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College Students and Recent Grads

When Do You Have to Pay Back Private Student Loans?

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When Do You Have to Pay Back Private Student Loans?
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Borrowing a private student loan can help put the cost of college or graduate school within reach. But when do you have to pay back private student loans, and can you defer private loans while in school?

Fortunately, most private lenders do give you a break while you’re in school and don’t require repayment until six months after you graduate, just as with federal student loans. But since every lender is different, it’s crucial to check your agreement before assuming you can put off repayment.

What’s more, you might prefer to start paying your loan off early to minimize interest. Here’s what you need to know about private student loan deferment and repayment options.

When do you have to pay back private student loans?

Unlike federal student loans, which abide by a blanket set of terms and conditions, private student loan contracts can vary from lender to lender.

Still, as mentioned, most private lenders don’t require you to make payments while you’re still in school. Instead, they typically honor a grace period, during which your payments are postponed while you’re enrolled in school and for six months after you graduate, withdraw or drop below half-time enrollment.

Once your grace period ends, you’ll start repayment according to the terms and conditions you agreed to when you borrowed your loan. And be prepared: You could be facing a bigger balance that you initially took out, since interest will accrue from the date of disbursement and might get added onto your principal (known as “capitalizing”) once repayment begins.

Note that some lenders do require immediate repayment of the interest on your loan. Make sure you’ve read through the terms of your contract so you don’t accidentally fall behind on your student loan bills.

What are my repayment options on private student loans?

Although the majority of private lenders offer in-school deferment on your student loan payments, many also let you choose alternative repayment approaches. If you can swing in-school payments, you could reduce the interest costs of the loan.

Here are some repayment options private lenders often offer to borrowers:

  • Deferred repayment: As mentioned, you can postpone payments while you’re in school and for an additional six-month grace period.
  • Interest-only repayment: Pay off any interest that accrues from month to month. With this option, you won’t be facing a bigger balance after graduation.
  • In-school fixed payments: Make a small fixed payment of $25 or so per month while you’re in school.
  • Immediate repayment: Although rare, some lenders will require you to start making full payments just a month or two after your loan is disbursed.

Make sure you understand all repayment requirements before signing your student loan contract. And if you can afford it, consider making small or interest-only payments while you’re still in school.

These in-school payments could cut down on interest and prevent your principal from ballooning, making your debt easier to manage after you graduate. In fact, you can prepay your loan at any time without penalty to save on interest and get out of debt ahead of schedule.

Is private student loan deferment or forbearance available?

As a college student, you might be eager to take advantage of your student loan grace period, giving yourself a little breathing room until you start making money. But if, later on, you’re struggling to find employment, lose your job or return to school, you might wish to pause payments again.

While federal student loans are eligible for deferment and forbearance, private loans aren’t guaranteed to have this option. Some private lenders let you pause payments if you run into financial hardship or go to graduate school, but not all of them do.

But even if your private lender doesn’t mention a deferment or forbearance option, it’s worth asking them for help if you’re struggling to repay your bills. Your lender might offer some flexibility, especially if the alternative is you going into default.

Remember that while deferment and forbearance can help you through a tough time, interest will continue to accrue, making your loan balance grow even bigger.

You can restructure your debt through refinancing

It’s crucial to read over the details of your private student loan contract before signing, since you can’t necessarily make changes to your repayment plan retroactively. But there is one way to change your terms — through student loan refinancing.

When you refinance, you basically trade in your old loan(s) for a new one. At this point, you can choose new repayment terms, often ranging between five and 20 years.

If you can swing heavier monthly payments, a shorter loan term can help you get out of debt more quickly. If, on the other hand, you’re looking for some relief, a longer term can save you more money each month (though it will cost you more in interest over the long run).

Refinancing can be a useful strategy for restructuring your debt, but you have to qualify first. Only borrowers with strong credit and income — or a creditworthy cosigner — will be able to qualify.

Consider paying back your student loans ASAP to save money

Even though you don’t have to make in-school payments on most private student loans, doing so could help your finances down the road. Some private student loans come with high interest rates, and some have variable rates that rise over time.

By making small or interest-only payments as a student — perhaps with income from a part-time job — you can cap interest before it grows out of control. Then you won’t have such a daunting balance when you leave school and are looking for work.

Once full repayment begins, you might also make extra payments to retire your debt faster. You can always prepay your student loans without penalty, but you might want to contact your servicer to ensure your extra payments are being applied to your principal and not being used to “prepay” interest.

Whether you choose to make extra payments or stick with the minimum, make sure to use a student loan calculator to learn about your loan. By playing around with the numbers, you can come up with a debt repayment plan that works for you.

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.

Rebecca Safier
Rebecca Safier |

Rebecca Safier is a writer at MagnifyMoney. You can email Rebecca here

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College Students and Recent Grads

Beware: Scholarship Displacement Can Cost You Grant Money

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

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You may be under the impression that winning a college scholarship reduces the amount you have to pay toward tuition, fees or living expenses. But due to a little-known practice called scholarship displacement, that’s not always the case.

Some schools subtract your scholarship winnings from your demonstrated financial need and take away some of their institutional financial aid as a result. So even though you worked hard to earn a scholarship, you might end up facing the same bill as if you never applied at all.

Read on to learn about scholarship award displacement — and what to do about it — so that you’re not caught by surprise when you see your tuition bill.

Here’s the deal with scholarship displacement

Once you’re accepted to college, you’ll get a financial aid package, typically made up of institutional and federal grants, as well as student loans. Students with financial need might also be invited to participate in the work-study program.

The amount of grants you get depends on your “demonstrated financial need,” as well as the policies of your college. While some colleges meet a student’s full financial need, others only offer a limited amount of aid.

However, colleges that practice scholarship displacement may adjust your financial aid award lower, based on your scholarship winnings. Basically, they’ll subtract your scholarship funds from your demonstrated financial need.

Since you now supposedly have less financial need, the college could take away part of your other grant awards as a result. Note that colleges can’t subtract from the federal Pell Grant — that will remain intact regardless of your scholarship winnings.

Why some colleges practice scholarship displacement

Before you freak out, note that most colleges don’t practice scholarship displacement. According to Edvisors, roughly only 1 out of 5 colleges will cut into those grant awards if you win scholarships. Rather, most schools will keep your grants at the same level and instead subtract from your student loan offer, so you won’t have to borrow as much to attend.

But why do any colleges practice scholarship award displacement at all? Well, they interpret the fact that you won a scholarship as evidence you have less demonstrated financial need. If you won a $1,500 scholarship, the college decides your need has gone down by $1,500.

Since you now have less need in the eyes of the financial aid office, it thinks you have been over-awarded financial aid — your package offers $1,500 more than you need. So it reduces its grant awards accordingly, perhaps to give them to another student with more financial need.

Colleges can practice scholarship displacement if your scholarship assistance exceeds your financial need by $300 or more.

Which states have banned the practice so far

By now, you might be feeling this system is pretty unjust. You worked hard to win a scholarship, so shouldn’t college become more affordable? It seems very unfair.

Well, the state of Maryland agrees with you. In July 2017, Maryland banned the practice of scholarship displacement at its public colleges and universities.

According to the state, colleges can only practice scholarship displacement if the student’s aid becomes greater than their school’s cost of attendance or if their scholarship provider gives them permission.

If neither of these conditions are met, then the school can’t cut into a student’s grants just because they won a scholarship.

Find out if your school treats scholarships as over-awarded financial aid

Since other states haven’t followed Maryland’s lead yet, it’s up to you to see if your college practices scholarship award displacement. The best way to find out is by calling the financial aid office.

If you do find yourself facing so-called “over-awarded financial aid,” it can’t hurt to ask the financial aid office to reconsider. Request that they adjust your student loan offer instead of cutting into your grants.

Or perhaps the school can raise your estimated cost of attendance by adding in certain expenses, such as the cost of a new laptop, so your aid no longer looks like an over-award. Although there’s no guarantee a financial aid officer will work with you, it’s worth making the request.

Another workaround is calling up your scholarship provider and asking them to defer the scholarship award until a later year. Although you might end up facing scholarship displacement in the future, you might at least get to keep your financial aid package intact for freshman year.

Applying for scholarships is still worth the effort

At first, scholarship displacement might discourage some students from seeking free aid. What’s the point of applying to scholarships if they won’t make college more affordable?

But remember that 80% of schools won’t cut into your grants for receiving other scholarships. So pursuing scholarship money could still help a great deal and stop you from having to borrow as much in student loans.

And if you do end up at one of the approximately 20% of colleges that engage in scholarship award displacement, ask your financial aid office to reconsider. You could even contact your representative in Congress: By bringing this issue into the spotlight, more states might join Maryland in banning the practice of scholarship displacement.

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.

Rebecca Safier
Rebecca Safier |

Rebecca Safier is a writer at MagnifyMoney. You can email Rebecca here

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College Students and Recent Grads

8 Things to Know Before Applying for Student Loans

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

8 Things to Know Before Applying for Student Loans
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If you’ve never borrowed money before, applying for student loans can be confusing. You might have to choose between federal and private student loans, for example, or a fixed or variable interest rate. With all your options, it’s crucial to learn how to apply for student loans before entering any kind of contract.

By understanding how to apply for college loans, you’ll be empowered to make smart decisions about paying for your education. This beginner’s guide will go over what you need to know about how and when to apply for student loans.

What to know before applying for student loans

1. Your loans might be federal or private

As a college student or parent of a college student, you have two options for student loans: federal or private. Federal loans come from the Department of Education and are available for any student attending an eligible school.

You can access federal loans, such as subsidized and unsubsidized loans, by submitting the Free Application for Federal Student Aid, or FAFSA. In most cases, it’s smart to max out your eligibility for federal loans before turning to a private lender.

This is because the federal government offers relatively low interest rates and a variety of flexible repayment plans. But since federal student loans come with borrowing limits, you might need more help to pay for school.

In this case, you could turn to private student loans, which come from a bank, credit union or online lender. Unlike federal student loans, you’ll need to meet underwriting requirements for credit and income to get a private loan.

Most undergraduates apply with a cosigner, such as a parent. Although private student loans can help fill the funding gap, be careful about borrowing a loan with a high interest rate. Private lenders typically aren’t so flexible if you run into financial hardship.

2. You may pay interest right away

Whatever type of student loan you borrow, you’ll have to pay back the principal amount and interest. As of July 1, 2018, federal student loans have an APR of 5.05% for undergraduates and 6.6% for graduate students. As of July 1, 2019, federal student loans will have an APR of 4.53% for undergraduates and 6.08% for graduate students.

Private loan interest rates vary depending on which lender you choose and how strong your credit is. Lenders in MagnifyMoney’s private student loans marketplace offer fixed APRs starting at 5.25% and variable APRs from 4.07%.

Because of interest, you’ll end up paying back a good deal more than you borrowed, especially if repayment spans 10 or more years. Plus, interest typically starts accruing from the date your loan is disbursed.

For example, let’s say you borrowed a $30,000 loan at a 5.05% rate. Over 10 years, you’ll end up paying $8,272 in interest. If you can pay off your loan in five years, you could save $4,263 on interest.

Note that subsidized federal loans, which are available to students with financial need, work slightly differently. The government covers interest while you’re in school on subsidized loans, so you’ll only have to start paying interest once your repayment period begins after graduation.

3. You’ll likely have a grace period

As a college student, you probably won’t have a lot of money to pay back your loans. Luckily, federal loans, as well as most private loans, don’t require immediate repayment.

Instead, you can postpone payments while you’re still in school and for six months after you graduate. This deferment is called a grace period, and it lets you focus on your education before having to worry about student loan payments.

But since interest might be accruing, you could choose to make small payments while you’re still in school. If you can swing small payments, perhaps with income from a part-time job, you won’t be facing such a big balance after graduation.

Note that some private lenders require you to make in-school payments, sending your first bill just a month or two after your loan was disbursed. Make sure you understand all the terms and conditions of a private loan before borrowing so you don’t accidentally fall behind on repayment.

4. You have various repayment options

Learning how to apply for student loans is a crucial first step, but you also need to know how to pay them back. Your options will look different depending on whether you’re borrowing federal or private student loans.

Federal student loans come with a variety of repayment plans. The standard plan spans 10 years, but you can opt for a different plan to adjust your bills, such as income-driven repayment or extended repayment.

Income-driven plans, which span 20 or 25 years, can lower your payments and end in loan forgiveness. But if you stretch repayment over two decades, you’ll end up paying a lot more in interest.

If you owe $35,000 at a 5.05% rate, for example, you’d pay $9,650 in interest over 10 years. But if you stretch repayment out over 20 years, you could pay $20,669 in interest. With a 25-year loan, you’d pay $26,688 in interest. So even though your monthly payments feel more affordable on an income-driven plan, you’ll end up paying more on your loan overall.

Private student loans work a bit differently. When you apply, you’ll choose your loan terms, typically somewhere between five and 15 years. After this point, you might not be able to change your terms.

Some lenders will be flexible if you run into financial hardship, and you might be able to choose new terms through refinancing. But you won’t have access to the many plans available for federal student loans, so make sure to choose your repayment plan carefully before applying for student loans from a private lender.

And no matter the repayment plan you select, you can always prepay your federal or private student loans without penalty.

5. Your private loan could have a fixed or variable interest rate

Federal student loans come with fixed interest rates that remain the same over the life of your loan. But private lenders set their own rates and assign the best ones to creditworthy borrowers. Plus, they typically let you choose between a fixed rate and a variable rate on your student loan.

A fixed rate stays constant, while a variable one could rise over time. If you’re spreading out repayment over a decade or more, a variable rate could cost you. But if you’re planning to pay back your loan quickly, electing a variable rate could save you money on interest.

6. You might be able to pause payments in certain circumstances

Even if you have every intention to pay back your student loan on time, you can’t help it if an emergency pops up. Maybe you lose your job and don’t have an income for a few months. Or perhaps you decide to return to school and want to pause payments again.

If you have federal loans, you can postpone payments temporarily through forbearance or deferment. Both programs let you pause payments, but you won’t have to pay interest on subsidized loans during a period of deferment — only on unsubsidized loans.

Forbearance is typically used during times of financial hardship, while deferment is more often used when you return to school, go on active military service, join the Peace Corps or experience unemployment.

Some private lenders also offer forbearance and deferment, but this varies by lender. Plus, there’s not much of a distinction between these two programs when it comes to private loans, since private loans will always keep accruing interest.

If you’re worried about your ability to keep up with payments, consider applying for student loans with a lender who offers this benefit.

7. You could qualify for loan forgiveness or repayment assistance

Depending on where you live and work, you could get some of your student loan debt wiped away through forgiveness or repayment assistance. Federal programs, such as Public Service Loan Forgiveness and teacher loan forgiveness offer partial or total forgiveness after a certain number of years of service in a qualifying organization or profession.

Many states also offer student loan repayment assistance to certain professionals who work in a shortage area or with a high-need population. Several of these programs offer assistance to pay off both federal and private student loans.

A growing number of companies are offering a student loan-matching benefit to their employees to help them cut through debt. If you’re looking to get your debt discharged ASAP, explore your options for loan forgiveness and repayment assistance.

8. You can restructure your debt through student loan refinancing

With Americans owing more in student loans than ever before, many are looking for relief. For some, student loan refinancing can help.

When you refinance, you give one or more of your old loans (federal or private) to a lender. That lender then issues you a new loan in their place, hopefully with better terms.

Creditworthy applicants can snag lower rates on their debt as well as choose new repayment terms, usually between five and 20 years. Not only can refinancing save you money on interest, but it also lets you adjust monthly payments in a way that works with your budget.

Along with these benefits, though, keep in mind one potential downside: Refinancing federal loans turns them private. As a result, you lose access to federal protections like income-driven plans and forbearance.

But if you’re confident you can pay back your loan on time, applying for student loan refinancing could be a strategic way to manage your debt.

Learn how to apply for student loans to pay for college

Most students should borrow federal student loans before turning to a private lender. Submit the FAFSA and you’ll have access to the world of federal financial aid.

But if you need more funding, learn how to apply for student loans with a private lender. You’ll need to fill out an application and submit your (or your parent’s) documents, such as pay stubs and tax returns.

It’s a good idea to shop around with lenders before choosing one. That way, you can find a private loan with the best rate to finance your education.

The information in this article is accurate as of the date of publishing.

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

Rebecca Safier
Rebecca Safier |

Rebecca Safier is a writer at MagnifyMoney. You can email Rebecca here