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Personal Line of Credit vs. Credit Card: Which Is Best for You?

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Credit cards and lines of credit are revolving credit accounts. Your account will have a credit limit — the most you can borrow at a time — that the issuer or lender will assign you based on your creditworthiness.

Unlike an installment loan, which you must repay in predetermined fixed payments over a specific term, a revolving account allows you to borrow against your credit line, repay the loan and borrow against it again without having to apply for a new loan. You may also be able to make small monthly payments, and your total repayment period can vary depending on how much you choose to pay.

Although they share some similar characteristics, credit cards and credit lines may be best used in different circumstances. See the key aspects of both in this chart and then dive in below to learn how personal lines of credit and credit cards work.

 Personal Line of CreditCredit Card

Type of Account

A secured or unsecured revolving credit line

A secured or unsecured revolving credit line

Generally Issued By

Banks, credit unions and online lenders

Banks, credit unions and credit card issuers

Interest Rate

A variable or fixed rate

The rate often ranges from around 4% for secured lines to over 20% with unsecured lines.

Generally a variable rate

Cards may have different rates for purchases, balance transfers and cash advances Purchase rates are around 15.5% on average


Potential Fees

  • Annual fee

  • Late payment fees

  • Cash advance or draw fee

  • Origination fee

  • Closing costs (for HELOCS)

  • Annual fee

  • Late payment fees

  • Cash advance fees

  • Balance transfer fees


Credit Line

Issuers may have a preset potential range, but your credit limit can depend on your creditworthiness. Secured credit line limits may depend on the value of the collateral

Unsecured lines could be for hundreds of thousands, and there are secured lines with several million dollar limits

The credit limit can vary depending on your creditworthiness and the credit card. The limit generally won’t be as high as what’s offered on credit lines

Minimum Draw Amount

There could be a minimum draw amount, such as $500 per draw

No minimum

May Be Best For

When you expect to take out a series of small loans or want an emergency loan option

Managing daily or monthly expenses, or when you can leverage a promotional interest rate offer or rewards program

How a line of credit works

A personal line of credit gives you the ability, but not obligation, to borrow money as needed. Your credit limit can depend on your creditworthiness and the lender, but you can take out smaller loans against your total limit.

You may only have to pay interest on the amount you borrow, although that interest could start to accumulate right away. You may also have to pay an annual fee, often around $25 to $50, to keep your account open, even if you don’t use the account.

Depending on the account, you may be able to make a draw as a cash withdrawal, bank transfer or with a check linked to the account. Some accounts charge a fee on your withdrawals — or draws, as they’re called — depending on how you get the money.

Once you’ve taken a draw, you may only have to make minimum monthly payments on your loan, although paying more than the minimum could limit how much interest accrues. Or, each of your loans may have a fixed repayment period and set monthly payments.

Some personal credit lines may have an initial draw period — a several-year period when you can take draws against your credit line. You may need to make at least minimum payments during the draw period, and once it ends and your repayment period starts your monthly payments may increase.

Personal credit lines may be unsecured or secured. Secured lines of credit require you to put up collateral, such as funds in a certificate of deposit account or your home (for a home equity line of credit or HELOC) that the creditor can take if you don’t repay your loan. A secured line of credit may have additional fees, such as closing costs on a HELOC, but you may be able to get a much larger credit line. Unsecured credit lines are offered to borrowers based on their creditworthiness and promise to repay the loan.

When to use a line of credit (and when not to)

Opening a line of credit could be a good idea if have a series of upcoming purchases to make. Say, for example, that you’re renovating a room in your home and will make progress payments to a contractor before purchasing new appliances or furniture later. Rather than taking out one large loan and paying interest the entire time, you can take out several smaller loans from your credit line and minimize how much interest accrues.

You may also be able to find a line of credit that doesn’t require any annual fees. Keeping a personal credit line open could be an OK option as an emergency fund. Although ideally, you can save up enough cash to build an emergency fund, a credit line could help you get cash at a predetermined (and hopefully low) interest rate.

A credit line isn’t likely the best option for regular expenses, as you’ll end up taking out, managing and paying interest on multiple draws. If you find yourself frequently short on money, focusing on decreasing your expenses or increasing your income should be a top priority.

Additionally, if you need to take out a single loan for a specific purpose, you may want to use a personal loan rather than a line of credit. Personal loans are installment loans that can be secured or unsecured, and you may be able to qualify for a lower fixed or variable rate than you could get with a credit line.

How credit cards work

A credit card also gives you access to a revolving credit line. Your card will have a credit limit — the highest your balance can go before the card issuer starts declining your transactions.

During your billing period, purchases, balance transfers, fees, interest charges and other transactions can increase your balance. When your billing period ends, the card issuer will send your credit card statement with a summary of your transactions, your current balance and your required minimum payment. Your next billing period will begin right away, although the bill you just received generally won’t be due for another 21 to 25 days.

If you continually pay the entire balance on your credit card statement and your card has a grace period (as many do), then you won’t have to pay any interest on your purchases.

However, you can pay less than your entire balance, all the way down to a minimum payment — which may be just $15 to $30 depending on your card and balance. If you pay less than the full amount, then the unpaid portion will be carried over to the next month and start to accrue interest. Additionally, any new purchases will begin to accrue interest immediately.

When to use a credit card (and when not to)

A credit card could be a good option for making regular purchases. You may have over 50 days from the start of your billing period to your bill’s due date, which gives you some flexibility to manage your cash flow. You also won’t pay interest on your purchases if you can pay your bill in full each month. You could even earn rewards with your purchases, such as cash back or points in travel loyalty programs.

There are also promotional rate and balance transfer credit cards that offer a temporary 0% interest rate on new purchases or balances that you transfer to the card. Using one of these offers could help you finance a large purchase interest-free, or transfer and pay down debts without accruing interest.

However, getting the most out of credit cards require financial and personal discipline, and might not be possible for someone who is struggling to stay on top of monthly bills.

Falling behind and making a less-than-full payment can lead to your balance accruing daily interest at a potentially high-interest rate. Even the promotional rates can eventually turn into a high rate, and if you’re unable to follow through with a plan to pay off the balance you could be left with a large high-interest debt.

For those who tend to make impulse purchases, even the best-intentioned plans could come crashing down. If you have several credit cards with a balance and then transfer the balances onto a zero-interest balance transfer card, you’ll now have multiple cards with an available credit limit. Max those out and you could be faced with even more credit card debt than you had at the beginning.

Bottom line

Credit cards and lines of credit are both revolving accounts, but they may be best used in different circumstances.

A credit card can be best for day-to-day purchases if you can afford to pay the bill in full each month. Additionally, using promotional rates and offers could sometimes save you money. However, credit cards’ high-interest rates can make paying off credit card debt difficult once you start revolving a balance.

A line of credit could be helpful if you have a series of upcoming expenses to finance, or if you want to open an account that you can tap during emergencies. But beware of minimum and maximum draw amounts and your overall cost if you don’t have a fixed repayment term for your draw.

No matter which type of account you want to open, always compare your options first. Both credit cards and personal lines of credit may offer different interest rates, terms and fees depending on the creditor, and you want to find the best fit possible.

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

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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What You Need to Qualify for Peer-to-Peer Loans

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If you want to take out a personal loan, turning to a peer-to-peer (P2P) lender could be a good option. These lending platforms help connect borrowers who need a loan with investors who want to lend out their money and earn interest.

When you apply and are approved for a loan with a P2P lender, your loan is listed on the lender’s website. Investors, which can range from individuals to companies, can then put up money to fund part or all of your loan. Technically, the money from investors isn’t sent directly to the borrowers. But investors will receive payments (minus the P2P lender’s fees) as you repay your loan.

Before you can get your loan listed, you’ll submit an application to determine if you’re eligible for funds and for what terms.

Here are a few tips that could help you qualify for a P2P loan, along with a discussion of the general pros and cons of P2P lenders.

5 tips to help you qualify for a peer-to-peer loan

1. Make sure you meet the minimum eligibility requirements

Each lending platform sets its minimum eligibility requirements for applicants. Generally, you can expect the following factors to be considered as you apply:

  • Your credit history and credit score
  • Your income and outstanding debts
  • Your history with the P2P lender
  • Whether you’re at least 18 years old
  • If you live in a state where the lender operates
  • If you have a bank account

To qualify for funds on Prosper, for instance, you must have a debt-to-income ratio that’s below 50 percent, at least some income and fewer than five credit inquiries during the past six months. You must also have a FICO credit score of 640 or higher, according to one Prosper representative.

Alternatively, Peerform and LendingClub look for minimum FICO scores of 600 and maximum debt-to-income ratios of 40 percent, which may make it a better option for some borrowers.

Meeting the minimum qualification requirements doesn’t guarantee that you’ll get approved for a loan. But knowing what the qualifications are upfront lets you avoid applying when you don’t have a chance of getting approved.

2. Try to get a preapproval with a soft credit pull

Some P2P lenders offer loan preapproval with a soft credit check. Unlike a hard credit check, a soft pull won’t impact your credit score.

Although getting preapproved doesn’t guarantee that you will get approved for a loan with the same rate and terms, it could be a quick and easy way to see if you meet the basic credit requirements.

3. Consider how much you need to borrow

Most P2P lenders set minimum and maximum loan amounts. For example, Prosper offers loans from $2,000 to $40,000, while LendingClub offers loans from $1,000 to $40,000. Even if you meet the P2P lender’s requirements, you may only qualify for a lesser amount depending on your creditworthiness.

Before applying, make sure your desired loan amount falls within the lender’s range. If you need to borrow more than the lender allows, you may want to turn to a different lender or type of loan. For example, you could apply for a personal loan for up to $100,000. Or you may find that it’s easier to get approved for a large secured loan, such as a home equity loan.

4. Prepare your paperwork and verification documents

P2P lenders may require a variety of verification documents to complete a loan request. Having these on hand when you apply could help you quickly get through the application process.

The specifics can vary by lender, but needed documents may include:

  • Recent pay stubs, bank statements and tax returns
  • A copy of your driver’s license or other government-issued ID
  • Proof of your current address from a recent utility or telecom bill

5. Look for ways to improve your credit score

If you don’t meet the lender’s minimum credit score requirement or think you may be able to get a lower rate with a better credit score, you could try to improve your credit before applying for a loan.

Improving your credit takes time, but if you can find and dispute errors on your credit report, that could lead to a quick change. Another option is to pay down your revolving debt, such as what you owe on credit cards.

Some P2P lenders may also allow joint applications. You can get approved for a loan by applying with a creditworthy cosigner. But both borrowers would be legally responsible for repaying the debt.

P2P lending: Pros and cons

Pros of using a P2P lender

Online P2P lenders may have straightforward application and verification processes. Working with a P2P lender could be easier and quicker than having to go into a credit union or bank branch to complete a loan application.

Although your interest rate will vary depending on your creditworthiness and the P2P lender, you may be able to find lower rates with a P2P lender than from other financial institutions. That’s not guaranteed, though, so you should shop around before taking out any loan.

While P2P lenders generally require a credit score of 600 or higher, that’s a lower cutoff point than some other online lenders. A low score may mean you don’t get the most favorable rates, but at least you may still be able to qualify for a loan.

Many P2P lenders only offer fixed-rate installment loans. With a fixed-rate loan, you’ll know exactly how much your monthly payments will be and when your loan will be paid off. Using a P2P loan to pay off higher-interest revolving debt, such as credit card debt, could help you save money and stick to a set repayment schedule.

While P2P lenders may ask you why you want to take out a loan, you can legally use the money for almost anything. There may be some exceptions, though. For instance, you may not be able to use the funds for investments, illegal activity or to make higher education-related purchases.

Cons of using a P2P lender

You may have to pay an origination fee when you receive a loan from a P2P lender. The fee amount is often a percentage (such as 1 to 6 percent) of your loan amount and may vary depending on your creditworthiness. Origination fees are taken out of your loan and you’ll receive the rest of the money but need to repay the full amount. You should take this into account when you’re considering how much money you want to borrow.

A P2P lender may not be the best option if you need money right away. With other lenders, once your application is approved and your information is verified, the lender can send you the money. With a P2P platform, you’ll need to wait until investors fund your loan. This doesn’t necessarily take a long time — LendingClub says the entire application and funding process typically takes about seven days — but it’s something to consider before applying.

Even if you get approved for a loan, there’s no guarantee that investors will decide to invest in and fully fund your loan. Depending on the P2P platform, you may be able to accept a smaller loan for the amount that was funded. Or you may have to reapply and have your loan request relisted.

Don’t overlook these loan details

As with any contract, you’ll want to carefully review the loan documents before signing. There are a few fine-print items that you may want to pay particularly close attention to with peer-to-peer loans. Some of these you may be able to research ahead of time and then double-check when you receive an official loan offer.

  • Loan rate: The annual percentage rate (APR) on your loan takes origination fees, compounding interest and your loan’s terms into account to show your true cost of borrowing. You should compare the APR you’re offered by different lenders when considering which loan offer to accept.
  • Loan fees: P2P loans may have an origination fee, late payment fee, check processing fee, insufficient funds fee or other types of charges. Read over the loan’s terms carefully so you’ll know when and why you’ll have to pay a fee, and how to avoid paying them. If your loan has a prepayment penalty or pre-computed interest, you may want to look for a personal loan from a different lender.
  • What happens if your loan isn’t fully funded: Because P2P lenders may treat partially funded loans differently, know what could happen before you decide which lender to work with to try to get a loan. If you have a short deadline for when you need the loan, you may want to consider a non-P2P lender.

Where to compare P2P lenders

You can compare P2P lenders and other lenders that offer similar types of loans by visiting each financial institution’s website. But you could also use our personal loan marketplace to review each lender’s loan terms, rates, fees and minimum credit score requirements.

Using our marketplace, you can input your credit score, desired loan amount and ZIP code to view lenders that suit your needs.

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

Louis DeNicola
Louis DeNicola |

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

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Should You Use a Personal Loan to Pay Off Student Loans?

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

Repaying student loans can be a long and stressful process, and an opportunity to take a shortcut can seem appealing. One option that interests some borrowers is to take out a personal loan and use the money to pay off your student debt.

By swapping your student loans with a personal loan, you might be able to change your monthly payment amount, consolidate your bills and save money by lowering your interest rate. Those are all potentially helpful benefits, but a personal loan isn’t likely the best way to go about it.

Learn more, including the pros and cons of using a personal loan to pay off student loans, along with other options that could help you manage and pay off your student loans.

Can you use a personal loan to repay student loans?

If you get approved for a personal loan, whether or not you can use the money to pay off your student loans depends on the agreement you have with your lender. Some lenders explicitly say you can’t use their personal loans to pay for educational expenses or refinance student loans.

However, if your loan contract doesn’t have these provisions, you may be able to use the funds to pay off some or all of your student loans. You’ll then need to repay your personal loan based on your new loan terms.

4 benefits of using a personal loan to pay off your student debt

Many of the potential benefits borrowers could reap by using a personal loan to pay off student loan can be achieved by using any type of lower-rate loan to pay off your student loans. If you do decide to use the personal loan option, compare your rates and terms from multiple lenders to ensure you get the best deal.

1. You might have fewer loan payments

If you use a personal loan to pay off more than one student loan, you’ll have fewer loans to manage each month. Consolidating your debt can make it easier to track your bills and stay on top of your finances. However, if you use automated payments to pay your student loans (which may come with an interest rate discount) then managing payments may not have been especially difficult before.

2. You could lower your interest rate

You may be able to qualify for a personal loan that has a lower interest rate than your student loan, which can help you save money. However, there are also companies that offer student loan refinancing, and their rates often start lower than personal loan rates.

3. You can release a cosigner

Borrowers with private student loans may have a cosigner who helped them qualify for the loan or get a lower interest rate. The cosigner will no longer be tied to the debt once you repay the student loan with your personal loan. Assuming you qualified for the personal loan without a cosigner, the new debt will be entirely yours to repay.

4. It may be easier to discharge the debt in bankruptcy

It can be especially difficult to get student loans discharged in bankruptcy. A personal loan might not be treated as an educational loan during the bankruptcy, which could make it easier to get the debt discharged.

However, if you paid off your student loans using a personal loan with the intention of then declaring bankruptcy, that could be considered fraud and the debt may not be dischargeable.

6 cons of using a personal loan to pay off your student debt

The cons stack up higher than the pros in this case. Some people may benefit from using a personal loan to pay off student loans, but for most borrowers, it probably isn’t the best idea.

1. Many of the pros could be achieved with student loan refinancing

You should consider all your funding options if you want to pay off your student loans by getting a new loan. And if you can qualify for a low-interest personal loan, you may also be able to get approved for student loan refinancing.

You’ll receive many of the same benefits, such as consolidating debts, lowering interest rates and releasing a cosigner if you use a private student loan refinancing lender. Additionally, your new private student loan could still be eligible for some student loan repayment assistance programs and tax benefits, and you may be able to get an even lower interest rate than you could get on a personal loan.

2. Personal loans aren’t eligible for student loan repayment assistance programs

Federal and private student loans may be eligible for a variety of student loan repayment programs. These include employer-based programs that are offered to employees as a benefit and government-funded programs that may be available if you work in a public service or high-need area, including nurses, doctors, volunteers, military members, and attorneys.

These programs often stipulate that they only help repay student loans, so if you transfer your student debt into a personal loan you’ll likely become ineligible.

3. Personal loans aren’t eligible for forgiveness, cancellation and discharge programs

In addition to missing out on assistance programs, if you currently have federal student loans, they may be eligible for federal forgiveness and discharge programs. These include the Public Service Loan Forgiveness program, Perkins loan cancellation or closed school discharge. Private student loans, refinanced student debt, and personal loans aren’t eligible for these programs.

4. Personal loans won’t qualify for the student loan interest tax deduction

The interest you repay on your student loans could qualify you for a tax deduction that can lower your taxable income by up to $2,500. Personal loan interest payments don’t qualify for this deduction.

Eligibility and the deduction amount can depend on your income, tax filing status and whether someone else claims you as a dependent on his or her tax return. You can use one of the IRS’ interactive tax assistant tools to see if you currently qualify for the deduction.

5. Your monthly payments could increase

Personal loan lenders offer a variety of repayment terms, but many likely won’t offer a repayment term of more than five or seven years. This is much shorter than many student loans’ 10- to 20-year terms (or sometimes longer), and as a result, your monthly payment may be much higher.

6. You may have to pay origination fees

Some personal loan lenders charge an origination fee, often a percentage of the amount you borrow. The fee may be taken out before the loan is disbursed. For example, with a 5% fee on a $10,000 personal loan, you’ll receive $9,500 and then have to repay the full $10,000.

The origination fee should be included in the personal loan’s APR, which you can compare with your current student loans’ rates and the potential APR from other lenders.

3 better ways to repay student loans

1. Check out your repayment plan options

If you’re considering refinancing your student loans to lower your monthly payments, look at all your current repayment plan options first. With federal student loans, you may be eligible for a variety of income-driven plans that can lower your monthly payment based on your discretionary income.

If you’re looking to pay off your federal student loans as quickly as possible, you may want to choose the option with the shortest repayment period — the 10-year standard repayment plan. Although your monthly payments may be higher than they’d be on an income-driven plan, you’ll pay off the loan sooner and pay less interest overall.

Private student loans may not have alternative repayment plans to choose from, although some lenders temporarily lower your payment amount, interest rate or let you stop making payments during a financial hardship (such as losing your job). These options can make it easier to manage your loans in the short term but will cost you more money in the long run.

With federal and private student loans, you can always prepay your loan without having to worry about a prepayment penalty.

2. Look for repayment assistance programs

There are a variety of student loan repayment assistance programs (LRAPs) that may give you extra money for your student loans or make direct payments to your loan services.

Student Loan Hero has a list of companies that may offer an LRAP as an employee benefit. MagnifyMoney also has in-depth guides to loan repayment options for nurses and attorneys.

Note: MagnifyMoney and Student Loan Hero are both owned by LendingTree.

3. Consider refinancing your student loans

Once you’ve graduated, built a good credit history and have a steady income, you may qualify for student loan refinancing. Similar to using a personal loan to pay off student loans, student loan refinancing involves using a new student loan to pay off your current student loans.

Refinancing student loans isn’t without its own list of pros and cons. For instance, your new loan will be a private student loan and it won’t be eligible for federal forgiveness, cancellation or discharge programs. You may not want to refinance federal student loans if you think you’ll ever need these benefits or options.

On the other hand, student loan refinancers may offer you lower interest rates, often don’t charge origination fees and have comparable loan terms to current student loans. You can also compare lenders and loan offers before refinancing, as your new private student loan rate, term and benefits can vary depending on which lender you use.

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

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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Understanding Your Student Loan Limits

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There’s a limit to how much you can borrow with federal student loans, and it can depend on your year at school, the degree you’re pursuing and the type of loan you want to use. Knowing which student loan limits apply to you can help you create an effective and workable plan for how you’ll pay for college.

Current students may be able to borrow several types of students loans from the U.S. Department of Education’s Direct Loan program. These include subsidized and unsubsidized direct loans for undergraduate students, and unsubsidized direct loans for graduate and professional students.

The subsidized and unsubsidized direct loans have annual and aggregate student loan limits.

These limits partially depend on your year in school, and they’re for each academic year rather than calendar year. If your program is shorter than a full academic year, your loan limit will be prorated.

The aggregate loan limits include the federal student loans taken out for undergraduate and graduate studies through the Direct Loan program and Federal Family Education Loan (FFEL) loan program. Once you reach your aggregate limit, you can’t take out additional subsidized or unsubsidized direct loans unless you pay down your outstanding federal student loan debt.

Annual and aggregate student loan limits for subsidized and unsubsidized direct loans

Year

Dependent students

Independent students

First-year undergraduates

$5,500 per academic year, including up to $3,500 in subsidized direct loans

$9,500 per academic year, including up to $3,500 in subsidized direct loans

Second-year undergraduates

$6,500 per academic year, including up to $4,500 in subsidized direct loans

$10,500 per academic year, including up to $4,500 in subsidized direct loans

Third-year undergraduates and beyond

$7,500 per academic year, including up to $5,500 in subsidized direct loans

$12,500 per academic year, including up to $5,500 in subsidized direct loans

Graduate students

N/A

$20,500 per academic year, only unsubsidized loans

Aggregate loan limits

$31,000 overall, including up to $23,000 in subsidized loans

$57,500 overall for undergraduates, including up to $23,000 in subsidized loans

$138,500 overall (including undergraduate loans) for graduate and professional students, including up to $65,000 in subsidized loans

A student’s dependency status isn’t the same as being a dependent on a parent’s tax return. It can depend on a variety of situations, including the type of degree the student is pursuing. You can follow the questionnaire on StudentAid.ed.gov to determine your dependency status.
If a dependent student’s parent isn’t able to take out a PLUS loan to pay for the student’s educational expenses, the student’s annual and aggregate loan limits increase to the independent student limits.

Time limits for subsidized direct loans

In addition to the annual and aggregate loan student loan limits for subsidized direct loans, there is a maximum time period for borrowers — 150 percent of your program’s published length. For example, if you’re in a four-year program, you can take out subsidized direct loans for up to six years.

Transferring to a program with a different published length could change your maximum eligibility period, and the subsidized direct loans you already took out will count toward your new limit.

Once you’re outside your eligibility period, the Department of Education will no longer pay the interest on your loans (i.e., you lose the subsidy). This applies even if you’re still in school and pursuing a degree.

Cost of attendance limits

Your specific loan limit may be lower than the maximum allowed student loan limits based on your school’s cost of attendance (COA) and your family’s finances.
Undergraduate subsidized direct loans are need-based loans, and your annual limit is capped base on your “financial need.” To determine your financial need for the year, subtract your expected family contribution (EFC), which is based on the information you submitted with your Free Application for Federal Student Aid (FAFSA), from your school’s COA.

Unsubsidized loans aren’t need-based, but your annual limit is still capped by your school’s COA minus the financial aid you’ve been awarded. The other aid could include scholarships, grants and other loans. The formula applies to unsubsidized direct loans for undergraduate and graduate students, as well as PLUS loans for graduate students and parents of undergraduates.

Increased student loan limits for health care degrees

Students pursuing select health profession degrees may be eligible for higher annual and aggregate unsubsidized direct student loans limits. To qualify, your program must be accredited by a specific accrediting agency — you can find the list on page 588 of the Federal Student Aid Handbook.

Increased unsubsidized loan limits for health care degrees

Program

For programs with a 9-month academic year

For programs with a 12-month academic year

Doctor of Allopathic Medicine
Doctor of Osteopathic Medicine
Doctor of Dentistry
Doctor of Veterinary Medicine
Doctor of Optometry
Doctor of Podiatric Medicine
Doctor of Naturopathic
Medicine, Doctor of Naturopathic

Additional $20,000 per year ($40,500 total)

Additional $26,667 per year ($47,167 total)

Doctor of Pharmacy
Graduate in Public Health
Doctor of Chiropractic
Doctoral Degree in Clinical Psychology
Masters or Doctoral Degree in Health Administration

Additional $12,500 per year ($33,000 total)

Additional $16,667 per year ($37,167 total)

The aggregate loan limit for students pursuing one of these health care degrees is increased to $224,000 in combined unsubsidized and subsidized loans.

If your program doesn’t have an academic year with nine or 12 months, your additional loan limit will be prorated to align with your program’s length.

PLUS loan limits

PLUS loans are a type of direct loan available to graduate and professional students, and to parents of undergraduate students. The PLUS loans differ from unsubsidized and subsidized direct loans in a few ways:

  • There’s a credit check. Borrowers with an adverse credit history may not qualify for a PLUS loan. An adverse credit history doesn’t have refer to a specific credit score but may include defaulting on a loan or having a vehicle repossessed within the last five years. Subsidized and unsubsidized direct loans don’t require a credit check.
  • There’s no specific annual loan limit. You can borrow up to your school’s COA minus the financial aid you already received.
  • There’s no aggregate loan limit. Eligibility for PLUS loans isn’t limited by your current student loan balances.
  • The costs are higher. PLUS loans have a higher disbursement fee and interest rate than subsidized and unsubsidized direct loans.

How to handle the cost of college with student loan limits

Although you can borrow up to the maximum loan limits with federal student loans, you may want to start your college funding by looking for ways to pay for school without borrowing money. If that’s not possible, and you reach your federal student loan limits, there may be additional options to consider.

1.Look at the cost and student loan limits when deciding on a school

If you’re still thinking about where you might apply, or you’re comparing financial aid award letters from different schools, you may want to consider your overall cost when deciding which school to attend.

Each school has a net price calculator you can use to see the estimated cost to attend the school after your potential scholarships or grants are taken into account. The net price may include estimated costs for room and board, personal expense and travel.

These ancillary costs could add up. For example, a college in New York City may be much more expensive than one in a smaller city or town due to the difference in living expenses. Likewise, attending college close to home could help you save money each time you want to travel home to visit friends or family.

If you’ve already received financial award letters, the letters will list the school’s cost of attendance, your expected family contribution and your loan offers. It will also show you which grants or scholarships you’ll receive this year, which could make an otherwise too expensive school a good option. However, keep the potential long-term costs in mind as you may not receive the same grants or scholarships next year.

2.Apply for grants and scholarships

Grants and scholarships can be one of the best ways to pay for school since you generally won’t need to repay the money you receive. You must fill out and submit a FAFSA each year to be eligible for federal grant and scholarship programs. However, you can also apply for additional opportunities on your own.

You can find scholarships and grants online or by asking high school or college counselors. Some employers also offer scholarships to their employees (or employees’ children), and you may be eligible for opportunities based on all sorts of affiliations, including where you live, what you want to study, your religion, ethnicity or heritage.

While some scholarship or grant applications can be difficult and time-consuming, remember that the work you’re putting in now could save you a lot of money later. Also, don’t give up on applying. Scholarships and grants are available to a variety of applicants, and you may qualify whether you’re in high school or in a Ph.D. program and regardless of your income.

3. Consider a PLUS loan

A parent of an undergraduate student may want to take out a federal PLUS loan to help pay for the student’s educational costs. As the borrower, the parent is fully responsible for repaying the loan and can’t transfer the federal loan to the student. If the student leaves school, builds credit and is able to qualify for private student loan refinancing, some lenders will let the student include a parent PLUS loan into the refinancing to transfer the debt obligation.

If the parent isn’t eligible for PLUS loans, or applies and gets denied, the student may be eligible for additional unsubsidized student loans for the year.

Graduate and professional students who can’t meet their funding needs with unsubsidized students loan may want to consider PLUS loans as well. However, because PLUS loans have a higher disbursement fee and interest rate than unsubsidized direct loans, you may want to maximize your unsubsidized direct loan borrowing before taking out a PLUS loan. In some cases, a private student loan may also be less expensive than a federal PLUS loan.

4. Explore private student loan options

The federal government isn’t the only student loan lender. Private lenders, including banks, schools, states and online lenders offer private student loans to students and parents of students.

Private lenders may allow you to borrow up to your school’s cost of attendance, which could help cover a funding gap. However, private student loans are credit-based loans, and your eligibility, terms and loan limits can depend on a variety of factors, including your credit history, credit score, income and other outstanding debts.

Because federal student loans may offer more favorable rates, terms, repayment options and access to forgiveness programs, you may want to maximize your federal borrowing before turning to private loans. If you do decide to take out private student loans, compare your loan offers from different lenders as each may give you different rates, terms and benefits.

5. Earn money to pay for school

Finding a part-time job during the school year, and continue with part-time or full-time work during the summer and holidays, could help you tackle some of your educational expenses without borrowing money.

If you receive a work-study award as part of your financial aid, you may be able to find a job on campus, with a local nonprofit or at an organization that works in a field that’s related to your major. A work-study award can give you a leg up, as the award will cover part of your paycheck, but you’ll still need to apply and interview for the job.

6. Find ways to cut costs

Your tuition and fees may be fixed costs for the year, but other expenses are variable and looking for money-saving options could limit how much you need to borrow.

For example, moving off campus might save you money compared with on-campus housing, especially if you also start making your own meals and don’t have to pay for a meal plan. Other expenses may not be as significant, but the savings from using student discounts, looking for free entertainment and buying used textbooks can still add up over the years.

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

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 Student Grants

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

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A grant can be one of the most useful forms of financial aid that you can receive, and you could be automatically eligible for some student grants if you apply for federal financial aid.

Even though some student grants require additional work, though, you should seek out as many opportunities for free money as possible — that money could help you avoid student loans or dipping into savings to pay for your education.

Grants vs. scholarships: What’s the difference?

Grants and scholarships are both free forms of financial aid, or gift aid. If you receive a grant or scholarship, you won’t need to repay the money unless you don’t follow through with the terms — for example, leaving school before the end of the term.

Both student grants and scholarships may have some general requirements, such as being enrolled at an accredited school and taking a full-time courseload. The primary difference between the two is that grants tend to be need-based, while scholarships may also be merited-based.

For example, you may be eligible for a grant if you or your family’s annual income is below a certain amount. Regardless of whether you qualify for that specific grant based on your income, you might qualify for scholarships based on your academic, athletic or artistic abilities.

These aren’t strict lines, though. Some student grants may have merit-based components or not require a financial need. Likewise, there are scholarships that require applicants demonstrate a financial need to qualify.

In the end, it may not matter much whether you earn money from a grant or scholarship program. However, as you search for funding options, you may want to start with scholarships if you don’t have a large financial need. Consider starting with student grants if you do.

How to find student grants

You can find grants from different types of organizations, including the U.S. Department of Education, your state, colleges or universities, nonprofits and private organizations. The qualifications, deadlines and amount offered can vary depending on the grant and may change from one year to the next.
Here are a few examples of grants from a variety of organizations.

Federal government

Through the Department of Education, the federal government offers four grants to students who are attending a college, university or career school. Each year, you may automatically be considered for these student grants after submitting your Free Application for Federal Student Aid (FAFSA).

Federal Pell Grants are generally awarded to students who haven’t received a bachelor’s or graduate degree and who have an exceptional financial need.

A Pell Grant could be worth up to $6,095 for the 2018-19 award year. However, the amount you’ll receive can depend on the cost of attendance at your school, your family’s expected contribution amount and whether you’re a part- or full-time student.

In total, you can receive a Pell Grant for up to 12 semesters, or about six years of schooling. Also, unlike with some other grant programs, you won’t be limited by your school’s funding and other financial aid you receive won’t impact your Pell Grant award.

Although the Department of Education funds FSEOGs, schools administer the grant program and may not participate in it. Like Pell Grants, FSEOGs are awarded to students who haven’t yet earned a bachelor’s or graduate degree.

The FSEOG may be worth up to $4,000 a year, although each school is only allocated a specific amount of funding. Awards may be distributed on a first-come, first-served basis to the students who have the most financial need. Submitting your FAFSA early could help you qualify.

A federal TEACH Grant isn’t need-based — it is intended to help students who are preparing to teach in a high-need field and are enrolled in a bachelor’s, master’s or postbaccalaureate program at a qualified school.

Recipients must sign a TEACH Grant Agreement to Serve. In part, it’s a promise to work as a full-time teacher serving low-income students for at least four academic years during the eight-year period afterYou must also teach in a high-need field, such as foreign languages, mathematics, science or special education. If you receive a TEACH Grant and don’t follow through with the agreement, your award amount will become a Direct Unsubsidized Loan, which you’ll need to repay.

While the TEACH Grant Program allows awards of up to $4,000, the federal sequester law can limit the maximum award amount for a particular year. For the 2018-19 award year, the maximum award is $3,752.

The Iraq and Afghanistan Service Grant is for students whose parent or guardian served in the U.S. armed forces and died during military service in Iraq or Afghanistan after 9/11. You must have been either under 24 years old or enrolled in school at least part time when your parent or guardian passed away to be eligible.

If you meet these criteria, you may receive an award that’s equal to the maximum amount of the Pell Grant for the award year. Even if your Expected Family Contribution (EFC) is too high and disqualifies you from receiving the Pell Grant, you may still receive the Iraq and Afghanistan Service Grant.

The Iraq and Afghanistan Grant award could be reduced due to sequestration. You also can’t receive a larger award than your school’s cost of attendance for the year.

State government

Many states have grant programs that could help you pay for school. As with federal student grants, you may need to submit the FAFSA to be eligible for a state grant for the year. The financial information from your FAFSA along with your school’s cost of attendance could determine your grant amount, as well.

Your state’s grant programs could have an earlier deadline than the federal FAFSA deadline, so it could be important to submit your FAFSA as early as possible. You can check your state’s FAFSA deadline on FAFSA.ed.gov.

There are often residency requirements for state-based grant programs. You may also need to attend a qualified in-state school to be eligible, although some states have reciprocity agreements that allow residents to attend schools in other states.

State grants can vary in size and the programs may be intended to help those who show a financial need, exceptional merit or are part of an underserved population.

Here are a few examples of state grant programs. Student Loan Hero, another LendingTree company, also has an in-depth guide to state grant programs.

California offers three student grants (Cal Grant A, B and C). These can help you pay for tuition and fees at California public and private schools, including career schools. Cal Grant B also offers low-income students funds they can use to pay for textbooks and living expenses, among other costs.

Eligible students are automatically assigned the appropriate grants based on their FAFSA and the school they’re attending.

Additionally, the California Dream Act allows qualified state residents, including some undocumented residents who don’t meet the requirements for the FAFSA, to qualify for state- and school-based grants by submitting a CA Dream Act Application.

In Indiana, the Frank O’Bannon Grant is a need-based award that offers merit-based incentives. Depending on their EFC, recipients could receive up to $9,000 to attend a private school or $4,500 for a public school. Additional awards are given to students who maintain at least a cumulative 3.0 GPA or are on an accelerated track to finish their program.

Massachusetts offers a Public Service Grant that doesn’t have a need-based component. It covers full-time tuition cost of Massachusetts public colleges and universities, or an equivalent amount at independent college or universities in the state.

Recipients must have been permanent residents of Massachusetts for at least the previous year and be the child or spouse of someone who was killed or missing while serving in a public service role in Massachusetts.

The Advanced Placement Incentive Grant in Missouri awards $500 to high school students who earn a three or higher on at least two Advanced Placement exams in math or science. There’s no financial-need requirement to be eligible.

There are many other state grant programs, including additional grants offered by some of the states listed above. The federal Department of Education maintains a list of contact information for each state, and your state’s department of education or higher education agency can help you find state-based grant programs.

Colleges and universities

In addition to administering federal or state grants, some colleges and universities may also offer their own grants to students. These awards can take different forms and help students in various circumstances.

For example, students at New York University may be eligible for the Wasserman Center Internship Grant, which offers $1,000 to students who have a nonpaying internships in fields such as the arts and public service. Students at the University of Chicago may also be eligible for student grants if they have unpaid internships during the summer, or an unpaid internship or professional opportunity outside the U.S.

The University of Central Florida has two needs-based grants that students may automatically qualify for if they submit the FAFSA by the school’s Dec. 1 deadline. The UCF Grant is for eligible students with substantial financial need, while the Charge On! Grant is for students who enroll in at least 15 credit hours in a term. Students may also be eligible for state-funded grants, such as the First Generation Matching Grant for students whose parents don’t have a bachelor’s degree.

Contact your school’s financial aid office, or the financial aid office at each school you’re considering, to see if you may be eligible for any school-based grants.

For-profit organizations

Some companies put aside funds to help students pay for school. Often, there’s a requirement to either be in a field of study related to the company’s industry or to work at (or have a parent who works at) the company.

The Airbus Leadership Grant is one such opportunity. The $5,000 grant is awarded to a college student who has a 3.0 or above GPA, exhibits leadership potential, is at least a sophomore, and is attempting to earn a degree in an aviation-related field. The applicant also needs to be a member of Women in Aviation International; both women and men can join the organization.

Nonprofit organizations

Nonprofits, including local community groups, large nonprofits and religious organizations, may offer student grants to members or other qualified applicants. Generally, the grant will be awarded to individuals who further the mission or values of the organization.

The Costume Society of America’s Stella Blum Student Research Grant, for example, offers funds to undergraduate and graduate students who are researching North American costume. The recipient receives a $3,000 grant, along with additional funds to present the research at the CSA National Symposium.

Another example is the InterExchange Christianson Grant. Although it isn’t an educational grant, it could help you to finance a gap year. The awards, ranging from $2,500 to $10,000, are given to 18- to 28-year-old applicants who commit to do at least six months of work in an approved program. However, you can’t receive college credit for your project.

Professional and student associations

Some professional organizations, associations, fraternities and sororities offer grants to members (and sometimes even nonmembers) pursuing a degree or certification program. These grants may be a good option for students who don’t qualify for need-based grants or didn’t receive enough aid to cover all of their expenses.

For example, the Alpha Epsilon Phi sorority has a fund that it uses to give out emergency grants to undergraduate students who may otherwise have to withdraw from school, and also offers several scholarships to its members.

The American Association of University Women (AAUW) has Career Development Grants to help women who have a bachelor’s degree and are continuing their education by enrolling in a certification, second bachelor’s, master’s, technical or specializing training program. The AAUW awards $2,000 to $12,000 to recipients, and prioritizes to women of color and women seeking training in nontraditional fields.

Another example is the National Collegiate Athletic Association (NCAA), which offers grants and scholarships to student-athletes. The NCAA generally offers aid to undergraduates in the form of scholarships or awards, but there’s a Graduate Student Research Grant Program that awards up to $7,500 to graduate students who are studying college athletics or student-athlete well-being and are attending an NCAA-member school.

There are also grants from profession-specific organizations, such as the Joseph C. Johnson Memorial Grant from the American Society of Certified Engineering Technicians (ASCET). To qualify, you must have a letter of recommendation from a faculty member from your school’s engineering technology department and be a member of the ASCET. If you win, you’ll receive $750 to help pay for tuition, books and lab fees.

How to apply for grants for college

There are two important general applications that can put you in the running, or be a prerequisite, for many student grants.

The FAFSA is a requirement for federal financial aid, including student loans, work-study and grants. It’s also a requirement for student grants from other organizations, including some state- and school-based grants. Once you submit your FAFSA, you may automatically be considered for multiple grants.

You must complete a new FAFSA by June 30 each year to remain eligible for federal financial aid. However, since many states and schools may have earlier deadlines and offer grants on a first-come, first-served basis, completing and submitting your annual FAFSA early is generally a good idea. The earliest you can submit is the previous Oct. 1 before your school year (e.g. Oct. 1, 2018, for the 2019-20 school year).

You may also want to complete the CSS Profile. Nearly 400 organizations, including schools, funds and scholarship programs, use the CSS Profile to evaluate students and award non-federal financial aid. Like the FAFSA, the CSS Profile application window opens on Oct. 1 and requires you to submit personal and financial information about you and your family.

The College Board has a profile overview video with step-by-step instructions for filling out your CSS Profile. There’s a $25 fee to submit your CSS Profile to a school or scholarship program, and an additional $16 fee for each subsequent submission. Low-income students may qualify for up to eight fee waivers.

Grant programs may also have individual applications or additional requirements along with submission of the FAFSA and CSS Profile. Pay close attention to each grant’s eligibility requirements, application process and deadline to help ensure you qualify and submit the necessary paperwork or information on time.

Just as your financial situation may change over the course of your time at school, your eligibility for grants and scholarships could change as well. Both grants and scholarships may be available to undergraduate and graduate students at all grade levels, and continuing to apply could limit how much you need to borrow or pull from your savings.

How might grants affect your finances?

While receiving grants means you could have more money to pay for school that you don’t need to repay, there are potential ramifications of accepting a grant.

With some types of financial aid, including many grants, scholarships and loans, the amount of aid you receive depends on other financial aid you’ve received. In some cases, if you receive a grant, your other financial aid offers could be decreased or you might even need to repay money you’ve received.

Ideally, if this happens, the school will decrease the loan amount it offers you. However, you might wind up with less grant or scholarship money, leading to no net gain on your part.

Taxes are another thing to consider. Some money from grants and scholarships might be tax-free as long as you’re in a degree-granting program and you spend the money on educational expenses. However, that only includes what you pay for tuition, fees and required books or supplies.

Grant money may be taxable if you use it to pay for other expenses, such as room and board or travel between home and school. You may also need to include the grant money as income for the year if you must work (e.g., as a teaching or research assistant) as part of the grant program.

Alternative ways to fund your college education

While student grants can be a great source of money for school, they’re not the only type of financial aid. Many students, especially those who don’t have an exceptional financial need, may not qualify for grants. Or the student grants they receive might not be enough to cover all of their educational and personal living expenses.

Here are several additional sources of money that could help you pay for school.

Scholarships

As another form of free money for school, scholarships should be a priority for students looking to pay for school. There are billions of dollars worth of scholarships available to students who are attending career, certificate, undergraduate and graduate degree programs. There are even scholarships that are open to children in grade school and high school.

While some scholarships have a need-based component, there are also many that are awarded regardless of the recipient’s finances. In some cases, you can qualify even if you don’t have outstanding grades, athletic skills or other particularly meritocratic achievements.

You can find scholarships online by asking high school or college counselors, looking for lists from local nonprofits that focus on educational access and asking about opportunities from organizations that you have some connection to, such as churches, after-school programs or a parent’s employer.

Student loans

Federal student loans are available to eligible students regardless of financial need, credit history, credit score or income. Dependent undergraduate students may be able to borrow up to $5,500 during their first year at school, $6,500 during their second year and $7,500 during each subsequent year.

If these options aren’t enough to cover a student’s educational expenses, their parent may be able to take out a PLUS Loan to help cover costs. The student may also be able to borrow more if the parent doesn’t qualify for a PLUS Loan.

Private loans are another option for additional funding. Private student loans are credit-based loans, meaning your credit history, score, income, outstanding debts and other factors could all impact your ability to get approved, along with your loan’s rates and terms. Many undergraduate students may need a creditworthy cosigner — someone who agrees to also take legal responsibility for repaying the loan — to qualify for a private student loan or receive a good rate.

However, if you’ve reached the federal loan limit and need additional funds, you may want to question whether taking on additional debt is worth it. If you’re still deciding between schools, or are open to transferring, you may want to consider a less expensive school or one that offers you a stronger financial aid package.

Savings and income

Some parents have a college savings fund set up for their children. Since the money is already set aside to pay for school, it’s naturally a place you may turn to early on. However, it could still be wise to apply for as many scholarships and student grants as possible and save as much of your college fund as you can.

Students may also be able to take on a job while they’re at school, during holiday breaks and over the summer. While the income from work may not be enough to pay for everything, it could help offset the cost of school and allow you to borrow less money. Additionally, the work experience you gain could help you determine what you want to study, the types of work you want to do and make it easier to land a job after graduation.

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

Louis DeNicola
Louis DeNicola |

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

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Building Credit, Life Events

How Do Student Loans Affect Your Credit Score?

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

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.

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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

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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.

Earnin What 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.

Dailypay What 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.

Payactive PayActiv 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.

Flexwage FlexWage 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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LendingTree is our parent company. LendingTree is unique in that you may be able to compare up to five personal loan offers within minutes. Everything is done online and you may be pre-qualified by lenders without impacting your credit score. LendingTree is not a lender.

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

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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Pay Down My Debt

How to Manage Your Law School Debt in 2018

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

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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.

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

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

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Is College Worth It? Here’s What to Consider

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

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

Louis DeNicola
Louis DeNicola |

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

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Student Loan ReFi

Should I Refinance My Student Loans?

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

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

Louis DeNicola
Louis DeNicola |

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

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