly paymentYesConsolidation
Lower your monthly paymentNoRefinancing
Make income-based payments and work toward loan forgivenessYesConsolidation

If you’d like to switch loan servicers, have a single monthly payment and reduce your interest rate, refinancing could deliver all three benefits.

But if you’re not willing to yield your government-exclusive loan options (such as IDR and PSLF), then you could settle for two out of three: Consolidation would allow you to work with a new servicer and achieve a simpler repayment, but not lower the rate.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Andrew Pentis
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Andrew Pentis is a writer at MagnifyMoney. You can email Andrew here

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College Students and Recent Grads

Guide to Graduate Student Loans & Grants in 2019

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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Graduate school funding is a bit trickier than undergrad funding. Your options for loans and grants become more limited. And while work-study opportunities may be attainable and provide great experience, they often eat up a lot of time and offer low compensation.You do have options, though — whether you’re a grad student or a parent. This guide will take you through them all in detail.

Part I: Financing Options for Grad School

As far as federal options, there are two types of graduate student loans: Direct Unsubsidized Loans and Direct PLUS Loans. Each financing option looks different, and you may need a combination of both loans to fully fund your education.

Federal graduate student loan options and programs

Loan TypeHow much can I borrow?What are current rates?Origination FeeRepayment OptionsWhere can I apply?
Direct Unsubsidized LoansUp to $20,500. Medical students may be able to borrow more if they ask their school.6.60%1.066% if you take your first disbursement prior to Oct. 1, 2018.
1.062% if you take your first disbursement between Oct. 1, 2018 and Oct. 1, 2019.
Standard,Graduated,Extended,IBR,PAYE,REPAYE,ICR,PSLFIf you are eligible, Direct Loans are typically included in your financial aid package after you fill out the FAFSA.
Direct PLUS LoansCost of attendance after any other financial assitance has been applied.7.60%4.264% if you take your first disbursement prior to Oct. 1, 2018.
4.248% if you take your first disbursement between Oct. 1, 2018 and Oct. 1, 2019.
Standard,Graduated,Extended,IBR*,PAYE*,REPAYE*,ICR*,PSLF*

*Does not apply to Direct PLUS Loans issued to parents.
After you have filled out the FAFSA, you can apply here

Eligibility requirements

In order to qualify for any federal student aid, you need to meet certain requirements. Specifically, you must…

  • Have a high school diploma, home-school high school education, GED or other certification of equivalency.
  • Be a U.S. citizen or permanent resident.
  • Have a Social Security number. This requirement is waived if you are from the Marshall Islands, Palau or Micronesia.
  • Register with the Selective Service, if you’re a male age 18-25. If you do not do so during this time frame, it can impact your ability to access federal financial aid later in life.
  • Be enrolled or accepted into a school with the aim of obtaining a degree, certificate or other recognized educational credential.
  • Maintain good grades. Standards for this requirement vary from school to school.
  • Certify that you aren’t currently in default on any federal student loans, that you owe money back on a grant, and that you will only use the money for educational endeavors. This certification happens on the FAFSA application.

If you meet all of these requirements, you now have to look at specific qualifications for each type of student loan.

Direct Unsubsidized Loans

In order to qualify for a Direct Unsubsidized Loan, you must be attending a participating educational institution and be enrolled at least half-time in a program that will lead to a degree or certificate. There is no need to demonstrate financial need in order to qualify for a Direct Unsubsidized Loan.

Direct PLUS Loans

Direct PLUS Loans have very specific credit standards. Qualification requirements include:

  • Must be pursuing a degree or certificate at the graduate or professional level and be attending school at least half-time — or be the parent of a student who is doing so.
  • Cannot have a debt that is currently 90 days delinquent with a balance of over $2,085.
  • Cannot have an item worth over $2,085 sent to collections or written off in the two years prior to your application.
  • Cannot have any of the following appear on your credit report in the past five years: default determination, bankruptcy, foreclosure, tax lien, repossession, wage garnishment or a write-off of other student loan debt.

These standards apply to both student and parent borrowers. If you cannot meet them, you can still borrow money by finding a cosigner who does meet these standards.

You may also be able to qualify if you can prove the blip on your credit report was caused by extenuating circumstances. In order to do this, you’ll need to complete credit counseling to the satisfaction of the PLUS program.

Pros and cons of federal grad school loans

There are times when taking out federal loans will be advantageous to you as a grad student and times when other options may make more sense. Let’s drill down into the pros and cons.

Pros:

  • Federal graduate student loans give you access to a number of repayment options, including some that adjust your monthly payments based on your current income.
  • Some debt forgiveness programs, such as Public Service Loan Forgiveness, only apply to federal loans
  • Credit requirements are typically more lenient than they are in the private sector.

Cons:

  • The fact that there are origination fees on Direct Unsubsidized Loans and Direct PLUS Loans is a major negative, as it will cost you money to borrow the money in the first place.
  • Interest rates on Direct PLUS Loans could be bested by private loan rates if you have a good credit history. You may be able to save money by going to a private lender in specific circumstances.
  • Direct Unsubsidized Loans and Direct PLUS Loans require at least half-time enrollment. If you are pursuing a graduate-level degree while working a day job, this may present a problem, depending on how many credits you are able to take on.

Federal grants and programs for grad school

While loans are money you will have to pay back, grants and work-study programs are sources of funding that you won’t need to repay. It’s essentially free money, and at the graduate level, you have a few federal options.

TEACH Grants

The Teacher Education Assistance for College and Higher Education (TEACH) Grant is a program that pays for part of your education as long as you promise to use your degree in a high-need, low-income area for four of the eight years following the completion of your education. You can also teach at a Bureau of Indian Education school during this time period to qualify.

High-need fields include:

  • Bilingual education
  • English language acquisition
  • Foreign languages
  • Math
  • Science
  • Special education
  • Reading specialists
  • Regional needs, which are updated annually

If your grant were disbursed today (or anytime between Oct. 1, 2018, and Oct. 1, 2019), the maximum amount you could qualify for would be $3,752.

If your school participates in the TEACH program, it will have specified which programs qualify for the grant. Get in touch with your financial aid office to find out if your program is eligible.

While you’re there, make sure you are eligible by checking your school’s academic requirements for qualification.

If you do not teach in a high-need field in a low-income or Bureau of Indian Education school for four of the first eight years after your graduation, your grant will turn into a Direct Unsubsidized Loan, which will have to be repaid.

After you have confirmed with your school that you are enrolled in an eligible program, you will need to fill out the FAFSA. You will also need to sign a letter of agreement and complete program-specific counseling.

Pell Grants

It is extremely rare for a grad student to qualify for a Pell Grant. In fact, for eligibility purposes, you’re not allowed to be pursuing a graduate degree.

The only time Pell Grants are available after undergrad work is when you are pursuing a post-baccalaureate teaching certificate. Even then, your certificate program must meet the following requirements:

  • It does not lead to a degree.
  • It is a prerequisite in your state in order to work as a primary or secondary school teacher.
  • It comes from a school that does not offer a bachelor’s degree in education.
  • It must be a post-baccalaureate program.

And as a student, you must also be enrolled at least half-time, pursuing your initial teacher certification/licensure within your state.

For the 2018-2019 school year, the maximum award you can receive is $6,095. The amount you get will be based on financial need.

To apply for a Pell Grant, all you have to do is fill out the FAFSA.

If a financial need is demonstrated when you fill out the FAFSA, you may be offered a work-study position. If your school participates, you’ll be given an hourly or salaried job where you are paid at least monthly. Your financial need will determine the number of hours you receive.

The kind of job you are assigned will depend largely on your school. You may find yourself in one of these fields:

  • Community service
  • Positions at your school
  • Fields relevant to your course of study

If you end up with a position on campus, you’ll likely be working for the school. If you are working off-campus, you’re more likely to be assigned to a position serving the public good or working in a position relevant to your future career.

You’ll make at least minimum wage, though as a grad student you may have some desirable skills that could land you a position with a pay boost.

Your school is obligated to issue you a paycheck at least once per month. The money will be paid directly to you unless you set up direct deposit payments, or you are applying your earnings toward tuition, fees or room and board.

Grants are a form of financial aid that you don’t have to pay back under most circumstances. However, if you don’t hold up your end of the educational bargain, you may have to return money that was paid to your school, or money you received as a refund check from your school.

You could end up owing money back for your federal grant if:

  • You don’t meet TEACH program guidelines as outlined above.
  • You drop out of school partway through the semester.
  • You reduce the amount of credits you are taking after the grant has been issued.

If you are disappointed by your FAFSA options, you should know that there are other ways to find funding for your graduate-level education. Be sure to review these resources prior to taking out loans.

Federal grants at the graduate level are admittedly thin. If you’re looking for other ways to pay for school that don’t involve student loans, here are some additional federal agencies outside the Department of Education that may be able to help.

ROTC scholarships

ROTC scholarships will pay for your education. You’ll also get a stipend for the time you spend at drill on weekends and may have your books covered as well.

In exchange for all of this money, you will be obligated to serve either on active duty or in the reserves after you have completed your education. Because you have a college education, you will enter the military as an officer.

Post-9/11 GI Bill

If you served in the military for at least 90 days after Sept. 10, 2001, and remain on active duty, or were honorably discharged due to disability after serving 30 consecutive days after the same date, the Post-9/11 GI Bill may cover your tuition and fees.

If a smaller portion of your service happened after Sept. 10, 2001, you may be eligible for prorated benefits.

All in-state tuition and fees will be paid at public schools, and up to $23,671.94 will be paid at private schools. This number changes annually.

If you still have a gap between how much the school charges and how much the Department of Veterans Affairs (VA) will pay under the latest version of the GI Bill, check to see if your school has opted into the Yellow Ribbon Program. Schools that do so reduce the tuition of veterans to meet the maximum VA payout, leaving you with no additional money to pay.

Yellow Ribbon schools may also provide funding equivalent to a Basic Allowance for Housing in addition to a stipend for books.

In certain cases, benefits may be transferable to minors, so if you are a parent who has unused GI Bill benefits, you may be able to give them to your child as they enter grad school.

AmeriCorps

AmeriCorps is a volunteer opportunity with some perks for college students. When you volunteer, you earn money for school through the Segal AmeriCorps Education Award. The amount of money you earn depends on how time-intensive your service is.

For example, currently, if you volunteer in an approved position for more than 1,700 hours over 12 months, you would qualify for an education credit worth $6,095 for the 2018-19 school year. You can only earn up to two full-time education credits. You can find further examples of how much you can earn on the Segal Award Eligibility page.

As a member of AmeriCorps, you may find yourself in one of the following positions or something similar:

  • Relief efforts after a natural disaster
  • Tutoring K-12 students
  • Building affordable housing
  • Working with local nonprofits and community groups

If you have served as an AmeriCorps member after Oct. 1, 2009, and are age 55 or older, you may have accrued educational benefits that you can pass on to your child, stepchild or grandchild. You can learn more program specifics here.

Other sources of federal grants for grad school

Higher education agencies in your state

Another great place to look for funding is the agency that handles higher education in your state. These state-level organizations typically offer grants. You’ll likely be prompted to visit your state’s website at the end of your FAFSA application, but if you want to learn more about available programs now, you can find yours here.

Your school’s financial aid office

Your school likely has endowments and partner employers — both of which might offer scholarship and grant opportunities. To find out what’s available at your school, schedule an appointment with the financial aid office.

Industry and professional organizations

Many industry and professional organizations offer some type of scholarship program for those studying in the field. Applying for these scholarships won’t just help you pay for school if you’re awarded — if you win one, it will look phenomenal on your resume.

Some of these organizations will require membership prior to application. While membership fees can be expensive, many such groups provide student-level memberships at a steep discount.

Private graduate student loans: A last resort?

Private graduate student loans are issued directly by lending institutions without the backing of the U.S. Department of Education. You can look to banks, credit unions or online marketplace lenders to access these loans.

Pros:

  • If you have a good credit history, you may be able to obtain a loan with lower rates than those currently offered through federal programs.
  • You may be able to access more capital than you would with federal loans, depending on your credit history and the type of federal loan.
  • You can shop around for different options. Some lenders don’t charge origination fees, and some are willing to work with you in cases of hardship.

Cons:

  • You will not have access to advantaged repayment programs like PAYE, REPAYE, IBR, ICR and PSLF (which are all covered in sections below).
  • If you do not have a good credit score, interest rates may be higher than federal loans, or you might not be able to get a private loan at all, depending on your credit report.
  • You have to shop around for different options. Some lenders will not work with you in cases of hardship, and factors like variable versus fixed interest rates may throw you for a loop if you’re not careful.

Questions to ask before you borrow private loans for grad school

Before you take out any graduate student loans, you’ll want to get answers to these questions:

This may vary, depending on your income and credit history.

This will typically be a range. If you have good credit, you may qualify for the best rates. If you don’t, you’ll be looking at the higher end of the spectrum.

Variable interest rates currently tend to start out lower. They may even stay lower for a set amount of time, but eventually they will move in accordance with the market. You may get lucky and have rates go down, but rates have been on the increase in recent years and are expected to continue to rise in the near term.

Fixed rates start out higher than variable rates but stay unchanged throughout the course of your loan term.

Shorter loan terms sometimes mean higher monthly payments, but you’ll usually end up paying less in the long term because of the way interest accrues over time.

If you can’t afford the monthly payments, though, you could end up paying late fees or damaging your credit. Longer loan terms may mean paying more interest by the time you’re through, but they also have the potential to lower your monthly payments.

Some lenders provide payment plans that allow you to defer payments until after graduation. Other payment plans start your payments immediately. Still others require interest-only payments while you’re in school, with principal payments being added after graduation.

Common fees to take note of are:

  • Application fees
  • Origination fees
  • Late fees
  • Prepayment penalty fees

Eligibility requirements to inquire about include credit requirements, citizenship/naturalization requirements and income requirements.

You’ll want to know if your lender offers any type of deferment in times of financial hardship. Some lenders will even work with you to help you find a new job or temporarily reduce monthly payments while you are in specific employment conundrums.

Compare private sector graduate school loan options here. >

Private LoansFederal Loans
Not eligible for advantaged repayment options (REPAYE, PAYE, ICR, IBR, etc.)Eligibile for advantaged repayment options
May or may not have origination fees Have origination fees
Potentially stricter credit requiremntsPotentially looser credit requirements : (depending on which private lender you're coparing them to) No credit requirements if we leave out PLUS loans
Interest rates potentially lower for those with good credit — can be much higher for those with bad creditInterest rates likely higher for those with good credit (with the possible exception of Perkins Loans)
Often offer an option of variable or fixed ratesOnly fixed rates for the products we are discussing
May require half-time enrollmentDefinitely require half-time enrollment
Will probably need a co-signer if you're a young borrower — especially wihtout a jobTypically won't need a co-signer

Part II: Repaying Grad School Debt

There is a slew of different repayment options, depending on which type of loan you take out. Whether you start repayment during your studies or after, here are some things you can do to prepare:

Federal grad school debt

Students are not required to make payments until six months after their graduation — or nine months if you have a loan from the now-expired Perkins Loan program. But just because you don’t have to make payments during this time period doesn’t mean you shouldn’t.

When to start repaying your federal grad school loan debt

The types of federal loans available to you as a graduate student accrue interest while you’re in school and during your grace period/deferment. You are not required to pay that interest immediately, but the unpaid interest will be added to your principal balance.

By making interest-only payments while you’re in school, you prevent the interest costs from multiplying upon themselves, saving you money.

You can pay toward the principal while you are in school as well, if you so choose, as there is no prepayment penalty on federal student loans.

Parents who have PLUS loans are typically required to start repaying immediately after the loan is disbursed. You can, however, request a deferment for the period during which your child is in school. It would be wise to at least make interest-only payments during this period if you choose to go this route.

Federal loan forgiveness and repayment assistance programs

Federal loans give you access to many advantaged repayment and forgiveness programs. Keep in mind that while many of these repayment plans are designed to make your monthly payment lower, they have the potential to cost you more over the course of your loan — especially if they don’t end in forgiveness — as interest will be charged over a longer period.

Income-Based Repayment (IBR)

If you took out your first student loan prior to July 1, 2014, and your student loan payments are more than 15% of your discretionary income, this program allows you to pay a maximum of 15% of your discretionary income for 25 years. After that point, your remaining debt is forgiven.

If you took out your first student loan after July 1, 2014, the capped percentage is 10%, and you will only have to pay it for 20 years.

Learn more about IBR here.

Income-Contingent Repayment (ICR)

If you opt into the ICR plan, you would make payments for 25 years. After 25 years, your remaining debt would be forgiven.

Your monthly payments would be the lesser of these two options:

  • 20% of your discretionary income
  • What you would pay on a repayment plan with a fixed payment over the course of 12 years, adjusted according to your income

Learn more about ICR here.

Pay As You Earn (PAYE)

Take your income and subtract 150% of the poverty level in your state. If your monthly student loan debt payments are more than 10% of the difference, you may qualify for PAYE. Use this calculator to see if you qualify.

Your monthly payments will be limited to 10% of your income and will never exceed what you would pay on a 10-year Standard Plan. After 20 years, the remainder of your debt will be forgiven.

You only qualify for this plan if your first student loan was disbursed after Oct. 1, 2007, and you have received at least one disbursement since Oct. 1, 2011.

Learn more about PAYE here.

Revised Pay As You Earn (REPAYE)

REPAYE does not have the same timing restrictions of PAYE. In fact, the date you took out your loans is irrelevant. There are also no income restrictions.

However, while you will only have to pay 10% of your discretionary income, there is no protection stating that your payments will not exceed those of a 10-year Standard Plan. You could end up paying more with this program — especially with a higher income.

Remaining balances on graduate school loans will be forgiven after 25 years.

Learn more about REPAYE here.

Public Service Loan Forgiveness (PSLF)

The future of this program is uncertain, but it is currently still open.

Under PSLF, you make payments for 10 years while you’re working 30-plus hours per week and considered a full-time employee by your employer. This job must be in a position of service (see list below), and the remainder of your loan balance will be forgiven. Your 10 years of payments should be made under IBR, ICR, PAYE or REPAYE.

Qualifying public service jobs include positions at:

  • Governmental organizations
  • 501(c)(3) organizations
  • Non-501(c)(3) organizations providing one of these services:
    • Public or school library services
    • Emergency management
    • Service on behalf of the U.S. military
    • Public education
    • Early childhood education
    • Law enforcement
    • Public interest legal services
    • Public services for the disabled or elderly
    • Public health

Learn more about PSLF here.

State programs

States have regional needs in a number of different fields, including medicine, education, social work, veterinary sciences, law and more. Across the country, there are programs offering to pay off portions of your debt if you agree to live and work in high-need communities.

Repaying private grad school debt

Different lenders will require different repayment terms from their borrowers. Be sure to understand what is expected of you before signing on the dotted line. Ask questions like:

  • Will I be required to make payments while I am in school?
  • If so, are they interest-only payments?
  • Will there be a grace period after graduation?
  • Do you have any deferment options in case of economic hardship?
  • What is the maximum time allowed for deferment?

When you should start repaying private grad school debt

The sooner you can pay off debt, the better. If your loan requires you to make principal and interest payments, make them without delinquency.

If your lender gives you the option of making interest-only payments while you’re in school and/or in a grace period, it’s a smart financial move to to save you significant interest.

Before you make any payments prior to your due date, make sure there is no prepayment penalty. Otherwise, a good portion of the money you think you’re throwing at your debt could end up going toward fees instead.

Learn more: Refinancing grad school debt

If you can get a lower interest rate on your student loans by refinancing, you may be able to save money as long as you pay off your debt in the same amount of time.

In order to avoid ruining your credit score, you may also want to refinance if you can’t afford your monthly payments. Find out more about potential advantages to refinancing here.

Type of LoanFederal Private
Pros
  • May be able to secure a lower Interest rate
  • Lowering monthly payments may help keep you from defaulting on your loans — but be sure to check all available repayment and deferment programs before refinancing in the private sector
  • May be able to secure a lower interest rate
  • Lowering monthly patments may help keep you from defaulting on your loans
Cons
  • You lose all potential access to advantage repayment programs and forgiveness
  • May have to pay application or origination fees
  • If you refinance for lower payments over a longer term, you will likely pay more in interest over the course of your loan
  • May have to pay application or origination fees
  • If you refinance for lower payments over a longer term, you will likely pay more in interest over the course of your loan
The rates and fees mentioned in this article are accurate as of the date of publishing.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Andrew Pentis
Andrew Pentis |

Andrew Pentis is a writer at MagnifyMoney. You can email Andrew here

TAGS: ,

Advertiser Disclosure

College Students and Recent Grads

Can You Really Get Rid of Student Loans by Leaving the Country?

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

government shutdown
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A college degree that didn’t lead to your ideal job. A stack of student loan bills you can’t afford. A collections agent blowing up your phone.

For any of these reasons, you might be seeking a way out — even out of the country. Leaving the U.S., however, might not solve your education debt.

Can you escape debt by leaving the country?

The short answer is no. The debt will still be there.

There’s no statute of limitations on federal loans, meaning that you’d be responsible for repaying your debt when or if you return to the U.S.

For private loans, on the other hand, state laws do put limitations on lenders’ ability to sue over your old loan debt. However, these statutes last years and won’t stop collections agencies from contacting you, regardless of where you reside.

If you abandoned your debt, you would need to establish an income and credit report in your new country and otherwise lay down roots.

But just because you could abandon your American debt doesn’t mean that you should.

For one, you have a moral dilemma on your hands: You borrowed money to fund your education, and although the borrowing and repayment process might seem unfair, you did agree to repay it.

But even if that’s not an issue, you still have to ask yourself whether you’re willing to face the consequences of creating zombie debt that will hang over your head.

Consequences of a move overseas to escape student loans

It’s impossible to say whether you’d need to look over your shoulder, wary of creditors on your tail. They might not have the willingness or the wherewithal to track you down.

You also can’t be arrested for your debt, and, no, your passport isn’t at risk. Still, the punishments of ignoring your debt can be severe. Some effects include:

Your loan balance will balloon

Just because you disappear doesn’t mean your debt will too. Quite the opposite — it’ll continue to grow. Interest will accrue and capitalize onto your balance each month that passes without payment.

If you skip town $40,000 in the hole at 7.00%, for example, your balance would collect about $16,000 worth of interest after 10 years, and almost $35,000 after 20 years.

Your credit score will tank

Although your credit score won’t follow you overseas, it will only worsen while you’re away.

After all, more than a third of your score’s composition rests on your payment history. By ignoring your payment due date, your score will take a nosedive. And when you default, the status will show up and stay on your credit report for up to seven years.

With such poor credit, you’ll have a hard time after your stateside return borrowing money in any form, including a home mortgage, car loan or credit card.

Your wages could be garnished — and worse

Once you default on your federal loans — that is, fail to make a payment for more than 270 days — your servicers could send your debt to a collections agency, where it will incur more fees.

The Department of Education could then take the following measures to collect your debt:

  • Treasury offset: The government could withhold any federal money you were set to receive, such as income tax refunds and Social Security benefits. Your driver’s license and/or other state-issued licenses could even be forfeited.
  • Wage garnishment: Your collections agency could require your employer to hand over 15% of your paycheck to put toward your defaulted loan. If it’s unable to take your income — perhaps because you’re self-employed — then you might face a lawsuit from the Department of Justice.

Private lenders vary in their practices, but you can bet they’ll farm out delinquent loans to their debt collection agencies. They can also sue you to secure a percentage of your income.

Your cosigner could be left hanging

Federal loans are borrowed in the student’s name, so you — and only you — are on the hook for them. The family you leave behind in the U.S., however, might have to deal with phone calls or mail from collections agencies.

Private loans are a different story. In all likelihood, you asked a family member to cosign your loan as an undergraduate, since about nine of 10 private loans are cosigned.

By leaving your debt and country, however, you’d be passing the buck to your cosigner. Mom, Dad or whoever else could be legally responsible for repaying your debt, potentially putting a stranglehold on their finances.

Can you even move to another country with student loan debt?

Just because you shouldn’t leave the U.S. to flee your student loans, however, doesn’t mean you’re trapped inside the country until your debt is repaid. If you’re motivated to live abroad for reasons other than escaping your education debt, consider that you could take your debt along for the ride.

You might make progress in repayment, for example, if you can earn an American salary but reside in a country with a lower cost of living.

No matter where you decide to shack up while repaying your education debt, consider these tips.

Explore repayment plan options

Whatever ails your loan situation so much that you’re considering quitting your repayment, know that there are debt relief options, including:

Income-Driven Repayment (IDR)

On the federal loan front, consider switching repayment plans. IDR would allow you to limit your monthly payment amount to a percentage of your discretionary income, making it a good option if you’re out of work or climbing the career ladder from the bottom. Keep in mind though that when you lower your payments and extend your loan term, your debt grows because of accruing interest.

Unfortunately, private lenders generally don’t offer IDR, but they could be willing to adjust your repayment if you fall on hard times.

Deferment or forbearance

There are more than a dozen types of eligibility for deferment and mandatory forbearance on federal loans. These measures pause your payments while you get back on your feet. To cure your wanderlust, you could even defer your loans for up to three years by joining the Peace Corps.

Private lenders’ protections are typically less comprehensive, so talk with your lender about what it offers.

Student loan refinancing

You’ll need good credit and steady income (or a cosigner) to qualify, but student loan refinancing could solve several of your repayment problems simultaneously. It could consolidate your debt into one new loan, potentially lower your interest rate and give you the power to choose your new (private) lender.

Just be aware that by refinancing federal loans, they’ll be stripped of the federal safeguards that come with them, such access to IDR and some loan forgiveness programs.

Budget for travel — and loan payments

Once you know how much you need to spend to keep pace with — or, better yet, attack — your loan balance, it’s time to budget. This step is crucial if you’re planning to live abroad. A budget will serve as your roadmap, helping you to estimate the affordability of the life you want to lead and the debt you’re due to repay.

Cutting U.S. expenses like apartment rent and utility bills is a great start. You can also maximize your money by choosing the right country. You might have designs on visiting Scandinavia, for example, but then find that Southeast Asia is more in your price range. Nomadlist is an excellent resource to help plan for potential monthly costs on a city-by-city basis.

Increase your income

You can budget until you’re blue in the face, but eventually you’ll run out of expenses to trim. Give yourself more wiggle room by increasing your income at home or abroad.

If you’re fortunate enough to work remotely and take your American salary with you, you might already have the cash flow necessary to travel cheaply and still pay down your debt. You might also seek side gigs like teaching English as a second language in another country.

Keep your American bank account

Even if you’re not sure when you’ll return to the U.S., keeping your American bank account will ease your student loan payments. You won’t want to deal with foreign transaction fees, for example.

Additionally, by keeping your domestic checking account, you can score an interest rate reduction with some lenders and servicers by signing up for autopay.

You can repay your debt and still wander the world

Leaving your home country for a clean slate elsewhere is an age-old strategy. But unless you’re planning to leave the U.S. permanently, it could wreck your student loan debt situation.

Before you book a flight, consider the consequences of wandering the world without a repayment plan. Whether you choose to live in the U.S. or abroad, there are plenty of ways to get back on track. You just have to look for them.

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Andrew Pentis
Andrew Pentis |

Andrew Pentis is a writer at MagnifyMoney. You can email Andrew here

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