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How Do Student Loans Affect Your Credit Score?

Editorial Note: The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

Many college students, graduates and parents (or grandparents) of students have taken out student loans to help pay for educational expenses. These loans are generally reported to the three national consumer credit reporting agencies — Equifax, Experian and TransUnion — and could impact the borrower’s credit score.

Building credit can be important for your financial and personal life. A high score can make qualifying for new loans or credit cards easier, may save you money with lower interest rates or insurance premiums and could even help you rent an apartment or home.

Because so many people have student loans — and for many new college students, the loans may be the first time they use credit — understanding how student loans can affect your credit is important.

So, how exactly do student loans affect your credit score?

Student loans can hurt or help your credit score

As with other types of installment loans, such as a personal loan or auto loan, your student debt can help or hurt your credit score depending on how you manage your loans and your overall credit profile.

But student loans have a few features, such as deferment or forbearance, that may not be as common with other types of installment loans. Understanding these features, how they work and the impact they could have on your credit can help you manage your student loans with confidence.

If you want to see where you stand with your credit, you may be able to check your credit reports and scores for free through a variety of financial institutions and online tools. For example, LendingTree, the parent company of MagnifyMoney, gives you free access to your TransUnion VantageScore 3.0.

How student loans can hurt your credit

Opening new accounts can lower your score

Whether you take out a student loan or something else, a new credit account can lead to a dip in your credit score for several reasons.

For one thing, the new account could decrease the average age of accounts on your credit reports — a higher average age is generally better for your score. Additionally, if you applied for a private student loan, the application could lead to the lender reviewing your credit history. A record of this, known as a “hard inquiry” or “hard credit check,” remains on your report and may hurt your score a little.

Your student loans will also increase your current debt load. While the amount you owe on installment loans may not be as important as outstanding credit card debt, it could still negatively impact your score.

Credit scores aside, lenders may consider your debt-to-income ratio when you apply for a new credit account. Having a large amount of student loan debt could make it more difficult to qualify for a loan or credit line later, even if you have a good credit score.

You might wind up opening many student loan accounts

Often, students who take out student loans will have their new loan or part of the loan disbursed near the start of each term. Each disbursement could count as its own loan on your credit reports. So even if you only send one payment to your servicer every month, the servicer allocates the payments among each individual loan.

Each of these student loans could impact your age of accounts and overall debt balance. Also, if you’re repeatedly applying for private student loans, each application could lead to a hard inquiry.

You might fall behind on your payments

Your payment history is one of the most important factors in determining a credit score. Being 30 or more days past due could lead to a negative mark on your credit reports that can hurt your credit score.

And even before the 30-day point, your loan servicer may charge you a late fee if you don’t pay your bill by the due date, although some servicers give borrowers a grace period, often for 15 days.

If you’re repaying multiple student loans, missing a single payment to your loan servicer could lead to a late payment on each of your student loan accounts. Falling further behind could lead to a larger negative impact on your score, as your loan servicer reports your payments 60-, 90-, 120-, 150- and then 180-days past due.

Unless you bring your accounts current, they could be sent to collections, which could be indicated on your credit reports and hurt your score more.

Getting too far behind on student loan payments could also end up putting you in default, and you’ll immediately owe the entire outstanding balance rather than being able to use a repayment plan. The lender may also be able to sue you to take money directly from your paycheck or, in some cases, your tax return or bank account.

Federal Direct and Federal Family Education Loans go into default after 270 days of nonpayment. Other student loans may default sooner.

It can be more difficult to pay other bills

Even if you can stay on track with your student loans, having to make the monthly payment could cause trouble keeping up with other bills.

Missing a credit card, auto loan or mortgage payment could hurt your credit, as could rolling over a large amount of credit card debt, even if you’re consistently making minimum payments on time.

How student loans can help your credit

Student loans can establish credit

A student loan may be some borrowers’ first foray into the world of credit, and it could help them establish a credit history.

Credit-scoring models require a minimum amount of data to generate a score, and having a student loan on your credit reports could help make you scorable rather than “credit invisible.”

A student loan can diversify your credit mix

Showing that you can manage different types of accounts, such as installment loans and revolving accounts (credit cards, lines of credit, etc.), could help your credit score.

If the only debt you’ve had is a credit card, adding an installment loan in the form of a student loan can increase your mix of accounts and help your score. Likewise, if your only credit account is a student loan, opening a credit card might help your score.

Making on-time payments can help your score

Since your credit history is one of the most important credit-scoring factors, try to always make on-time payments as you repay your student loans. Doing so could help you build a solid credit history, which can lead to a higher score.

If you’re having trouble affording your student loan payments, consider your options (discussed below), and look for a way to lower or temporarily stop your payments before you miss one.

The loans can help build a lengthy credit history

Although it’s not one of the most important credit-scoring factors, the length of your credit history and the average age of your accounts can impact your credit score.

If you take out a student loan during your first term at school, you may wind up with years’ worth of credit history before graduating.

Continuing to take out new student loans each term could lower your average age of accounts. But your average age of accounts will still increase as you repay your loans.

One common point of confusion is whether closed accounts can still impact your credit history.

They can.

For example, if you take out a student loan as a freshman, then defer the payments for four years and repay the loan using the 10-year standard repayment plan, the account will be closed once it’s repaid.

But the account will still stay on your credit reports for up to 10 years from when it was closed, and it could impact your credit history and average age of accounts during that period.

Protecting your credit while repaying student loans

Once you take out student loans, you may be able to defer making full (or any) payments until after you leave school. But once you start repaying the loans, a misstep could lower your credit score. Here are a few ways you could keep your student loans from hurting your credit.

Don’t miss your first payment

Many student loans offer an in-school deferment period, which lets you put off loan payments until six months after you leave school. In-school deferment lets you focus on your schoolwork and makes student loans affordable, as many students might not have enough income to afford monthly payments.

But don’t forget about your loans and miss your first payment. Doing so could hurt your credit score.

To avoid missing the first — and subsequent — payments, you may want to enroll in an auto payment program with your student loan servicer. Many lenders and loan servicers will even offer you an interest rate discount as long as you’re enrolled in autopay.

Compare repayment plans

You may be able to choose from several federal student loan repayment options. The main options include the standard, extended, graduated and income-driven plans.

 

Federal student loan repayment plans
Federal student loan repayment plans

Choosing an extended, graduated or income-driven plan, rather than the standard plan, could lower your monthly payments.

If you choose an income-driven plan, be sure to renew your repayment plan every year and send your loan servicer updated documentation to remain eligible.

Although the nonstandard plans could wind up costing you more in interest overall, the lower payments could make managing all your bills easier, which can be important for maintaining and building credit.

Contact your lender if you’re struggling to afford your payments

If you do find yourself struggling to make payments, be sure to reach out to your loan servicer. With federal student loans, you may be able to switch repayment plans, or temporarily place your loans into deferment or forbearance to stop making payments.

Private student loans aren’t eligible for the federal repayment plans, but private student loan lenders may offer similar deferment or forbearance options. Some may also have other hardship options, such as temporarily reduced payment amounts or interest rates.

Your credit score won’t be affected by placing your loans into deferment, forbearance or using a hardship option, as long as you make at least the required monthly payment on time. But interest may still accrue on your loans if you’re not making payments, and the accumulated interest could be added to your loan principal once you resume your full monthly payments.

Learn about federal student loan default rehabilitation

If one or more of your federal student loans has gone into default, there are two ways that you could potentially “rehabilitate” the loan and get back on a repayment plan:

  • You could consolidation the loans with a federal Direct Consolidation Loan. The Department of Education will issue you a new loan and use the money to pay off your existing loans. If you include your defaulted loan, that loan will be paid off, and your new consolidation loan will be current. To be eligible, you must agree to either repay the consolidation loan with an income-driven repayment plan or to make three monthly payments on your defaulted loan before applying for consolidation.
  • Alternatively, you could contact your loan servicer and agree to make nine monthly payments within 10 consecutive months. The servicer will determine your monthly payment amount, which should be “reasonable and affordable” based on your discretionary income. Once you complete the payments, your loan will be taken out of default.

If you use the second method — and this if the first time you rehabilitated the student loan — the default associated with the loan will also be removed from your credit reports. Although the late payments associated with the loan will remain for up to seven years from the date of your first late payment, having the default removed could help your score.

With the first method, the default won’t be removed.

Private student loan companies may also offer you a way to rehabilitate a private student loan that’s in default. If you use the program, you may be able to request the removal of the default from your credit reports by contacting the lender, but the late payments on the account could remain.

Can shopping for student loans impact your credit?

Comparing student loan lenders and loan types won’t impact your credit score unless you submit an application for a private student loan. When you submit a private student loan application, the resulting hard inquiry could have a minor negative impact on your score.

Shopping for a private student loan, comparing the pros and cons of different lenders, and submitting multiple applications so you can accept the loan with the best terms is generally a good idea. Hard inquiries usually only have a small impact on credit scores, and scores often return to their pre-inquiry level within a few months, as long as no new negative information winds up on your credit reports.

While multiple hard inquiries can increase score drops, particularly for those who are new to credit, credit-scoring agencies recognize the importance of rate shopping. As a result, multiple inquiries for student loans that occur with a 14- to 45-day window (depending on the type of credit score) only count as a single inquiry when your score is being calculated.

Can refinancing student loans help or hurt your credit?

If you already have a good-to-excellent credit score and a low debt-to-income ratio, you may want to consider refinancing your student loans. When you refinance your loans, you take out a new credit-based private student loan and use the money to pay off some or all of your current loans. (The lender will generally send the money directly to your loan servicers.)

Refinancing can save you money if you qualify for a lower interest rate than your loans currently have, and combining multiple loans into one could make managing your debt easier.

When it comes to credit scores, refinancing student loans is a bit like taking out a new loan. You’ll need to apply for the loan, which could lead to a hard inquiry. Shopping around and submitting applications during a short period could help you get the best rate while limiting the negative impact of the inquiries.

After getting approved for refinancing, the new loan may be reported to the credit bureaus, which could lower your average age of accounts. Your other loans will be paid off, but they could stay on your credit reports for up to 10 more years. Your overall installment-loan debt will stay the same, and as long as you continue to make on-time payments, your score may improve over time.

Advertiser Disclosure: The card offers that appear on this site are 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 card companies or all card offers available in the marketplace.

Louis DeNicola
Louis DeNicola |

Louis DeNicola is a writer at MagnifyMoney. You can email Louis at louis@magnifymoney.com

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4 Companies That Help You Get Your Paycheck Early

Editorial Note: The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

Financial emergencies have a habit of cropping up at the worst possible time — when you’re stuck in-between paychecks. Perhaps you need $250 for an emergency car repair, but you just paid rent and won’t have the funds until your next payday in two weeks. Normally, you might want to turn to a credit card or a payday loan, racking up onerous fees in the process.

What if you could get a portion of your next paycheck early without paying hefty fees or interest?

That’s the premise behind the following four services. They try to help workers make ends meet without taking on debt by giving them access to the money they earn when they earn it.

Earnin

  • Available if you have direct deposit.
  • Withdraw up to $100 per pay period, with this amount increasing to $500 with continued use of the app.
  • No fees or interest.

EarninWhat it is: Earnin is an app-based service available on Android and iPhone smartphones. Once you download the app and create an account, you connect your bank account and verify your paycheck schedule. You must have direct deposit set up and linked to a checking account.

How it works: In order to use Earnin, you need to upload your timesheet, either manually or by connecting a time-tracking account to the app (your employer must use one of the eligible timesheet partners in order for this to work). Using this information, Earnin estimates your average take-home hourly rate after taxes and deductions.

As you work, the hours will be automatically shared with Earnin, or you may have to upload your timesheet. You can then cash out a portion of your earned pay before payday.

You can withdraw up to $100 each pay period. Based on your account balances and Activehours use, the pay-period maximum could increase up to $500. The payment will arrive in your checking account within a few seconds, or within one business day, depending on where you bank.

Earnin doesn’t connect to your employer’s payroll. It connects to whatever bank account you use to collect your pay. The next time your paycheck hits your bank account, Earnin will automatically withdraw what you owe. There aren’t any fees or interest charges for using the service, however Earnin does ask for support in the form of tips.

DailyPay

  • Works with popular ride-share and delivery services.
  • Get paid daily for your fares or deliveries.
  • There’s no interest. You pay a flat fee that is subtracted from the day’s earnings.

DailypayWhat it is: DailyPay caters to workers who are employed by ride-share or delivery services, such as Uber, Postmates, Instacart, Fasten, and DoorDash. It can also be used by workers at restaurants that use delivery apps, such as GrubHub, Seamless, or Caviar.

How it works: After signing up for DailyPay, you’ll need to connect a bank account where DailyPay can send you payments. Next, you’ll need to connect your DailyPay account with the system your employer uses to track your hours. DailyPay tracks the activity within the accounts and sends you a single payment with the day’s earnings, minus a fee. Restaurant workers get paid for the previous day’s delivery earnings, minus a fee, from all the connected delivery programs.

DailyPay charges a fee of $1.25 for every transfer that you make, with the funds being delivered the next business day. If you need your money before tomorrow, you can do an instant transfer that has a fee of $2.99.

PayActiv

  • Employer must sign up and offer PayActiv as a benefit.
  • You can withdraw up to 50% of your earned income.
  • Fees vary based on what program the employer chooses.

PayactivePayActiv is an employer-sponsored program that allows employees to withdraw a portion of their earned wages before payday. While you can’t sign up on your own, you can ask PayActiv to contact your employer about offering the service. There’s no setup or operating costs for employers.

Once your employer offers PayActiv, you sign up and withdraw money as soon as you earn it. You can withdraw up to 50% of your earned income during each pay period via an electronic transfer or withdrawal from a PayActiv ATM (available at some employers’ offices).

The early payment comes from PayActiv, but it isn’t a loan and you won’t need to pay interest. Instead, your employer will automatically send PayActiv an equivalent amount from your next paycheck.

There is $5 fee per pay period when you use the service, although some employers cover a portion of the fee, according to Safwan Shah, PayActive’s founder. As a member, you’ll also get free access to bill payment services and savings and budgeting tools.

FlexWage

  • Employer must sign up and offer FlexWage as a benefit.
  • You’ll receive a reloadable debit card tied to an FDIC-insured account where your employer deposits your pay. You can add earned pay to your account before payday.
  • There is a flat fee of $3 to $5 for early transfers.

FlexwageFlexWage is an employer-sponsored program that relies on the use of a payroll debit card and integrates with employers’ payroll systems. If your employer offers FlexWage, you can get your paycheck deposited into an FDIC-insured account with the linked Visa or MasterCard debit card. You can also add earned, but unpaid, wages to your account before payday without paying any fees.

With FlexWage, the employer determines how often you can make early withdrawals and the maximum amount you can withdraw. Unlike PayActiv, FlexWage doesn’t act as a middle-man. Your paycheck advances will come directly from your employer’s account.

Need more money?

While cash advance apps can help when you are in a small pinch, they often cannot help when you have a larger expense that needs to be paid quickly. They can also cause short-term financial troubles, since the amount of your advance is going to be subtracted from your next paycheck, simply delaying your financial troubles.

If you need more money and want to have more time to pay off your loan, you might want to take a look at getting a personal loan. Personal loans often come with fixed interest rates and fixed loan amounts that are paid out over a specific period of time. Money is deposited directly into your bank account and some lenders can get you your funds the same day that you apply.

Want to compare multiple personal loan offers from a variety of personal loan lenders? Check out LendingTree, our parent company, where you can easily compare personal loan offers and find the best rate on your loan.

LendingTree
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Bottom Line

These four companies work slightly differently, but they share the same basic premise: giving you early access to the money you earned, without saddling you with a painful assortment of fees. If you’ve had to rely on borrowing money in the past when funds are tight, these could be a better alternative to credit cards or payday loans.

Advertiser Disclosure: The card offers that appear on this site are 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 card companies or all card offers available in the marketplace.

Louis DeNicola
Louis DeNicola |

Louis DeNicola is a writer at MagnifyMoney. You can email Louis at louis@magnifymoney.com

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Pay Down My Debt

How to Manage Your Law School Debt in 2018

Editorial Note: The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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With average tuition and fees running around $38,000 a year, most law students take out student loans. And then there are books, fees, transportation and living expenses to consider. Even students who find high-paying summer associate positions may wind up with six-figure student loan debts to repay after graduation.

That’s a lot of debt, but it doesn’t need to be unmanageable. Attorneys can also find high-paying positions, and those looking to go into lower paying legal work may be eligible for a range of student loan forgiveness and repayment assistance programs.

Law school debt in the U.S.

The average student loan balance can vary greatly depending on the school you attend. U.S. News and World Report publishes a list of law schools with the average indebtedness (among those who took out law school loans). At the high end in 2017, graduates from the Thomas Jefferson School of Law in San Diego had an average of $198,962 in student loans. The least was for graduates from Brigham Young University (Clark) in Provo, Utah who had $53,237 on average.

How much debt do law students have?

Among all law schools, the average student loan debt is near or above the six-figure mark according to Law School Transparency (LST), a nonprofit that analyzes and shares data about the legal profession. It shared the average amount of federal student loans borrowed by 2017 law school graduates based on their type of school:

  • Nonprofit private law schools: 74.9% of graduates had federal loans. On average, they borrowed $130,224.
  • Public law schools: 76.2% of graduates had federal loans. On average, they borrowed $92,997.
  • For-profit private laws schools: 85.8% of graduates had federal loans. On average, they borrowed $122,296.

You also might wind up graduating with more than you borrowed as interest can accumulate if you defer payments while you’re at school. Students may have also taken out private student loans in addition to federal loans, and graduates could still be paying off undergraduates loans.

Starting salaries for a lawyer

According to a 2018 LST report, the median entry-level salary for the class of 2016 was $66,499. However, as with the cost of school, your earnings can vary greatly depending on where you went to school and whether you work in the private or public sector.

The National Association for Law Placement, Inc. (NALP), an association of legal career professionals, found that the median private-sector starting salary for first-year associates was $135,000 in 2017. On the high end, top candidates may be able to start at $180,000 a year.

Public-sector salaries paint a different picture. NALP reported the median entry-level salary in 2018 was just $48,000 for attorneys who work in civil legal services and $58,300 for public defenders. While pay increases with experience, even public defenders with 11 to 15 years of experience make $96,400 on average.

Is law school worth the cost?

A law degree can certainly pay off and may provide a secure and stable job in the future. The U.S. Bureau of Labor Statistics projects employment of lawyers will grow 8% by 2026, slightly higher than the average 7% projected growth for all professions.

A law degree isn’t a guarantee of a job, though. The American Bar Association (ABA) found that among 2016 and 2017 law school graduates, 7.9% are unemployed and seeking work. Others are employed but only working part time, or have short-term contracts with an employer or temp agency.

Whether a law degree is worth the cost isn’t simply a question of economics. Although you can use a JD to work in a wide variety of industries and professions, the debt you take out could push you toward higher-paying work even if you’re not particularly excited about it. In the end, statistics can help you determine possibilities, but determining if a law degree is worth it is a highly subjective question.

Law school forgiveness and repayment programs

While attending law school can be expensive, attorneys may also be eligible for federal student loan forgiveness programs and school, state, employer and federal student loan repayment programs (SLRPs) or loan repayment assistance programs (LRAPs). You may be able to significantly decrease how much money you repay by using one or more of these programs.

John R. Justice Student Loan Repayment Program

The John R. Justice (JRJ) student loan repayment program offers aid to eligible full-time state and federal public defenders and state prosecutors who agree to remain a prosecutor or public defender for at least three years.

If you qualify, you could receive up to $10,000 per calendar year, and up to $60,000 total. The money will be sent directly to your loan servicer and can be used to pay for federal Federal Family Education Loan (FFEL) and direct loans that are in good standing. The money may be considered income for tax purposes.

You must register for the Office of Justice Programs Grants Management System and submit an application to be eligible. Availability for grants can vary depending on state allocations, and the 2018 application period ended on May 21, 2018.

Department of Justice Attorney Student Loan Repayment Program

The Department of Justice Attorney Student Loan Repayment Program (ASLRP) is for Department of Justice (DOJ) employees who agree to at least a three-year service obligation. The program may be competitive as it’s intended to help the DOJ attract and retain high-quality attorneys.

You must have at least $10,000 in student loans to be eligible for the ASLRP. If you get it, the DOJ could match up to $6,000 in student loan payments that you make each year, with a cumulative maximum benefit of $60,000. Only federal student loans are eligible, and the payments you receive are considered income for tax purposes.

Check the key dates page to see when application periods open and close, and a timeline of the important ASLRP-related events throughout the year.

Herbert S. Garten Loan Repayment Assistance Program

The Legal Services Corporation (LSC) offers the Herbert S. Garten LRAP to eligible attorneys who are working at an LSC-funded legal services program. About 80 eligible attorneys are chosen each year through a lottery system, and if you’re chosen, you’ll be issued forgivable loans for up to three years.

The LSC will issue you an LRAP loan to repay your student loans, and if you fulfill a year of service the debt will be forgiven. You can choose to continue in the program for a second and third year if you want.

You must have at least $75,000 in outstanding law school loans and be below the annual income and net worth threshold ($62,500 and $35,000, respectively, for continental U.S. employees). The LRAP awards up to $5,600 a year, which you’ll receive in two disbursements and can use to repay federal and private law school and bar loans.

Learn more about the Herbert S. Garten LRAP on the LSC website.

Judge Advocate General’s Corps Student Loan Repayment Program

The U.S. Air Force’s JA-SLRP program offers up to $65,000 in student loan repayment assistance if you qualify and agree to at least a four-year active-duty service commitment. The payments will be made over a three-year period which begins at the end of your first year of service.

Federal and private student loans that you took out for undergraduate, graduate and law school are eligible. The payments will be sent directly to your lender, and federal income taxes will be withheld from the payments to the lender.

Public Service Loan Forgiveness

The federal Public Service Loan Forgiveness Program (PSLF) will forgive remaining student loan debt if you make 120 qualifying payments (10 years’ worth) while working full time at an eligible employer. The PSLF only applies to direct federal student loans, although FFEL loans may be eligible if you first consolidate them into a direct consolidation Loan.

Qualifying employers generally include local, state and federal governments, as well as nonprofits. If you’re using one of the student loan repayment assistance programs, which may have similar employment requirements, you could also be making qualifying payments toward PSLF.

Federal student loan debt that’s forgiven under PSLF isn’t taxable.

Income-driven repayment plans forgiveness

If you have federal student loans, you may be able to switch your repayment plan to one of the income-driven plans. With these repayment plans, your monthly payment amount can vary based on your discretionary income, which generally depends on the difference between your income and the poverty line based on where you live and your family size.

With four of the plans, the remainder of your student loan balance will be forgiven after you make qualifying payments for 20 or 25 years (depending on the plan and if the loans were for undergraduate or graduate school). While the forgiven amount is taxable income, you may be able to get a lot of debt forgiven if you’ve been making relatively small monthly payments.

Some of the small-print differences between the plans can make a big difference in how much you pay overall. For example, the revised pay as you earn (REPAYE) plan has an interest subsidy if your monthly payment doesn’t at least cover how much interest accrues each month. Other plans also offer a subsidy, but only during your first three years of loan repayment.

You can use the Department of Education Repayment Estimator tool to see how much your monthly payments could be, and how much debt could be forgiven, with different repayment plans. However, if you’re dealing with a lot of student loan debt and are interested in forgiveness via an income-driven plan, you may want to contact a student loan consultant or attorney who is familiar with the differences between the programs and can advise you of your best option.

School-based programs

Many law schools have funds set aside to help graduates who go into low-paying fields, which often means a public interest or government job. In some cases, you may also qualify if you participate in a fellowship or public service initiative. Equal Justice Works has a directory of more than 100 law schools with such programs.

State-based programs

Your state may also have student loan repayment assistance programs, or you may want to consider moving to a state that does if you could qualify for help with your loans. According to the ABA, there are 24 states offering 26 LRAPs for civil legal aid attorneys or other public interest attorneys. You can find more information on the ABA and Equal Justice Works state LRAP pages.

Employer-based programs

For-profit employers may offer student loan repayment programs or assistance as part of their benefits package for employees. Availability, eligibility and aid amounts can depend on the company and whether you’re a part-time or full-time employee.

4 strategies to pay back your law school debt

There’s no secret trick to quickly getting rid of your student loans, but having a strategy and following through on that strategy could save you money, keep you motivated and help you reach your debt-free goal sooner.

1. Pay as little as you can while working toward forgiveness or assistance

If you qualify for one of the student loan forgiveness or assistance programs, or plan to use one in the future, you may want to pay as little as possible in the meantime. This could mean switching repayment plans or only making the minimum loan payments.

Compared with making extra payments, this method could increase how much interest accrues on your loans. However, if your goal is to repay as little as possible overall, leaving more debt to be forgiven or paid off by someone else could be a sound approach.

2. Use the snowball or avalanche method

You may have multiple student loans from different terms at law school, or even from undergraduate school and law school. If you can afford to pay more than your minimum payments, you could take either the snowball or avalanche method.

The snowball method involves paying off the loan with the lowest principal balance first. Once you pay off one loan, you can put more money toward the next lowest balance loan. Continue the process and you can build momentum as you repay one loan after another.

With the avalanche method, you apply any extra loan payments toward the loan that has the highest interest rate. The avalanche method can help you save money overall, although if your high-interest loans also have high balances, it could take some time before you get to completely wipe out one of your loans.

3. Apply your extra payments to the loan’s principal balance

Whether you’re taking a dedicated snowball or avalanche approach, or just occasionally making extra payments on your loans when you can afford to, you’ll want to review how your loan servicers apply your extra payments. Without instruction, your servicer may apply your extra payment to a future month’s payment and spread it out among all your loans.

You might be able to target your payment to a specific loan’s principal balance if you make a payment online. Or, you could send your servicer instructions on how you want to apply all your extra payments in the future — the Consumer Financial Protection Bureau has a sample letter you can use as a template.

4. Refinancing to a lower rate

If you’ve established a good credit history and found employment (or have income from another source), you may be able to save money by refinancing your student loans. When you refinance your student loans, you’ll take out a new loan and the lender will pay off your current student loans.

Your new loan’s interest rate depends on your creditworthiness, and if it’s lower than your current loans’ interest rates you could save money if you continue making the same monthly payments.

You can pick and choose which loans to refinance, so even if the new loans rate isn’t lower than all your current loans’ rates, you may still be able to benefit from refinancing. However, your new loan will be a private student loan and won’t be eligible for federal student loan programs, including the forgiveness programs. Some of the LRAPs can also only be used to repay federal student loans.

Read more about refinancing and consider all the pros and cons because once you refinance you won’t be able to turn your student loans back into federal student loans. If you decide to refinance some or all of your loans, you can compare lenders to find the best rate and terms.

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College Students and Recent Grads

Is College Worth It? Here’s What to Consider

Editorial Note: The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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Rising tuition and fees at colleges may have children and parents alike questioning if college is worth the cost. On the one hand, many jobs may require a college degree and, on average, lifetime earnings could be higher for those who earn a degree. But bachelor’s degrees recipients also graduate with an average five-figure debt. It could be too high a cost to pay, particularly if you’re not certain that you want to work in a field or job that requires a degree.

Is college worth the cost?

There’s no simple answer to such a personal question, and there are many subjective questions to ask yourself before applying for college. But overall, there is data that points to the value of having a college degree.

  • Bachelor’s degree holders earned 61% more than high school graduates, after taxes, in 2015.
  • Those who get their bachelor’s degree in four years earn enough by the time they’re 34 to offset the cost of attending school, based on median earnings.
  • The unemployment rate for bachelor’s degree holders is generally about half what it is for high school graduates, among those 25 and older
  • Only 4% of bachelor’s degree holders lived in poverty versus 13% of high school graduates, among those 25 and older.

Earnings-related statistics clearly show that a college education could be worth it from an economic perspective. However, statistics don’t guarantee an individual’s outcome or experience. So, here are a few of the advantages and disadvantages of attending college to consider.

Advantages of attending college

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A degree could help you get a job

A college degree could help open doors and may be a requirement to start certain career paths. Data from the U.S. Bureau of Labor Statistics shows that in May 2016, nearly 37 percent of entry-level jobs required at least some secondary education.

The importance of a college degree may increase over time, as well. Georgetown University’s Center on Education and the Workforce predicts that by 2020, about 65 percent of job openings (not only entry-level jobs) will require at least some college experience or an associate’s degree.

Having a degree could lead to higher lifetime earnings

As the College Board statistics showed, bachelor’s degree holders generally earn more money each year than high school graduates. Even if it takes some time to pay off student loans and offset the years that you were in school rather than working, the long-term earnings potential is higher for those with a college degree.

The U.S. Department of Education found, on average, college graduates will earn $1 million more during their lifetimes than high school graduates.

There could be other financial and personal benefits

In addition to a potentially higher income, bachelor’s degree holders are more likely to have employer-provided health insurance and access to employer-sponsored retirement plans than employees with only a high school diploma.

Having a college degree also correlates with more civic activity and healthy behavior, such as regularly exercising, volunteering and voting. College degree holders are also more likely to engage in educational activities with their children, such as reading and visiting cultural centers.

You can expand your personal and professional networks

There may not be hard numbers to back up the value of forming friendships and professional connections in college, but there is some truth behind the adage, “it’s not what you know but who you know.”

Hopefully, if you’ve spent years attending classes, “what you know” is important as well. But there is value in having strong connections with other college graduates and professors in your area of interest.

Drawbacks of attending college

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Earnings among degree holders can vary a lot depending on your career

Even among those with college degrees, there’s a large variation in income, depending on individuals’ jobs or career paths. The College Board found that by mid-career, the difference in college degree holders’ median earnings was as large as $46,000 a year. For example, an early childhood educator might earn $40,000 a year while someone with a computer science degree could earn $86,000.

Student loans could impact many areas of your life

Taking out student loans is a necessity for many college students. However, leaving college and entering the “real world” with students loans can impact graduates in many ways. A survey conducted by American Student Assistance in 2015 found that most students’ decision to purchase a home or car and their ability to save for retirement was affected by their debt. More than a third said it was difficult to afford daily necessities due to their loans.

Some people leave college with debt but no degree

Student loans could be seen as an investment in one’s future. Unfortunately, that’s not necessarily the case for students who take out loans to attend school but leave before earning a degree.

According to an analysis of federal data by The Hechinger Report, a nonprofit focused on inequality and education, 3.9 million undergraduates with federal student loans dropped out of school from 2014 to 2016.

Students may drop out for various reasons, from having to deal with medical issues or financial troubles to getting a job offer that’s too good to pass up. Some may also return to school and finish their degree in the future. However, having to leave school or deciding college isn’t for you after taking out loans could set you back financially.

Is college worth it for you?

College isn’t a good fit for everyone, and being able to recognize that early on could save you a lot of time and money. To that end, here are a few questions you can ask yourself to help you determine if college is worth it for you.

Are you prepared for the cost?

Using the Department of Education’s net price calculator, or calculators on colleges’ websites, you can estimate your annual cost to attend different schools. Consider the four-year cost, how much you and your family can contribute and how much you may need to borrow in student loans.

Comparing your net cost at different schools could help you make an educated choice when deciding if college is worth the cost, and if it is, which school to attend.

Are you ready for the academic rigor?

The jump from high school to college can be difficult for those who had trouble keeping up with school work during high school or attended a high school that didn’t have especially demanding teachers. It could also be up to you to manage your time and find support and assistance, such as study groups or tutors, once you’re in college.

You don’t need to avoid college because it’s difficult. After all, challenges can be great learning opportunities. Acknowledge the academic expectations that you’ll face in college and ask yourself if you’re ready to put in the work.

Have you identified your career goals?

While students can switch majors once they enter college, knowing what you want to do before you begin could help you create a plan and finish college within four years.

If you’re unsure of your career goals but certain that you want to earn a bachelor’s degree, you might want to save money by satisfying some of your general education requirements at a local community college and then transferring to a four-year school.

Does your desired degree increase your earning potential?

If you have a specific major in mind, you may be able to research the average annual income of other people who graduated with the same major. The Center on Education and the Workforce’s The Economic Value of College Majors project could be a good place to start.

A proposed major doesn’t need to lead to riches to be worthwhile, but consider your overall cost, potential loans and how much you might earn after graduation. If your monthly loan payments will make it difficult to maintain a modest standard of living, the cost of college might outweigh the benefits.

Do you have a plan for repaying student loans?

A 2017 MagnifyMoney survey found that nearly half of recent college graduates regret not being more careful handling their debts. If you anticipate having to take out student loans, having a plan early on could help you manage the debt and pay as little as possible.

For example, the interest on unsubsidized student loans can accumulate while you’re at school, causing you to graduate with more debt than you took out. You may be able to avoid this by working and starting to repay your loans while you’re at school.

Will you make the most of your time at college?

You can address this question in different ways. Will you make the most of the educational opportunities, social events and experience of living away from home? There’s more to the college experience than receiving a degree and a potential earnings increase, and you should consider that as well when you’re trying to decide if going to college is worth it.

Alternatives to a traditional college education

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It may sometimes feel like a college degree is a new norm. However, while young adults today are more likely to have a college degree than past generations, you’re not alone if you decide to forgo college. You also don’t need a college degree to go into a well-paying field.

A Pew Research Center report shows only about 36 percent of millennial (ages 21 to 36) women had at least a college degree in 2017. Less than a third (29 percent) of men in the same age group had a degree.

In other words, more than six out of every 10 millennials today don’t have a bachelor’s degree.

If you feel like enrolling at a four-year institution isn’t the correct choice for you right now, here are a few alternatives to consider:

Attend a community college

Community colleges, also known as junior colleges, can provide educational opportunities at a much lower cost than four-year schools. You may be able to earn an associate’s degree or certification, or explore different fields of study while determining if you want to continue your academic studies. You may be able to transfer credits from community college toward later efforts to earn a bachelor’s degree at a four-year institution.

Some community colleges also have bachelor’s degree programs, although they’re generally in specialized or technical fields. There are also a few places throughout the country where you can attend community college tuition-free.

Enroll in a technical college

A technical, vocational or career school education could set you on a path toward a career of your choosing. The programs can vary in nature and you may be able to get a degree, certification, license or diploma in a specific trade, such as cosmetology, auto mechanics or different healthcare professions. If you’re looking for hands-on training and skills that can help you land a job, a technical college could be a good route.

Become an apprentice

Somewhat similar to attending a technical school, an apprenticeship lets you get hands-on experience as you start a career. You’ll also get paid during your apprenticeship, which often lasts for one to six years, with pay increases depending on your experience.

Apprenticeships combine classroom and real-world training, and you may be able to earn college credits which you could apply toward an associate’s or bachelor’s degree later. Apprentices also receive a certification or credentials once they finish their training program, which they can use to continue their career.

You can choose an apprenticeship in different industries, including hospitality, construction, energy and technology. The U.S. Department of Labor has tools and resources for those interested in becoming an apprentice, along with a job board you can use to find local opportunities.

Applying won’t guarantee your admission, as you may need to interview, pass aptitude tests and, in some cases, have work experience. You could consider a pre-apprenticeship program at a technical school to increase your chances of getting an apprenticeship from your top-choice employer.

Join the military

Just like college, the military isn’t a good fit for everyone. However, military service does offer potentially valuable technical training along with professional development. It could also be a career path of its own or offer you financial assistance that you can use to pay for a technical school or degree-granting college or university.

Start your own business

Running a business isn’t necessarily as glamorous as it sounds. In some cases, you might wind up working long hours with little to show for it. Or, you could have to take out a loan to start the business or keep it running, and eventually find yourself in trouble if the business stops making money.

On the other hand, if it does work out, you’ll get to be your own boss. One day, you may even be able to step back and continue making money while you explore other interest or ventures.

Take a gap year

Some students decide to take a year off before starting at a four-year university. They might spend the year working to save money, try out several jobs to get ideas for what they want to study or travel if they can afford it. A gap year could be a good option if you need more time to explore or mature before heading to college.

However, if you’re planning on going to a four-year school after the gap year, you may want to apply while you’re still in “school mode.” It could be more difficult to take a standardized test and complete application requirements after taking time away from school. If you’re accepted into a college or university, the school may let you defer your start date and hold a spot for you until after you return from the gap year.

Advertiser Disclosure: The card offers that appear on this site are 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 card companies or all card offers available in the marketplace.

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Louis DeNicola is a writer at MagnifyMoney. You can email Louis at louis@magnifymoney.com

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Should I Refinance My Student Loans?

Editorial Note: The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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Refinancing student loans is similar to refinancing other types of debt — you apply for a loan and use the money to pay off your existing loans. With student loans, the refinancing lender will generally send the money directly to your current loan servicers, and you’ll then start making monthly payments to your new lender.

You may be able to simplify your monthly payments by combining multiple student loans into one new loan. Refinancing could also save you money if you get approved for a lower interest rate than you’re currently paying, and you may be able to decrease your monthly payments depending on your loan’s rate and term.

10 questions to ask when deciding if you should refinance your student loans

There are many pros and cons to refinancing student loans, but everyone’s circumstances are different and there isn’t a universal answer to whether refinancing your student loans is a good idea.

What is certain is that once you refinance your loans you can’t undo the process — your old loan has been paid off, and you’re working with a new loan now. You may be able to refinance again, but you’ll never be able to switch back to your original terms.

To help you decide the best course of action for your situation, ask yourself the following questions. The answers can help you determine if you should refinance your student loans.

1. Do you have federal or private student loans?

A variety of institutions originate student loans, including the U.S. Department of Education and private banks. As a result, you may have federal student loans, private student loans or a mix of the two.

You may be able to refinance federal or private student loans, and you may be able to combine both your federal and private loans into one new private student loan. (Only private lenders offer refinancing.)

If you have federal student loans, one of the largest potential downsides to refinancing is that your new private loan won’t be eligible for federal student loan programs, including income-driven repayment programs, forgiveness, cancellation, forbearance, deferment and discharge options. Private lenders may offer some similar programs that allow you to delay making payments if you’re experiencing a hardship, but they don’t offer loan forgiveness programs.

If you have private student loans, replacing your current loan with a new private student loan may not be as difficult of a decision. However, you’ll still want to compare each lenders’ programs and benefits rather than solely comparing the interest rates and loan terms.

2. Do you plan on using a federal repayment plan?

Federal student loans may be eligible for up to five income-driven repayment (IDR) plans. In some cases, your monthly payment amount could drop to $0, and you can switch between plans for free at any time.

The IDR plans can be especially helpful for those who are having trouble finding work or are pursuing a career in a low-paying industry. In addition to making your monthly payments more affordable, with four of the IDR plans, the remainder of your loan balance could be forgiven after you make payments for 20 to 25 years.

If you’re on an IDR plan, or think being able to switch to an IDR plan could be helpful in the future, you may not want to refinance your federal student loans. After refinancing, your new private loan won’t be eligible for federal IDR plans.

3. Do you want to use a federal loan forgiveness or cancellation program?

Your federal student loans may be eligible for a forgiveness program, such as the Public Service Loan Forgiveness (PSLF) program or the Perkins loan cancellation program. Private student loans aren’t eligible for these programs.

If you’re considering one of the programs, you may want to research all the eligibility requirements, including which loans qualify for the program and the requirements for receiving forgiveness or cancellation.

Those who qualify, or who have already been making eligible payments towards one of the programs, may not want to refinance the loans that will be forgiven or canceled.

However, private student loans don’t qualify for the programs and there are different types of federal student loans, some of which may not be eligible for the program you’re pursuing. You may want to consider refinancing those loans.

4. Can you save money by lowering your interest rate?

Congress sets the interest rate on federal student loans, and if you previously took out a private student loan your interest rate could depend on the lender, your creditworthiness and your cosigner if you had one.

When you refinance your student loans, the interest rate of the new loan can also vary depending on your current creditworthiness, the lender and a cosigner.

Lowering your interest rate can save you money in interest payments over the lifetime of your loan and may lead to lower monthly payments depending on your new loan’s term (the amount of time you have to repay the loan).

If you’re only able to get approved for refinancing with a higher interest rate than you currently have, then generally it won’t make sense to go through with the refinancing.

5. What is your credit score?

Your eligibility for refinancing student loans, and the rate and terms you’ll receive, may depend in part on your credit score. Having a high credit score can help you get better rates and terms, and the best offers may go to those with a score in the good to excellent range (e.g., a FICO score above 670). Some refinancing lenders also have a minimum credit score requirement that you must exceed to be eligible for a loan.

If your credit score has increased since you first took out a private student loan, that may be an indication that you could qualify for a lower interest rate now. On the other hand, if it’s dropped, you may not qualify for a lower rate and might want to focus on building your credit and increasing your score before refinancing.

6. What is your income, and what other financial obligations do you have?

Along with a credit score, lenders may look at your income relative to your overall required monthly payments — your debt-to-income ratio. DTI can be an important factor in determining your eligibility for refinancing and your interest rate offer. If your rent or mortgage, loan payments, credit card bills and other monthly obligations make up a large portion of your monthly income, it could be more difficult to qualify for a good rate.

Applicants who have a high credit score and want to refinance their student loans but don’t qualify for a low rate may want to focus on paying down debts, decreasing other financial obligations and increasing their income before reapplying.

7. What could happen if you can’t afford your loan payments?

Federal student loans offer prescribed options for borrowers who have trouble making payments. You may be eligible for an income-driven plan, which can lower your payment amount. Or, you might be able to temporarily stop making payments by putting your loans into deferment or forbearance if you return to school, join the Peace Corps, lose your job, have a medical emergency or meet other criteria.

Although private student loan companies may offer borrowers some hardship options, they vary by lender, and some lenders determine eligibility on a case-by-case basis. If you think you may have trouble making payments later, and particularly if you don’t have an emergency fund to fall back on, you may want to hold off on refinancing your federal student loans.

If you do decide to refinance, carefully review different companies’ hardship policies. You may want to choose the lender with the most favorable or lenient policies, even if it isn’t the one that offers you the lowest rate.

To lower the risk of refinancing, you could choose to refinance at a longer loan term. Although a longer term could result in a slightly higher interest rate, it could also lower your monthly payments. You can always pay more than the required amount to pay off your loan early, but the lower required payment gives you more flexibility if you run into financial trouble.

8. Will you need a cosigner to qualify?

Applicants who have trouble qualifying for refinancing on their own may be able to add a creditworthy cosigner to their application. Even if you qualify on your own, having a creditworthy cosigner could help you get a lower rate.

You can ask any creditworthy person to cosign as long as they meet the lender’s eligibility requirements, although you may feel most comfortable asking a family member. That person takes on a risk by cosigning your loan, because they will be legally liable for the student loan if you don’t pay.

The liability could make it more difficult for the cosigner to qualify for financing elsewhere, and missed payments could hurt the cosigner’s credit. If you stop making payments altogether, both your and your cosigner’s credit could take major hits, and you both might start getting collection calls.

If you do need a cosigner to qualify, you could look for a student loan refinancing lender that offers a cosigner release. Here’s how it works: After making a series of full and on-time payments, you can apply to take over the loan. You’ll need to pass a credit check and qualify for the loan on your own, and if you do, the cosigner will be taken off the loan and you can continue with the same rate and terms.

9. What will the lender do if something happens to you or your cosigner?

With federal student loans, any remaining debt can be discharged if the borrower, or the student for whom a parent PLUS loan was taken out, dies or becomes permanently and totally disabled.

Some private lenders offer a similar arrangement to borrowers, but others may handle these situations on a case-by-case basis and don’t guarantee a discharge. If the debt isn’t discharged, you could be leaving your cosigner with a large bill to pay, or it could be taken from your estate.

Also, review the contract to see what happens if a cosigner dies or declares bankruptcy. In the past, it was a common practice for lenders to place a student loan in default when this happened, meaning you’ll owe the entire balance right away even if you had been making your monthly payments on time. Automatic defaults aren’t as common anymore, but it’s still something you should double check.

10. Which student loans should you refinance?

Based on your circumstances and answers to the questions above, you may find that you want to refinance some of your student loans and leave the others as is.

You may also be able to accomplish some of your goals, such as simplifying your monthly payments, by consolidating federal student loans. Consolidation allows you to combine multiple federal student loans into one loan, and you can choose which servicer you’d like to work with for your new loan.

However, consolidation is only available on federal student loans, and it won’t necessarily save you money, because your new loan will have the weighted average interest rate of the loans you’re consolidating. So if the largest loan you’re consolidating has a lower interest rate than the rates on your loans with smaller balances, the weighted average may produce a lower overall interest rate on your consolidation loan. On the flip side, if your loans with the largest balances also have the highest interest rates, you could actually end up with a higher interest rate on your consolidation loan.

If you decide to refinance additional loans later, or want to refinance all your loans together at some point, you may be able to do that as well. Even if you refinance all your loans now, you may want to refinance again if interest rates drop or your creditworthiness improves.

Advertiser Disclosure: The card offers that appear on this site are 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 card companies or all card offers available in the marketplace.

Louis DeNicola
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Louis DeNicola is a writer at MagnifyMoney. You can email Louis at louis@magnifymoney.com

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College Students and Recent Grads

Paying Off Student Loans Faster: A How-to Guide

Editorial Note: The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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Whether you’re facing a mountain of student loans or you’re just a few thousand dollars away from finally doing away with the debt, several methods and tactics could help you pay off student loans faster. However, every solution does not fit every situation. Depending on which type of loans you have, what your other debt and financial obligations are and how much disposable income you have, paying off your student loans aggressively may not be the best option.

Consider the pros and cons before you dive in and send every extra penny to your loan servicer.

Pros of paying off student loans quickly

You can save money on interest. Your student loans could be accruing interest every single day, and the quicker you pay off your loans, the more money you could save on interest. Unlike with some other types of loans, student loans don’t have any prepayment penalties, meaning you don’t need to worry about extra fees for paying off your loans ahead of schedule.

It could be easier to qualify for other financial products. Having a student loan payment due each month can impact your debt-to-income ratio (DTI) — your monthly financial obligations divided by your monthly income. Paying off the loan and lowering your DTI could help you get approved for more financial products, such as other loans or credit cards, and may help you qualify for better rates or terms.

You’ll have one fewer debt to worry about. It can be hard to quantify the psychological impact of paying off debt, but there certainly could be benefits to having fewer monthly bills. Even if you still have other debts to repay, striking your student loans from the list could be a relief.

Cons of paying off student loans quickly

It may make more financial sense to pay off other loans first. If you have several types of loans, you may want to focus on other debts before paying off your student loans.

For example, you may have credit card debt that has a much higher interest rate than your student loans. Paying off the credit card could save you more money, and you could then put those savings toward your student loans (or the next highest-rate debt).

It also may make more sense to pay down a secured loan, such as an auto loan, first. Falling behind on your auto loan could lead to your vehicle getting repossessed, which could then snowball into other negative impacts, such as having trouble getting to work. While falling behind on student loans may lead to fees or even wage garnishments, your physical assets aren’t at risk.

There may even be benefits to starting with other unsecured loans, such as a personal loan. If both your personal loan and student loan have the same interest rate, your student loan may actually cost you less overall each year if you qualify for a student loan interest deduction.

You might come out ahead by investing instead. Your student loans may have a low single-digit interest rate. While it’s not guaranteed, you might earn more from investing your money in, say, a 401(k) or IRA than you could save paying off your loans early. However, you’ll need to weigh the risks. There’s no guarantee that your investments pay out, while you know for certain the return you can get on extra student loan payments. The key is to find a balance — pay off your student loans but don’t let that stop you from investing for your future, especially when it comes to funding your retirement account.

You may want to establish an emergency fund first. An emergency fund, generally three to six months’ worth of normal expenses, can help you overcome a financial emergency without having to take on more debt or falling behind on loan payments.

If you deplete your fund, or put off building one to focus on student loan payments, you may have to turn to more expensive forms of debt (such as credit cards) if you’re faced with an emergency.

You may qualify for loan forgiveness. Federal student loans may be eligible for forgiveness and cancellation programs. If you’re on a path towards loan forgiveness, paying off your loans early could lead to paying more than you need to and getting less debt being forgiven.

9 ways to pay off student loans quickly

Paying off student loans ahead of schedule can require planning, hard work and dedication. There’s no single path to success. But whether you can make double your normal payment or are having trouble affording payments at all, there are options and tactics that could speed up the process.

#1 Make additional payments on your loans

Making extra payments when you can or increasing your monthly payment will help you pay off your loans sooner. However, simply sending more money to your loan servicer(s) may not be the best approach.

First, be sure that those extra payments go toward the loan with the highest interest rate. Ask if your loan servicer will allow you to designate which loan the extra funds should go to. Depending on the servicer, your extra payments may be evenly divided amongst all your loans by default.

Also, the servicer may credit your account for future payments instead of putting your payments towards your a loan’s principal. As a result, you might not owe anything next month, but you also won’t be saving as much on interest. To make matters even more confusing, the servicer may continue to withdraw automatic debits from your account even if you’ve already prepaid next month.

Contact your servicer and find out how you can make sure additional payments go toward the principal balance of the loan with the highest interest rate. You may be able to send instructions for how it should apply all your extra payments. Or, if you don’t want to give it a blanket rule, there may be ways to specify how you want each payment applied.

Another option if you can’t afford to make more than your required payment each month is to send loan payments every two weeks rather than once a month. Paying half of the amount early can decrease how much interest accrues during the month, leading to paying less overall in the long run. Make sure you make both payments before the due date to avoid a late payment fee.

#2 Start making payments as soon as you can

You don’t need to wait until after you graduate, or until your grace period is over, to start repaying your student loans. Making payments while you’re in school and during the deferment could lead to significant long-term savings.

Aside from subsidized federal loans, interest will accrue on your loans while you’re in school and during other deferment period. Once you start making full payments, the interest could be added to your principal balance (i.e. capitalized) and your interest rate will now apply to that larger balance.

If you can afford to make payments on your loans while they’re in deferment, you can limit how much interest will accrue and capitalize.

#3 Avoid deferment and forbearance

You may qualify to temporarily stop making payments and place your loans into deferment or forbearance for various reasons, such as returning to school, losing your job or following a medical emergency. However, as with the initial in-school deferment, unsubsidized loans will continue to accrue interest that will capitalize once you start making full payments. Even subsidized loans accrue interest during forbearance.

Continue making payments if you can afford it. Or, even if you have to put your loans into deferment or forbearance, try to make at least partial payments when you can. Doing so will limit how much interest accrues and could keep your loans from growing.

If you’re having trouble affording your payments, you also may be able to switch your federal student loans to an income-driven repayment plan. Depending on your income, doing so could decrease your monthly payment amount and let you continue paying down your loans and avoiding debt default or placing them in deferment and forbearance.

Even if your monthly payment is only a few dollars, with four of the income-driven repayment plans, the remainder of your loan’s balance could also be forgiven after 20 to 25 years of payments. Your monthly payments may also qualify you for other federal forgiveness and cancellation programs.

#4 Increase your income and cut expenses

Whether you can negotiate a raise at work, take on extra hours, find a higher-paying job or start working a side gig for extra income, the more money you have coming in, the more you can afford to put toward your student loans. There are many opportunities to make money online, and while they don’t all pay especially well, they’re often flexible and can be squeezed into your normal routine.

On the other side of your personal cash flow statement, you could try to cut your expenses. There are a lot of ways to go about doing this, everything from looking for fee-free financial accounts and ending subscriptions, to changing your dining and grocery habits.

#5 Consider consolidating your federal student loans

Consolidating (i.e. combining) your federal student loans can be one way to make it easier to manage multiple student loans at once. However, it may not save you money in the long run. That’s because when you consolidate your loans, you’ll be issued a new loan for the total balance with the weighted average interest rate of the loans you’re combining.

If you keep your loans separate, however, you can focus on paying down the loan with the highest interest rates first. Doing so could help you save money, which you can then put toward paying down the next highest rate loan. But that’s not an option if consolidate all your loans together.

Also, consolidation could result in a much longer loan term and lower monthly payment. While you can still make extra payments each month and pay off the loan early, it may be easier to stick to your plan if you don’t have to regularly schedule extra payments.

There are pros and cons to this approach. Consider whether it’s worth it based on your unique situation.

#6 Stay on the standard federal repayment plan

Federal student loans may be eligible for a variety of repayment plans, including plans that base your monthly payment amount on your income. You may want to stay with the standard 10-year repayment plan, as generally the income-driven plans will lead to lower monthly payments and a longer repayment term.

There is a middle ground, though. If you can’t afford the monthly payments on the standard plan, switching plans could help you avoid late payments or missed payments, which could result in fees and potentially hurt your credit. However, you can still pay more than the minimum and pay off your loans faster.

#7 Look into loan forgiveness programs and options

Federal student loans may be eligible for several forgiveness and cancellation programs which could help you get out of debt sooner. Only certain types of federal loans may qualify, and you may need to meet a variety of qualifications and requirements before the Department of Education forgives your remaining debt. Generally, the programs are restricted to those who take on some sort of service work, whether that be as a teacher, government worker or nonprofit employee.

You might also find employer- or government-backed programs that could help you repay your private and federal student loans. These can range from industry-specific opportunities for attorneys and health care workers to more general loan repayment programs that companies offer as an employee benefit.

In some cases, it may make sense to switch to an income-driven repayment plan and decrease your monthly payments to take advantage of a forgiveness or repayment program. You won’t necessarily pay off your loans as quickly as possible, but it could be a worthwhile trade-off if you can pay less out of pocket overall.

#8 Sign up for automatic payments

Many student loan servicers offer a 0.25 percent interest rate discount if you sign up for automatic payments. It may not make a huge difference in your overall costs, but every little bit counts.

#9 Refinance your student loans

By refinancing your student loans — taking out a new loan to pay off your current debts — you may be able to your lower interest rate and decrease how much interest your loans accrue each month. After refinancing, even if you make the same monthly payments you’ll pay off the loans quicker.

You may be able to refinance your student loans by taking out a new private loan and using that loan to pay them off. There are lenders that specifically offer student loan refinancing.

Just keep in mind if you use a private loan to refinance federal loans, you will be forfeiting your option to use federal repayment programs and may not be able to apply for federal loan forgiveness programs.

If you refinance with a private lender, your loans could still be considered student loans for tax purposes and the interest payments may qualify you for the deduction.

Borrowers who have a good credit score and high income may qualify for the lowest rates when refinancing their student loans. However, don’t assume you can’t get a good rate if that doesn’t describe your situation. You can at least apply for preapproval with a soft credit check from some lenders and see your estimated rates and eligibility without affecting your credit scores.

Also, compare your options before you go through with refinancing. You may find that lenders offer you different rates or terms, and you won’t necessarily get the best rate from the company with the lowest advertised rates.

Advertiser Disclosure: The card offers that appear on this site are 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 card companies or all card offers available in the marketplace.

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Louis DeNicola is a writer at MagnifyMoney. You can email Louis at louis@magnifymoney.com

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College Students and Recent Grads

Subsidized vs. Unsubsidized Student Loans: What’s the Difference?

Editorial Note: The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

iStock

Undergraduate and graduate students who need money to pay for school can apply for federal students loans after submitting a Free Application for Federal Student Aid (FAFSA). But once your school sends you an award letter, you’ll need to figure out which student loans to accept.

The U.S. Department of Education issues several types of federal student loans through the William D. Ford Federal Direct Loan Program, or simply the direct loan program. Two of these are direct subsidized loans and direct unsubsidized student loans.

Direct subsidized loans are only available to eligible undergraduate, community college, trade, career or technical school students, while direct unsubsidized student loans may be offered to graduate students as well.

There are also several other types of direct loans:

  • Direct PLUS loans for graduate or professional students, also known as grad PLUS loans
  • Direct PLUS loans for parents of undergraduates, also known as parent PLUS loans
  • Students who have previously taken out federal student loans may be able to combine their loans with a direct consolidation loan.

We’re going to delve into direct subsidized and direct unsubsidized student loans, the differences between the two and when one type of loan may be better than the other.

What is a direct subsidized loan?

Direct subsidized loans are federal student loans for undergraduate students. There’s no credit or minimum income requirement to borrow a direct subsidized loan, but the loans are need-based, and your school’s official cost of attendance (COA) and your expected family contribution (EFC) will impact your eligibility for direct subsidized loans.

Direct subsidized loans also have a $23,000 aggregate loan limit along with annual loan limits:

  • $3,500 for your first year
  • $4,500 for your second year
  • $5,500 for your third and subsequent year

Your school will determine your loan offer. At most, you may be offered direct subsidized loans for the greater of your annual loan limit or your financial need amount, which is the difference between your COA and EFC.

Since your COA and EFC may change from one year to the next, your eligibility for direct subsidized loans and your loan offer amount may also vary.

You also can’t borrow direct subsidized loans for longer than one-and-a-half times your programs length. For example, if you’re in a two-year associate degree program you can only take out direct subsidized loans for up to three years. If you later switch to a four-year bachelor’s degree program, your timeline increases to six years, but the direct subsidized loans you previously took out still count against that limit.

What is a direct unsubsidized loan?

Like with direct subsidized loans, there’s no credit or minimum income requirement for direct unsubsidized student loans. Unlike direct subsidized loans, they aren’t need-based, and you may be able to borrow an unsubsidized loan even if you don’t have financial need. However, your school still determines your loan offer amount, which may depend on your COA and EFC.

The loan limits for direct unsubsidized loans are different for dependent and independent undergraduate students, and for graduate students. A dependent student whose parent applies but doesn’t qualify for a parent PLUS loan may also be eligible for an increased annual loan limit.

Borrower’s status

Annual loan limit

Aggregate loan limit

Dependent undergraduate students

$5,500 for your first year
$6,500 for your second year
$7,500 for your third and subsequent years

The limit includes your subsidized loans.

$31,000

The limit includes up to $23,000 in subsidized loans.

Independent undergraduate students

Dependent undergraduate students after a parent applies and is denied for a PLUS Loan

$9,500 for your first year
$10,500 for your second year
$12,500 for your third and subsequent years

The limit includes your subsidized loans.

$57,500

The limit includes up to $23,000 in subsidized loans.

Graduate and professional students

$20,500

$138,500

The limit includes up to $65,500 in subsidized loans. This limit also includes any federal loans obtained during undergraduate study.

Both subsidized and unsubsidized direct loans require students to maintain at least a half-time schedule at a Title IV school to be eligible. You will also need to meet the basic eligibility requirements and complete and submit a FAFSA each year to remain eligible for any form of federal student loan.

There are also a few differences between subsidized and unsubsidized loans. In addition to the need-based requirement for subsidized loans and the varying loan limits, the primary difference is right in the name — the subsidy.

How does the subsidy work?

With direct subsidized loans, the education department will pay the interest that accrues on your loan while you’re enrolled at least half time in school and during your loan’s grace period (the six months after you leave school).

The department will also pay interest that accrues if you place your loan in deferment and temporarily stop making payments. And, if you consolidate your federal loans and include a subsidized direct loan, the Department of Education will pay a portion of the interest that accrues on your direct consolidation loan if it’s placed in deferment.

There are a few situations when you may lose your interest subsidy, such as if you’re still in school but you’ve exceeded your eligibility period for direct subsidized loans. However, even when this happens, you’ll only lose the subsidy going forward, and you won’t have to repay the interest that was already paid on your behalf.

With a direct unsubsidized loan, the interest will begin to accrue once the loan is disbursed (the money is sent to your school). Because there’s no subsidy, the interest will continue to accumulate if you defer your payments while you’re in school, during a grace period or if you temporarily stop making payments by placing the loan in deferment or forbearance.

Once you begin making payments, the interest will be added to your loan’s principal balance (i.e., the interest will be capitalized). Now, your interest rate will apply to a larger loan balance, and your loan will accumulate more interest each month.

The value of the subsidy

If you borrowed $5,500 during your first term as an undergrad in the 2018-19 school year, you received about $5,441 after paying the disbursement fee. During the following 51 months (45 months at school, plus a six-month grace period), the loan would accrue about $1,168 in interest. (The interest rate for undergraduate loans disbursed for the 2018-19 school year is 5.05%.)

With a subsidized direct loan, your principal balance will be $5,441 at the end of your grace period since the Department of Education pays the interest. But it would be $6,609 if you had an unsubsidized loan, because the interest will accumulate and capitalize.

If you repay the loan using the standard 10-year repayment plan, you’ll pay approximately $6,941 in total for the direct subsidized loan. By contrast, you’ll pay approximately $8,431 in total for a direct unsubsidized loan—a difference of $1,490 for just one year of school.

Rates and fees

For undergraduate students, or students who are enrolled at a community college, trade, career or technical school, the subsidized and unsubsidized loans offer the same interest rate and disbursement fee.

Graduate and professional aren’t eligible for subsidized loans and will receive a higher interest rate on their unsubsidized loans.

Subsidized vs. unsubsidized student loan

Loan type

Borrower type

Interest rate

Disbursement fee

Subsidized

Undergraduate

5.05%

For loans disbursed from Oct. 1, 2017, to Sept. 30, 2018: 1.066%


For loans disbursed from Oct. 1, 2018, to Sept. 30, 2019: 1.062%

Unsubsidized

Undergraduate

5.05%

Oct. 1, 2017-Sept. 30, 2018: 1.066%


Oct. 1, 2018-Sept. 30, 2019: 1.062%

Unsubsidized

Graduate / professional

6.60%

Oct. 1, 2017-Sept. 30, 2018: 1.066%


Oct. 1, 2018-Sept. 30, 2019: 1.062%

What about other types of student loans?

In addition to subsidized and unsubsidized direct loans, students may be eligible for grad PLUS loans or private student loans.

Grad PLUS loans are unsubsidized direct PLUS loans for graduate and professional students. Like other federal student loans, they offer the same fixed interest rate to all borrowers, and charge a disbursement fee that’s taken out of the loan disbursement amount. For grad PLUS loans disbursed from July 1, 2018, to June 30, 2019, the interest rate is 7.60%, a full 1 percentage point higher than unsubsidized student loans.

Unlike with subsidized loans, the education department will review borrowers’ credit reports, and you may not be eligible for a grad PLUS loan if you have an adverse credit history. However, your income and credit score won’t affect your eligibility.

Private student loans are available from a variety of lenders, including banks, credit unions, online-only lenders, states and schools. Private student loans are credit-based loans, meaning your credit history, credit score, income, outstanding debts and other factors may be considered when you apply for the loan.

Each lender may set its own eligibility requirements, and the rates and terms you’re offered can depend on the lender as well as your creditworthiness. Lenders may also have different policies that can impact borrowers who have trouble making payments. Because of this, it’s important to compare private student loan lenders and their loan offers.

Private student loans don’t give borrowers access to federal student loan repayment, deferment, forbearance, forgiveness or discharge programs. Because of this, and due to the underwriting requirements that may lead to much higher interest rates than federal student loans, many borrowers are better off with federal student loans.

Which type is right for you?

Undergraduate students

For undergraduate students who are offered both subsidized and unsubsidized direct loans, starting with a subsidized loan is generally the best option. Although the loan limits are lower than for subsidized loans, the interest rate and disbursement fees are the same and you can save money by avoiding accumulating interest while you’re at school. The subsidy will also help keep your debt from growing if you need to put a loan into deferment in the future.

If you’ve maxed out your subsidized loan limit for the year, in aggregate or due to the time limit, you may still be able to borrow more money with an unsubsidized direct loan. And, if you still have a funding gap, one of your parents may be able to take out a parent PLUS loan or cosign a private student loan for you.

Graduate and professional students

Graduate and professional students aren’t eligible for subsidized loans, but they may be able to take out grad PLUS loans. For these students, the subsidized loans are probably the best option because they have a lower interest rate and disbursement fee than grad PLUS loans.

Students who’ve maxed out their unsubsidized loan limits may then want to turn to grad PLUS loans, which don’t have a preset annual or aggregate loan limit.

Because graduate and professional are more likely to have an established credit history and higher income than undergrads, they may also want to look into different private student loan options. Although private student loans don’t offer as many options to borrowers who have trouble repaying their loans, they may offer you a lower interest rate than federal loans, and generally don’t charge an origination fee.

Advertiser Disclosure: The card offers that appear on this site are 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 card companies or all card offers available in the marketplace.

Louis DeNicola
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Louis DeNicola is a writer at MagnifyMoney. You can email Louis at louis@magnifymoney.com

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College Students and Recent Grads

How to Transfer a Parent PLUS Loan to the Student: Is It Possible?

Editorial Note: The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

If you’ve taken out a federal parent PLUS loan to help a child pay for college, you may have already started making loan payments while your child is in school. Or, perhaps you’ve deferred the payment until after graduation.

When you borrow a parent PLUS loan, the money gets sent to your child’s school. However, as the borrower, you are legally responsible for repaying the loan.

Sometimes, a parent and child may have an arrangement where the child starts making payments or reimbursing a parent once he or she can afford it. However, these are informal arrangements and don’t reflect the legal liability that you have as the borrower. If you want the child to take on full responsibility for the loan, you’ll have to figure out a way to transfer the debt to the child’s name.

Can a parent PLUS loan be transferred to the student?

Yes, transferring a parent PLUS loan to a child is possible. However, the U.S. Department of Education, which issues parent PLUS loans and lends money to students for educational costs, doesn’t offer a way to transfer a parent PLUS loan.

Even if your child has his or her own student loans and is making monthly payments to the same loan servicer that you’re working with, there’s no way to transfer the parent PLUS loan to the child within the federal student loan system.

To transfer the debt, the child will need to qualify for and take out a loan from a private lender and then use the money to pay off the parent PLUS loan. The new loan doesn’t have to be a student loan. Children could take out a personal loan or use a cash-out refinance if they own a home, and then give the money to a parent to pay off the parent PLUS loan.

But there are student loan refinancing companies that let borrowers refinance a parent PLUS loan into the child’s name. The loan may remain a qualified educational loan, which means eligible borrowers may be able to deduct up to $2,500 in interest payment from their taxes each year. The refinancing company will also generally pay off the other student loans directly, rather than sending the borrower cash.

Steps for children who want to take over parent PLUS loans

If you’re a student or former student who wants to transfer a parent PLUS loan to your name, refinancing the loan with a private student loan refinancing company could your best option.

You can choose which loans you want to refinance, including some of your own student loans. Refinancing could even save you money if you can qualify for a lower interest rate, and combining multiple loans into one new loan can make managing your loans easier.

However, carefully consider your options before refinancing your federal student loans. After refinancing, your new private student loan won’t be eligible for federal repayment, assistance and forgiveness programs.

Whether or not you want to refinance your own loans, if you’re looking to transfer a parent PLUS loan, consider taking these four steps:

1. Review your budget

Refinancing your student loans could lead to lower monthly payments if you’re only refinancing your own loans. However, if you’re taking on additional debt by adding in a parent PLUS loan, your monthly payments may increase. You can use a student loan refinance calculator to estimate the change in your monthly payment amount.

Consider how your new monthly payments will impact your budget, and whether you’ll still be able to cover all your living expenses. If you don’t think you can afford all the payments, you may not want to transfer the parent PLUS loan.

2. Find lenders that offer parent PLUS loan transfers

Many lenders offer student loan refinancing, but some lenders only let your refinance your own student loans. If you want to transfer a parent PLUS loan, you’ll need to find lenders that let you include a parent PLUS loan into the child’s new loan. For example, CommonBond, SoFi and Laurel Road — some of the top private student loan refinancing companies — all offer parent PLUS refinancing that transfers the debt to the student.

3. See if you’re eligible

Once you’ve identified a few lenders that let you transfer parent PLUS loans, review their basic eligibility criteria to see if you’ll qualify for refinancing.

Your citizenship status, state of residence, whether you received a bachelor’s degree and how much debt you’re refinancing could impact your eligibility. Your monthly income could also be a factor, as lenders want to be certain you can afford your loan payments.

Additionally, your credit history and score can determine whether a lender will approve your loan application and the terms it offers. Some lenders offer a soft credit preapproval, which lets you see if you qualify for refinancing and your estimated loan terms without affecting your credit score. With others, you won’t know what terms you’ll get until you apply.

You could check your credit score for free online to help estimate your chances of getting approved. Although lenders may use different credit scoring models to evaluate applicants, and a credit score isn’t the only important factor, you may need a minimum score of around 660-680 to qualify for refinancing from some of the top lenders.

You also may want to review your credit reports for negative marks. For example, regardless of your score, some lenders may not approve your application if you have recent collections accounts or a bankruptcy on your credit reports. You may need to wait until the negative items fall off your reports (which can take seven to 10 years), and can focus on building a good credit history with on-time payments.

4. Compare your loan offers and complete a loan agreement

Once you have a list of lenders that you think may be a good fit, you could start submitting applications.

When you submit a complete application for student loan refinancing, the resulting hard inquiry on your credit report could have a small, negative impact your credit score. And multiple inquiries can sometimes increase the damage. However, multiple hard inquiries from student loan applications that occur within a 14-day period (depending on the type of credit score) only count as one inquiry for scoring purposes. Therefore, shopping lenders and comparing offers during a short period could help you secure the lowest rate possible without causing excessive damage to your credit.

Once you figure out which offer is best, and if you decide to move forward, you’ll need to complete the application process. You may need to upload verification documents, such as recent pay stubs, tax returns or a job offer to verify your income. You’ll also have to sign the loan agreement, which you may be able to do electronically.

The private lender will then generally send payments to your loan servicer as well as your parent’s loan servicer to pay off those student loans. You should both continue making payments as usual until you’ve confirmed the original loans were paid off.

Pros of transferring your parent PLUS loans

Transferring your parent PLUS loan to a child may offer several benefits for both parties.

The debt will no longer impact the parent’s eligibility for financing. Decreasing the debt that’s in the parent’s name will lead to a lower debt-to-income ratio, which can help the parent qualify for loans and lines of credit at lower rates.

The child may be making the loan payments anyway. If you have an informal agreement that the child makes the loan payments or reimburses the parent, transferring the parent PLUS loan will let the legal responsibility match your arrangement.

The child can build credit. After transferring the loan, the child can build his or her credit by making on-time loan payments. However, a late payment could now hurt the child’s credit.

The loan’s interest rate could drop. Depending on the loan offers that the child receives, the refinanced loan could have a lower interest rate. A lower rate could lead to lower monthly payments and long-term savings.

Cons of transferring parent PLUS loans

There are also potential drawbacks to transferring your parent PLUS loans. Consider these carefully, because you can’t undo the transfer once it’s complete.

The borrower loses access to federal programs. Private student loans aren’t eligible for federal repayment plans, forgiveness programs or forbearance and discharge options. Therefore, if you’re having trouble making payments, you may have fewer options when dealing with your private lender.

The child might not qualify for a good rate. If the child doesn’t qualify for an equal or lower interest rate, the long-term cost of repaying the loan could increase. When there isn’t a pressing reason to transfer the loan, you may want to wait to refinance while the child builds their credit.

Additional parent PLUS loan repayment options

If your child doesn’t qualify to refinance the parent PLUS loan in his or her name, or you decide against the transfer for another reason, there still may be other options for your loan.

Consider a different federal repayment plan

If you’re struggling to afford monthly parent PLUS loan payments, you may want to consider switching your repayment plan. The graduated plan starts with a lower rate, which usually increases every two years. There’s also an extended plan, which increases your term to 25 years, versus 10 with the standard or graduated plans, and leads to a lower monthly payment (but more interest paid over time).

Parent PLUS loans borrowers are also eligible for the income-contingent repayment (ICR) plan, if you first consolidated your parent PLUS loan (or loans) into a federal direct consolidation loan. The ICR plan will adjust your monthly payments based on your discretionary income, and any remaining balance will be forgiven after you make payments for 25 years. You may, however, have to pay income taxes on the forgiven amount.

Look into federal forgiveness and discharge options

Parent PLUS loans are eligible for some of the same federal cancellation and discharge programs as federal student loans lent directly to students. For example, the debt may be discharged if your child’s school closed and he or she wasn’t able to complete the program.

You could also get part of the loan forgiven through the Public Service Loan Forgiveness. You’ll need to consolidate your loan and switch to the ICR plan specifically. To qualify, you (not your child) must work for an eligible employer, such as a government or nonprofit tax-exempt 501(c)(3) organization, and make 120 qualified monthly payments.

Additional student loan forgiveness or repayment programs

There are a variety of federally funded and private student loan repayment assistance (LRAP) programs that could also help you with your loan. Many of these programs are targeted at people in specific professions, such as those who work in health care, law or the military. And there may be additional requirements to work in high-need areas. Depending on the program, you may receive an additional signing bonus or annual stipend that will be sent to your loan servicer to repay your student loan.

Refinance the loan in your name

Just as your child may be able to refinance his or her student loans, you may be able to refinance your parent PLUS loan with a private lender. You may be able to qualify for a lower interest rate or change your loan term, which could lower your monthly payment and may save you money over the lifetime of your loan.

Advertiser Disclosure: The card offers that appear on this site are 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 card companies or all card offers available in the marketplace.

Louis DeNicola
Louis DeNicola |

Louis DeNicola is a writer at MagnifyMoney. You can email Louis at louis@magnifymoney.com

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College Students and Recent Grads

Education Loan Finance: Student Loan Refinance Review

Editorial Note: The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

As long as you qualify to refinance your student loans, you may be able to combine multiple student loans into one new loan, lower your interest rate and decrease your monthly payment. Doing so could save you money and make it easier to manage your loans. But remember, if you want to refinance your student loans, you can shop around to make sure you find the best deal.

Student loan refinancing companies may offer you different interest rates, loan terms and benefits, which is why it can be important to compare lenders before deciding which one to use.

What is Education Loan Finance?

In 2012, SouthEast Bank was bought by Education Services of America (also known as Edsouth Services), a nonprofit that’s been in the student loan space for 30 years. SouthEast Bank went on to create Education Loan Finance, or ELFI, a division of SouthEast that offers student loan refinancing. ELFI is based in Knoxville, Tenn., which is also where the customer service representatives are based.

ELFI prides itself on its decades of experience in the student loan industry and the positive reviews it receives from borrowers. It has a student loan refinancing product for graduates, and for parents who took out federal student loans to pay for their child’s education. The program we’re reviewing here is for students who are refinancing their loans.

Education Loan Finance student loan refi in a nutshell

Fixed APR range

3.09% to 6.69%

Variable APR range*

2.69% to 6.01%

Loan terms offered

Five, seven, 10, 15 and 20 years

Fees

The are no application, origination or prepayment fees.

The late fee is the lesser of $50 or 5% of the amount past due.

There’s a $30 returned check or insufficient funds charge.

Maximum loan amount

You must refinance at least $15,000 in student loans. The maximum loan amount varies by applicant.

Cosigners

You can apply with a cosigner.

You can reapply to refinance the loan in your name and release a cosigner.

Savings opportunities

None

Other perks

ELFI will mail you a $100 bonus if you accept your loan offer within 30 days of your application date.
You can earn $400 for referring new ELFI customers.

*Although the interest rate will vary after you are approved, the interest rate will never exceed 9.95% for the 5-year, 7-year, 10-year, 15-year, or 20-year term.

What it takes to qualify with Education Loan Finance

Credit score

680

Income/employment

You or your cosigner must make at least $35,000 a year.

Loan types

  • Federal and private student loans

  • Parent PLUS loans that were taken out to pay for your education.

School/state eligibility

You must graduate with at least a bachelor’s degree from one of the approved post-secondary institutions.

Available to residences of every state, Washington, D.C. and Puerto Rico.

How Education Loan Finance compares with other lenders

You may find that there are a lot of different lenders that offer student loan refinancing. ELFI stands apart from some of the other top lenders with its relatively low interest rates and somewhat strict eligibility requirements.

In general, if you can qualify, ELFI may be one of the better options because the lender doesn’t seem to sugarcoat its offering. For example, ELFI doesn’t offer an interest rate discount if you sign up for automatic payments. Other lenders may offer you a discount, such as 0.25% off your interest rate, while you’re using autopay — and they may advertise this lower rate on their website.

While the lack of a discount may sound like a drawback, it isn’t necessarily a bad thing. If ELFI approves you for a lower rate than other lenders, then you’ll receive this lower rate whether or not you use autopay.

There are other potential advantages and drawbacks to consider as you’re comparing lenders.

Advantages of refinancing with Education Loan Finance

Soft credit pull preapproval. You can check your eligibility and get estimated loan rates with a soft credit check, which won’t hurt your credit score.

Open to residents of every state. While other lenders aren’t able to offer refinancing to residents of some states, ELFI’s refinancing is available to everyone in the U.S.

You can include multiple types of student loans. ELFI lets you combine your federal and private student loans. You can also include a parent PLUS loan, as long as your parent took out the loan to pay for your education.

Forbearance option. You may be able to put your loans in forbearance and temporarily stop making payments for up to 12 months. Eligibility is handled on a case-by-case basis.

Up to a 20-year loan term. ELFI offers five loan terms with both its variable- and fixed-rate loans. While the longest, a 20-year term, may lead to paying more interest over your loan’s lifetime, it may also lower your monthly payment. Having that option is a plus because some lenders don’t offer a 20-year term.

Bonus opportunities. ELFI offers three potential bonuses: a $100 bonus if you’re referred by an ELFI borrower, an additional $100 bonus if you accept a loan within 30 days of submitting your first application and $400 for each new ELFI borrower you refer.

Drawbacks of refinancing with Education Loan Finance

You must earn at least a bachelor’s degree. Other lenders may let you refinance your student loans once you earn an associate’s degree, or if you didn’t graduate.

No cosigner release option. If you add a cosigner to help you qualify for refinancing, or secure a lower interest rate, you may want to remove the cosigner later. Some lenders let you apply for a cosigner release (removing the cosigner without refinancing) after making a series of consecutive on-time payments. While you may need to agree to a credit check and meet all the requirements to take over the loan on your own, you’d keep the original loan terms if you qualify. ELFI does not offer such a cosigner release option.

The only way to remove a cosigner from an ELFI loan is to refinance again, without a cosigner. However, interest rates may have risen since you originally refinanced.

There isn’t a clear policy for death or permanent disability discharge. Some other lenders will always discharge the remaining loan balance if the borrower dies or becomes completely and permanently disabled. ELFI doesn’t have a clear policy and handles situations on a case-by-case basis.

Relatively high minimum credit score requirement. ELFI requires a 680 credit score, which is in line with some other refinancing companies, but a bit higher than a few other lenders that only require a 660 to qualify.

Relatively high minimum income requirement. ELFI requires you, or your cosigner, make at least $35,000 a year to qualify for refinancing. Some lenders only require a $24,000 a year income or don’t have an explicit minimum income requirement.

$15,000 minimum loan requirement. Other lenders may let you refinance as little as $5,000 in student loan debt, but ELFI requires you to refinance at least $15,000.

Who is Education Loan Finance best for?

Since it won’t hurt your credit, there’s no downside to applying for preapproval with ELFI to see if you qualify and check your estimated rates. Even so, the lender may be a better fit for some types of borrowers.

Creditworthy applicants with a high income relative to their debts may pass the eligibility requirements and lock in one of ELFI’s low interest rates. These types of applicants may get the best rates from many student loan refinancing lenders, but they they may not be eligible with other lenders based on where they live or which loans they want to refinance.

ELFI may not be the best option if you need a cosigner because it doesn’t offer a cosigner release, unless you reapply for refinancing again with either ELFI or a different lender. It also might not be a great fit for those who don’t have a lot of outstanding private student loan debt.

Borrowers may want to only refinance their private student loans to avoid losing the benefits on their federal student loans. But ELFI’s $15,000 minimum threshold could be difficult to reach with just your private student loans.

Education Loan Finance

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on Education Loan Finance’s secure website

Taking a closer look at the online platform

Education Loan Finance’s website is intuitive to navigate and focused on its student loan products. There are pages devoted to each product, a few pages about the company or recent company-related news, a blog with personal finance posts and a page with testimonials.

There is also a calculator, several checklists that you can review to see if you’ll be eligible for refinancing and to prepare for the application process and an FAQ page. The FAQ page is broken down into six sections, ranging from general questions to sections about rates or the ELFI bonus programs.

Starting an application is also simple — we detail the process below — and if you want to take a break and start again later, you can log in to your account and pick up wherever you left off.

The fine print

There are a few fine-print items that were fairly easy to find on ELFI’s website. There’s a page with a list of the approved postsecondary schools, as well as a document checklist you can reference to see what you should gather before applying.

The terms page is also helpful, as it has an overview of the potential loan fees, interest rate amount, variable-rate interest rate cap, eligibility requirements and repayment options.

However, there were also a few fine-print items that were difficult to find on the website. A representative from the company confirmed the 12-month potential forbearance period and the case-by-case nature of the death or permanent disability discharge.

What to expect during the application process

ELFI’s online application process straightforward, and you may be able to complete it in just a few minutes.

Create your account

You’ll need to create an account to start your application. After entering your name, email address and password, you’ll be sent an email with a verification code. Submit the code, and you can then fill out your profile with your:

  • Name, address, date of birth and citizenship status
  • The school you attended, highest degree you attained and date of graduation
  • Your Social Security number
  • Whether you own a home, rent or live with family, as well as your monthly housing expense
  • Your gross income
  • The loan amount you’re requesting

You also must agree to a soft credit pull and read the Education Loan Finance’s communication policy before continuing.

Choose a loan term

If you qualify for preapproval, you can now choose between a fixed- or variable-rate loan with a term of either five, seven, 10, 15 or 20 years. You’ll see an estimated interest rate and monthly payment for each loan type.

The final loan offer may vary from these preapproval rates, and you can choose a different interest-rate type and loan term later if you want.

Complete your profile

The next step is to complete your profile by entering your mailing address and choosing three security questions and answers.

Read the loan disclosure forms

There are three loan disclosure forms you must read, and acknowledge that you read, before continuing:

  • The federal loan disclosure form goes over the differences between federal and private student loans.
  • The application disclosure fixed-rate form discusses the fixed-rate loan that Education Loan Finance offers. It will tell you your potential interest rate range, the fees associated with the loan and eligibility requirements, and it has examples of repayment times and amounts.
  • The application disclosure variable rate form is similar to the fixed-rate form, but for Education Loan Finance’s variable-rate loans.

Apply for refinancing

Once you reach this point, you can complete the official application for refinancing. Some of the information will be filled in for you based on what you’ve already entered.

  1. Borrower information. Much of this section will be filled in already, but you may need to add your driver’s license number/state and how long you’ve lived at your current address. If you’ve lived there for fewer than two years, you’ll also need to add your previous address.
  2. Reference information. You need to have two references who are at least 18 years old, don’t live with you and aren’t your cosigner. You’ll have to share the reference’s name, email address, phone number, mailing address and how you know the person.
  3. Employment information. Choose your employment status and then complete the related information about your employer, or how long you’ve been unemployed or retired. If you’re employed, you’ll also be asked to share the company’s address, how many years you’ve worked for the company and your income. You can also add additional sources of income, which may help you qualify for refinancing.
  4. Review application and approve hard credit pull. The fourth step asks you to double-check all your information and then authorize a hard credit pull. A hard pull could affect your credit score.
  5. Student loan information. You’ll need to share information about the student loans that you’re refinancing and may need to upload copies of recent billing statements or payoff letters. The documents should show the loan servicer’s name and address, your account number and the current balance or payoff amount.
  6. Rates. Choose the interest rate type and loan term that you want for your new loan.
  7. Documents. The documents step is where you’ll find copies of the disclosures you previously read. This is also where you can upload additional documents, such as pay stubs or tax returns to verify your income, or a copy of a government-issued ID to verify your identity.

Once you finish the seven steps, ELFI can use the documents you uploaded to verify your eligibility for the loan you chose. You can then sign the promissory note for the new loan to complete the process.

It can take about 30 to 45 days for your current loan servicer(s) to receive the payments for your student loans. You should continue making your loans payments as usual during this period to avoid missing a payment. And don’t worry, if you overpay your loan, the overpayment will decrease your loan balance with ELFI.

If you refinance with ELFI, a company named MOHELA will service your loan. MOHELA should reach out to you so you can set up an account, and you’ll send your monthly payments to MOHELA.

How to compare student loan refinance companies

There are many factors to consider when comparing student loan refinancing companies. The most important ones may be the eligibility requirements so you can rule out potential lenders, and the interest rates that the lenders offer you. The lower your interest rate, the greater your potential savings.

However, there may be other details to compare as well. For example, some lenders may not offer a 20-year term, which you may want if you’re looking to lower your monthly payments. And there are lenders, including SoFi and CommonBond, that give borrowers extra perks, such as invitations to exclusive events.

You can quickly compare lenders’ maximum loan terms, interest rate ranges, maximum loan amounts and transparency scores on MagnifyMoney.

But determining which lender is best for you depends on your circumstances. Once you find a few lenders you think may be a good fit, look to see if they offer a soft credit check preapproval so you can compare estimate interest rates.

Once you’re ready to refinance, submit applications to all the lenders on your short list. Although each application could result in a hard inquiry, which may hurt your credit score, multiple student loan inquiries won’t increase the impact if they occur within a 14-day period. Some, depending on the credit-scoring models, offer a longer “rate shopping” period, but to be safe, it’s a good idea to shop around in as short a period as possible.

After completing the applications, you can compare the official loan offers from each lender and decide which option is best. If you want to see how the different loan offers may affect your savings, you can plug the numbers into our student loan refi calculator.

 

Advertiser Disclosure: The card offers that appear on this site are 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 card companies or all card offers available in the marketplace.

Louis DeNicola
Louis DeNicola |

Louis DeNicola is a writer at MagnifyMoney. You can email Louis at louis@magnifymoney.com

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College Students and Recent Grads

The Ultimate Guide to Paying Off Big Grad School Loans

Editorial Note: The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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A graduate degree can open up new doors and may lead to higher annual earnings. But earning a degree generally isn’t cheap.

According to the College Board, as of the 2016-2017 academic year, the average graduate student borrowed $42,710 in federal student loan to pay for that year’s schooling — more than six times the $6,590 that the average undergrad borrowed. (Although, on average, parents also borrowed $15,880 to help pay for a child’s undergraduate education.)

And that’s not including any private loans students may have obtained along the way. By the time graduate students finish their degree, they may have a combination of undergraduate and graduate student loans to repay.

Tackling these student loans can be a daunting task, but having a plan could help diminish some of the fear or anxiety that may arise. Here’s a guide to help you navigate the process. You may even learn a few tips or strategies that could save you money or make your monthly payments more affordable.

Get organized and understand your grad school loans

Getting a clear understanding of all your student loans can be an important first step. You may want to start listing your student loans alongside important information for each loan.

Write down the name of the loan servicer, the loan type, the loan amount, remaining amount due, your monthly payment, the loan’s interest rate and whether the loan has a fixed or variable interest rate. Using a spreadsheet could be helpful, as you can then quickly arrange the loans by different criteria, such as the remaining amount due or interest rate.

You may then want to separate your loans into two groups — federal and private student loans — and further separate your federal loans by the federal loan type. These can be important distinctions and you may want to take different approaches to different types of loans.

The different types of student loans

You may have one or more of the following types of student loans:

Private student loans. A variety of institutions offer private student loans, including banks, credit unions, schools, states and online lenders. If you applied for a student loan without first filling out the Free Application for Federal Student Aid (FAFSA), then you took out a private student loan.

Some private student lenders outsource their loan servicing to a third party and the company you make your monthly payments to may not be the same company that lent you the money. You may need to contact that loan servicer, review a recent statement or check your account online to get information on your private student loans.

Federal student loans. The Department of Education offers federal student loans to undergraduate and graduates students, as well as parents of students. The federal government funds the loans, and there have been several different federal student loan programs over the years.

You may have different types of federal loans, including ones from your undergraduate degree. Some of the federal student loans also go by several names. Your loans could include:

  • Direct loans, which may be direct subsidized loans, direct unsubsidized loans, direct consolidation loans, and direct PLUS Loans (also known as grad PLUS loans when offered to a graduate or professional student).
  • Perkins loans
  • Federal Family Education Loan (FFEL), which may include subsidized and unsubsidized Stafford loans, FFEL PLUS loans, and FFEL consolidation loans.

Your federal student loans may be serviced by one or more of the 10 loan servicers that the education department contracts to collect payments. However, you can log into the National Student Loan Data System (NSLDS) to get an overview of all your federal student loans.

Know your options

Once you’ve got your loan information organized, learn about your options for loan forgiveness and repayment. You may be able to use one or more of the programs below to help manage your payments and ultimately get rid of your graduate school debt.

Federal student loan forgiveness programs

Several loan forgiveness programs are exclusively for federal student loans. However, your eligibility may depend on the type of federal loan you have, and you may need to meet other requirements to qualify.

For example, the federal Public Service Loan Forgiveness (PSLF) is only available for direct loans. With PSLF, you’ll have to make 120 qualifying monthly payments while working full time at a qualifying employer to get the remainder of your direct loan forgiven. Our guide to applying for PSLF has more details on determining if your loans qualify and how to get started.

Consolidate your federal loans

You may be able to consolidate your federal student loans into a direct consolidation loan. Consolidation lets you combine multiple loans into a new loan that’s part of the direct loan program.

Consolidating your loans may not save you money because the new loan has the weighted average interest rate of your existing loans. In some cases, since your loan term could be extended, it may even result in you paying more in interest over the lifetime of the loan.

However, consolidation could make managing your loans easier since you’ll have fewer monthly payments to manage, and it could give you access to repayment plans and forgiveness or cancellation programs that are only available to direct loans.

Federal repayment plans

Although you may wind up paying more in interest in the long run, switching repayment plans could lower your monthly payments and make managing your finances a little easier.

Student loans start with a 10-year standard repayment plan. You could change to a graduated repayment plan, which also has a 10-year term but the payments start low and gradually increase. The extended repayment plan, which has a 25-year term, is another option.

There are also income-driven repayment plans that base your monthly payment amount on how much money you earn. An income-driven plan could greatly decrease your monthly payments if you’re not making a lot of money. Plus with four of the plans, the education department will forgive your remaining balance after you make payments for 20 or 25 years on an income-driven plan.

Career-based forgiveness programs

You may be eligible for a variety of loan forgiveness or repayment programs from government or private organizations. Unlike the federal forgiveness programs, your private student loans may also be eligible for some of the programs.

The career-based programs can help you repay undergraduate and graduate degree loans, but they are generally limited to a few qualifying professions, some of which require an advanced degree. These are often service-oriented jobs, such as teachers, attorneys, military members and healthcare professionals.

You may also need to work in a high-need area, such as a federally designated health professional shortage area, for at least a year to qualify for loan repayment assistance.

Employer-based repayment programs

Some employers offer student loan repayment assistance programs (LRAPs) as an employee benefit. The specifics of the programs and the amounts vary, but some employers offer monthly payment toward your private or federal student loans.

Design your repayment road map

Once you know your options, you can start designing your plan for repaying grad school loans and any remaining undergrad debt. Here are a few of the questions you may want to ask yourself:

Which loans should you try to pay off first?

If you’re focused on paying off your graduate student loan debt ahead of schedule, you may want to organize your loans based on which one you want to pay off first.

For example, you could try to pay off the higher rate loans first, which could save you money on interest in the long run. Or, you may want to focus on your private student loans first, since those generally offer fewer options to borrowers who are having trouble making payments.

Should you consolidate your federal student loans?

Consolidating your federal student loans could be a good first step, but there are several pros and cons to consider.

Pros to consolidating your federal loans

  • It may be easier to manage your monthly loan payments if you only have one loan.
  • You can choose your new loan servicer.
  • Non-direct loans, such as FFEL loans, could be eligible for PSLF after consolidation.
  • The consolidated loan may be eligible for more income-driven repayment plans than your previous loans.
  • You may be able to take a loan out of default by consolidating it.
  • The consolidated loan will have a fixed interest rate (some previously issued federal student loans had variable rates).

Cons to consolidating your federal loans

  • If you consolidate all your federal loans, you won’t be able to make extra payments on the loan that has the highest interest rate.
  • You may lose progress you’ve made toward a federal loan forgiveness program.
  • If you consolidate all your loans, and then default on your loans, you won’t be able to consolidate again to take them out of default.
  • Consolidating could increase your loan term, and may lead to paying more interest over time, unless you make more than the required monthly payments.
  • You may lose interest rate discounts or rebates that you had on your loans.

Consider the pros and cons, as well as your circumstances, before rushing to consolidate your federal student loans. You can also pick and choose which loans you want to consolidate. For example, you could only consolidate your relatively low-interest-rate loans. Then, you can still make extra payments on your higher-interest loans.

Does it make sense to refinance any loans?

Private lenders offer student loan refinancing, which involves taking out a new loan to pay off one or more of your existing student loans. Depending on the lender and your creditworthiness, you may be able to qualify for a lower interest rate, which could save you money.

Even if you considered refinancing in the past, and weren’t able to get a good rate, you may want to revisit the option. Your credit score may have risen if you’ve been making your credit card and loan payments on time, and your debt-to-income ratio may be lower if your graduate degree helped you secure a higher paying job. Both of these factors can help you qualify for a better rate.

When you refinance, you can often choose your new loan’s term. A longer term can lead to lower monthly payments, but also paying more in interest over the lifetime of the loan. A shorter term could help you get a lower interest rate, but your required monthly payments could increase.

Keep in mind, there’s no prepayment fee for student loans. So, even if you refinance with a longer term and have a lower required monthly payment, you could pay extra and repay your loans early.

Your new loan may maintain its status as an educational loan, which means you may still be eligible for a tax deduction. However, once you refinance a student loan, it will be a private student loan. As a result, the loan won’t be eligible for any of the federal loan forgiveness, cancellation, discharge or repayment programs.

One option could be to only refinance your private student loans. Or, you may find it makes sense to refinance a few federal loans that have a higher interest rate, such as your grad school loans, while leaving other federal loans untouched.

If you do decide to refinance your student loans, comparing lenders can be a good idea since different lenders may offer you different interest rates, loan terms and benefits.

Strategies for getting ahead of graduate student debt

Being proactive and following through on your road map could help you repay your loans early. Here are a few strategies and tips that could help:

Create a budget and look for ways to save

A budget is a tally of your income and expenses broken down by category, and many free and inexpensive apps can help you with the tracking and organization. Knowing where your money comes from and goes to each month can be an important step in getting your finances in order, and may provide insights into savings opportunities.

For instance, you may find that you’re spending a lot of money eating out each month or paying for subscription services you rarely use. Cutting back on these expenses could help you free up money that you can then put toward your student loans.

Increase your income: negotiate a raise, change jobs or find a side gig

While saving money can help you pay down loans, there’s usually a limit to how much you can cut back. On the other hand, you may be able to greatly increase your income, maintain your standard of living and make big strides in paying down your debt.

While it’s not necessarily a quick or simple process, negotiating a raise is one way to increase your income. Alternatively, you may be able to get a higher pay increase if you’re open to changing companies or finding a new job in your field.

In the meantime (or in addition) you could get a side gig to earn extra money. There are a number of opportunities, ranging from turning a hobby into a source of income, to using one of the many “sharing economy” apps. You also may be able to leverage the specialized knowledge you obtained while earning your graduate degree, and use the side gig experience to build your resume or help make your case for why you deserve a raise.

Make (targeted) extra payments

Research how your student loan servicer will apply additional payments to your loans before you send a payment. Some servicers may split the payment amount between all your loans or use the money to prepay next month’s bill unless you specify how you want them to apply the payment. And, even if you don’t owe anything next month, they may still withdraw money from your account if you signed up for autodebit.

Whether you’re paying extra each month, or get a large gift, bonus or tax refund that you want to use to repay student loans, you want to make sure the payment aligns with your strategy. Ask your loan servicer how you can ensure this happens, and check your loan balances after you send in payments to make sure they were applied correctly.

Ask for help if you are struggling

While your aim may be to quickly pay down your grad school loans, you could find yourself falling behind on payments or struggling to meet all your financial obligations. If this happens, reach out to your student loan servicer and ask about your options.

You may be able to switch repayment plans, or the servicer may allow you to temporarily stop making payments while you get your finances in order. However, if you miss a payment, you may wind up having to pay late fees and hurting your credit.

Keep your entire financial situation in mind

You might be focused on paying off your grad school debt as quickly as possible, and that’s a commendable undertaking. However, consider your grad school loans within the context of your entire financial situation.

In some cases, you may want to start by paying down other, higher interest debt before your student loans. Doing so could free up the money you’d been spending on interest payments, which you can then use to pay off your student loans.

Building an emergency fund could also be a priority, as it can help you weather a financial setback without having to take on additional high-interest debt.

Advertiser Disclosure: The card offers that appear on this site are 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 card companies or all card offers available in the marketplace.

Louis DeNicola
Louis DeNicola |

Louis DeNicola is a writer at MagnifyMoney. You can email Louis at louis@magnifymoney.com

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