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College Students and Recent Grads

Understanding Student Loan Interest Rates

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

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Looking into student loans to pay for college or graduate school? Before you take on debt, it’s important to understand how the interest on student loans work, so you can make smart decisions before you borrow and when it comes time to repay the debt.

Understanding how student loan interest works

When you take out a student loan, the lender charges interest as a fee for borrowing the money. Interest on student loans isn’t a flat fee. Instead, interest on student loans is expressed as a percentage of the unpaid loan amount. Right now, federal direct unsubsidized loans for undergraduates carry a 4.45% annual interest rate (but they’re about to go up for the 2018-19 school year). That means the lender charges 4.45% of the unpaid loan balance per year.

When interest on a student loan goes unpaid, the balance of the loan grows over time. For example, during college many students “defer” student loan payments. In general, during deferment, the bank continues to charge interest, so the balance grows over time. A student who borrows $5,000 at a 4.45% interest rate at the start of his freshman year of college will owe $5,974 four years later when he starts making payments. Generally, any unpaid interest is added to the principal balance once the loan enters the repayment period.

Even though interest rates on student loans are expressed as an annualized interest rate (such as 4.45% per year), interest on federal student loans is determined by a daily interest rate. A 4.45% annual interest rate translates to a 0.0122% daily interest rate.

Once you start making standard monthly payments on the loan, the balance of the loan and dollar amount of interest being charged each day drops. For example, on a 10-year repayment plan, the $5,000 loan that grew to $5,974 loan from the previous example will have a $61.77 monthly payment.

After making the first payment, the balance will fall by $39.62 to $5,934 — the other $22.15 goes toward paying interest. By contrast, with the last payment, $61.27 goes toward balance reduction, and just $0.23 goes towards paying interest.

Many people have heard stories of student loan borrowers who have faithfully made regular payments for decades but have barely made a dent in their balance or owe more money today than when they graduated from college. This doesn’t happen when borrowers make payments based on standard repayment plans. However, it can happen when federal loan borrowers opt for income-driven repayment plans. Under these plans, the monthly payment is based on a person’s income, not on a repayment schedule. That means that the required monthly payment could be less than the amount of interest that the lender charges on the loan. In that case, the balance of the loan grows over time, and the amount of interest charged grows, too.

Variable vs. fixed interest rates

All federal student loans disbursed since July 1, 2006, have fixed interest rates, meaning the interest rate will never change. By contrast, some private lenders offer variable-rate loans. Variable-rate loans are loans where the interest rate may change over time. In general, variable interest rates are set based on an index rate such as the LIBOR (London Interbank Offered Rates). When the LIBOR increases, the variable interest rate on a student loan increases. When it decreases, the interest rate on a student loan decreases. The interest rate on a variable-rate loan could change as often as once a month.

As the interest rate on a variable-rate loan changes, the minimum monthly payment changes, too. A higher interest rate will mean a higher monthly payment, and a lower interest rate will mean a lower monthly payment.

Some variable-rate loans will have maximum interest rates. That means, no matter how high the index rate goes, the lender will not charge more than the maximum rate.

The primary advantage of fixed-rate loans are that borrowers will know exactly how much they owe each month, which makes it easy to budget for. However, most private lenders set higher interest rates for fixed-rate student loans compared with variable-rate loans. That means that borrowers could end up paying more in interest over time.

The lower starting interest rates mean that some people may save money by opting for a variable-rate loan. But variable-rate student loans are riskier than fixed-rate loans. The changing interest rates could mean that borrowers have to make large monthly payments and pay more in interest over the life of a loan.

When should borrowers choose a fixed-rate student loan?

No wiggle room in budget: Fixed-rate student loans are an ideal choice if you don’t have a ton of wiggle room in your budget. You may pay a bit more — but you might not — and you don’t have to worry about your monthly payment increasing.

Long repayment periods: Fixed-rate loans also tend to make sense if your repayment plan will last several years. By contrast, variable rate loans are riskier when you face longer repayment periods. Longer repayments mean that you’ll face a higher risk that the rate will increase significantly from where you first took out the loan.

Small rate difference between fixed- and variable-rate loans: Variable-rate loans often have lower prices, but you get that lower price by taking on more risk. If the interest rate you’ll pay on a fixed-rate loan is just a tiny bit more than the interest rate on a variable-rate loan, the peace of mind is probably well worth the financial cost. Plus, if interest rates fall, you may be able to refinance to a lower, fixed rate in the future.

When should borrowers choose variable-rate student loans?

Expect rapid loan payoff: Borrowers who plan to aggressively pay back loans (and cut years off of standard repayment plans) can take advantage of lower interest rates in the early years of the loan. Even if interest rates rise over time, people who aggressively pay back loans in the early years will save enough in interest to compensate for the higher rate in the later years.

Rate difference between fixed- and variable-rate loans: Most of the time, variable-rate loans are less than 1% cheaper than fixed-rate loans. This offers some savings. But depending on your borrower qualifications (credit score, debt-to-income ratio, etc.), you may qualify for a much better variable-rate loan. If you personally qualify for a much lower rate on a variable rate loan (compared with a similar fixed-rate loan), you can expect to save a lot of cash over the life of a loan, even when student loan interest rates start to rise.

Federal student loan interest rates

Congress sets interest rates on federal student loans. Once you borrow the money, the interest rate on the loan will not change because federal student loans have fixed interest rates, but not all federal student loans have the same interest rates. For example, direct unsubsidized and subsidized loans for undergraduates carry a 4.45% interest rate for the 2017-18 school year. The same loan for graduate or professional students is 6%. PLUS loans, which are available for parents and graduate students, have a 7% interest rate. For federal student loans disbursed between July 1, 2018 and June 30, 2019, rates are as follows: 5% for undergraduate loans, 6.6% for graduate and professional unsubsidized loans and 7.6% for PLUS loans borrowed by parents or graduate and professional students.

How does interest work during deferment?

Many students defer payment on their student loans while they are studying or for select other reasons, such as unemployment or active-duty military service, if their loans offer such flexibility (some private loans and all federal loans do).

During deferment and the grace period following graduation, you will not make payments on your student loans, but interest continues to accrue on the loan. Interest that accrues during deferment is added to the balance of the loan, so your principal loan balance grows during deferment.

However, the U.S. Department of Education helps reduce the burden of interest by paying interest on subsidized loans while the borrower is enrolled in school at least halftime, during deferment and during the grace period that follows graduation. Subsidized loans include direct subsidized loans, federal Perkins loans and the subsidized portions of direct consolidation loans and FFEL consolidation loans.

It’s important to note that deferment is not the same as forbearance. Forbearance is a period of reduced or suspended payments a lender may grant to a borrower going through financial hardship. During forbearance, interest continues to accumulate and will capitalize (be added to the principal balance).

Current interest rates and fees on federal student loans

The table below shows the interest rates and fees on federal student loans for the 2018-19 school year. It’s important to note that some loans have a loan fee. These fees are a percentage of the principal balance, taken from the disbursement and paid to the bank. For example, a $5,000 loan will actually be a $4,946.70 disbursement to you (assuming the 1.066% loan fee).

Federal loan type

Borrower type

Interest rate

Loan fee

Does interest accrue during deferment?

Direct unsubsidized

Undergraduate

4.45% (for loans disbursed between July 1, 2017 and June 30, 2018)

5% (for loans disbursed between July 1, 2018 and June 30, 2019)

1.066%

Yes.

Direct unsubsidized

Graduate or professional students

6% (2017-18)

6.60% (2018-19)

1.066%

Yes.

Direct subsidized

Undergraduate

4.45% (2017-18)

5% (2018-19)

1.066%

No.

Direct consolidation

Past borrowers

Weighted average interest rate of all loans being consolidated, rounded up to the nearest one-eighth of one percent.

None.

Generally yes. The subsidized portions of the loan do not accrue interest during deferment.

PLUS

Parents, graduate students and professional students

7% (2017-18)

7.6% (2018-19)

4.264%

Yes.

Private student loan interest rates

Private student loans can be a double-edged sword for students and their parents. The private student loan marketplace allows a greater level of borrowing, and some people find better interest rates in the private loan marketplace. However, private student loans generally do not offer the safeguards of federal student loans.

For example, many private loans don’t offer forbearance or deferment (except in-school deferment), and they may have very high student loan interest rates. Unlike federal student loans, most private student loans don’t have income-driven repayment plans, and the interest rates on private student loans aren’t set by legislation. Instead, interest rates on private loans are determined by a variety of factors:

  • Your credit score (or the score of a cosigner)
  • Your income (or the income of a cosigner)
  • Employment status
  • The length of repayment
  • Fixed- or variable-rate terms
  • Rates charged by other lenders

Many private lenders require a cosigner (someone who promises to make payments if you can’t) if you don’t have a high enough income or credit score to qualify for the loan.

Interest rates on private student loans have a much greater variety than federal student loans. For example, some student loan refinancing companies offer interest rates as low as 2.57%. However, some lenders charge interest rates that exceed credit card interest rates.

Borrowers who are considering private student loans should research the costs and have a plan to make the required monthly payment once they graduate.

Student loan interest rate vs. APR

When it comes to student loan borrowing, borrowers should understand both the interest rate and the APR (annualized percentage rate) on a loan. The Federal Truth in Lending Act requires lenders to disclose a loan’s APR. APR measures the annualized cost of all finance charges (including interest and transaction fees) if you make all your payments on time. By contrast, the interest rate on a loan is simply the annual cost of borrowing the money, and does not include other fees.

When you pay off student loans early, you will reduce the total interest you pay on the loan. However, finance charges (such as loan fees or origination fees) are not reduced by paying off the loan early.

Lowering your student loan rates

When it comes to any type of borrowing, paying less in interest means you’ll have more money to put elsewhere. Student loan borrowers should consider methods for reducing the interest rate on their loan, and methods to pay less interest overall. These are just a few options to consider.

Lowering your student loan interest rates

Fill out FAFSA: If you’re a traditional student (generally under 24 years old with limited work/life experience), federal student loans likely offer the lowest possible interest rates on student loans. To qualify for federal aid, you and your parents must fill out the FAFSA (Free Application for Federal Student Aid). The FAFSA may also be required for merit-based aid at your university.

Get a cosigner: Borrowers in the private marketplace may find that a cosigner helps them qualify for a reduced rate. Its common for grandparents or parents to cosign private student loans, but cosigners must exercise caution. If a borrower can’t make their monthly payments, the cosigner has to step up and make the payments, otherwise both borrowers’ credit scores will suffer from the impact of missed payments.

Refinance: Following graduation, borrowers (especially those with high incomes or good credit scores) may be able to reduce their student loan interest rates by refinancing with private loans. However, borrowers must be careful when refinancing. Private lenders generally do not offer income-driven repayment plans or other safeguards that can help borrowers who experience unemployment, underemployment or low incomes. Plus, debts that are refinanced with private lenders will not qualify for federal student loan forgiveness programs.

Enroll in automatic payments: Many private lenders offer borrowers a rate discount when the borrower sets up automatic monthly payments.

Reducing total interest paid

Reducing interest rates aren’t the only way to free up cash. Borrowers may also use other methods to reduce the total amount of interest they put toward loans.

Borrow as little as possible: The less you borrow during school, the less interest that will accrue on the loans. Students may be able to minimize borrowing during school by working, applying for scholarships and grants, and using savings. This may sound obvious, but it’s important to point out, because the amount you’re approved to borrow may exceed what you need, resulting in unnecessary debt and, as a result, unnecessary interest payments. Budget carefully and borrow only what you need.

Pay more than the minimum: The more money you put toward your loans each month, the faster you’ll pay them off. Extra principal payments are especially helpful in the early life of the loan when a large portion of the standard payment goes to interest. When you put extra money toward your loan, be sure that the additional payment goes toward repaying the principal. The Consumer Financial Protection Bureau offers guidance on how borrowers can make sure their lender processes their payments correctly.

Combine income-driven repayment with student loan forgiveness: A lot of times, income driven repayment plans reduce monthly payments only to have the loan balance grow over time. However, if you qualify for a student loan forgiveness program, the lower payment is a huge advantage. Not only will you reduce your cash outflow during the repayment phase, once you complete the requirements for loan forgiveness, you may qualify for forgiveness without any incurring tax penalties. (However, some loan forgiveness requires you to pay income taxes on the forgiven amount.) Different loan forgiveness programs have different requirements, so be sure you qualify before planning to use this strategy.

Pay interest during school: Many students are cash-strapped during their studies, but putting money toward interest may go a long way toward keeping loans at a manageable level. Making interest-only payments during college allows students to keep loans at a set level instead of allowing the lender charge interest on interest once the loan enters repayment and unpaid interest is capitalized (added to the principal loan balance).

Refinance to a shorter term: Borrowers who have sufficient cash flow can reduce their total interest payment by refinancing their loans to a shorter term. Sometimes a shorter term means a better interest rate. But, even without a lower rate, a faster repayment means that less money goes to interest overall. For example, a borrower with a $10,000 loan at 3.5% will pay $1,866.21 in interest over the life of a 10-year loan. If that borrower refinances to a five-year loan (also at 3.5%) the total interest is cut in half to just $915.03.

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Hannah Rounds
Hannah Rounds |

Hannah Rounds is a writer at MagnifyMoney. You can email Hannah here

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College Students and Recent Grads

4 Student Loan Refinancing Companies for Medical Residents

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

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Medical students may look forward to a high income and bright financial future. But the path to becoming a doctor often requires students to take on a lot of student loan debt — 75 percent of graduating medical students in 2017 had education debt, and the median debt balance was $192,000 (including undergraduate loans).

Graduating medical students generally don’t jump right into a high-income job, either. After graduating, the next step to becoming a doctor is a residency and/or fellowship program, and for the 2016-17 academic year, the starting median income for residents was $53,580. On top of that, a residency or fellowship can take three to seven years to complete, depending on your focus and specialization.

However, your student loan payments may begin after your loan’s grace period ends, generally six to nine months after graduation.

Managing student loans during your residency

Medical residents may have several options for handling their student loans during their residency and fellowship programs:

  • Start making full payments. If you can afford to make full principal and interest monthly student loan payments, paying down your loans now could help reduce the total amount of interest you pay. However, a medical school graduate’s monthly payments could be thousands of dollars, which might not be manageable on a resident’s income.
  • Switch repayment plans. Residents with federal student loans may be able to switch to a different federal student loan repayment plan and significantly lower their monthly payments compared with the standard federal repayment plan. Lower payments can lead to paying more overall but can help you manage your budget.
  • Defer payments. You may be able to put federal and private student loans into deferment and temporarily stop making payments while you’re a resident. However, interest will continue to accumulate, and this option could significantly increase your total cost of borrowing.
  • Refinance and repay your loans. Refinancing your student loans could lower your interest rate, which may decrease how much interest accumulates while you’re a resident and lower your monthly payments. Some medical residency refinancing programs also let you make preset, low monthly payments while you’re a resident or fellow.
  • Understand how interest accrues and capitalizes. When you defer payments, interest will continue to accumulate on your loan balance. The same may be true if your refinance your loans with a residency loan and the monthly payment doesn’t cover the interest that accrues each month.

Generally, the interest won’t compound, meaning you won’t get charged interest on your interest. However, the interest gets capitalized — added to your loan’s principal — once you start making full payments. As a result, your principal debt load could increase during your residency unless you make additional monthly payments to offset the interest accumulation.

4 companies that offer medical residency refinancing

Many companies offer student loan refinancing. However, there are only a few that have specialized refinancing programs for medical residents and fellows.

LenderVariable APR*Fixed APR*TermsMinimum loan amountMaximum loan amount 
SoFi

3.14%-8.01%**

3.50%-7.75%

5-20 years

$10,001

Total eligible loan balance

LEARN MORE Secured

on Sofi Bank’s secure website

3.55%-6.15%***

4.33%-7.27%

7-20 years

$5,000

Total eligible loan balance

LEARN MORE Secured

on Laurel Road’s secure website

Not available

3.91%-7.13%

7-20 years

$40,000

$450,000

LEARN MORE Secured

on LinkCapital ’s secure website

Not available

5.29%-5.44%

Up to 10 years

$25,001

$346,000

LEARN MORE Secured

on Splash Financial’s secure website

**SoFi variable-rate loans have an interest rate cap of 8.85% for five-, seven- and 10-year terms and 9.95% for 15- and 20-year terms.
***Laurel Road variable-rate loans have an interest rate cap of 9% for seven- and 10-year terms and 10% for 15- and 20-year terms.

Details on medical residency refinancing programs

SoFi medical and dental resident student loan refinancing

SoFi is an online-only lender that offers several types of loans and loan refinancing products. After taking out a loan from SoFi, you can take advantage of several SoFi membership benefits, including discounts on other types of loans and free career coaching services.

Why we like SoFi

SoFi offers the lowest potential APR of the four lenders we compared. It also doesn’t have a maximum loan limit and offers variable- and fixed-rate loans.

You can choose from five loan terms at SoFi, with a short five-year option that some other lenders don’t offer. While a shorter term will increase your monthly payment, it can decrease the total interest you pay.

You only have to make $100 monthly payments during your residency and for up to six months following the end of a four-year residency program.

If you think SoFi may be a good fit, you can pre-qualify online. SoFi pre-qualification involves a soft inquiry on your credit report, which won’t hurt your credit.

Eligibility requirements

To refinance medical school loans with SoFi, you must graduate with an MD, DO, DMD or DDS from an eligible school, currently be a resident or fellow and have up to four years left in an approved program.

You also must generally refinance at least $10,001 in eligible student loan debt (residency loans do not qualify). However, people who live in Connecticut and Kentucky must refinance a minimum of $15,001, and those who live in Pennsylvania must refinance a minimum of $25,001.

Residents of Mississippi, Montana and Washington, D.C., aren’t eligible for medical and dental resident student loan refinancing from SoFi.

There are also other general eligibility and underwriting requirements.

Where SoFi may fall short

Although SoFi offers the potential lowest APR and a variety of interest-rate types and loan terms, it may not be the best fit for everyone.

One potential drawback is that you can only make $100 monthly payments for up to 54 months, after which you’ll have to make full interest and principal payments. However, some residency and fellowship programs last longer than 54 months.

You can apply for refinancing with SoFi as soon as you match with your residency or fellowship program. But you’ll lose any grace periods your loans have and must start making $100 monthly payments once you get your new SoFi loan.

Laurel Road student loan refinancing for medical residents

Laurel Road is a Connecticut-based bank and online lender. Originally named Darien Rowayton Bank, the bank rebranded as Laurel Road in April 2018. Laurel Road offers student loan refinancing to students and parents, and it has a special product for doctors and dentists who are in a residency or fellowship program.

Why we like Laurel Road

With Laurel Road, you can apply to refinance your student loans as soon as you’re matched with a residency program. Laurel Road may honor your student loans’ grace periods, so you could lock in a lower interest rate as soon as you match and still delay making payments until after graduation.

You can choose from four loan terms — seven, 10, 15 or 20 years — and can pick between a variable-rate or a fixed-rate loan. Laurel Road also lets you prequalify with a soft credit pull, which allows you see estimated loan terms without hurting your credit.

Laurel Road may let you make monthly payments as low as $100 while you’re a resident or fellow, including up to six months after finishing your residency or fellowship.

Eligibility requirements

You must be a U.S. citizen or permanent resident with a valid I-551 card and have eligible student loans that are in their grace period or repayment. You’ll also need to pass Laurel Road’s credit check and underwriting requirements.

Laurel Road can refinance medical school loans in all 50 states, as well as Washington and Puerto Rico. You’ll need to refinance at least $5,000 worth of debt, and you can refinance up to your total outstanding federal and private student loan balance.

Where Laurel Road may fall short

Based on the rate ranges listed above, you may be able to qualify for a lower interest rate at other lenders. Laurel Road also doesn’t offer the $100 minimum monthly payment to all borrowers.

Beyond that, there aren’t any clear downsides to Laurel Road’s student loan refinancing for medical residents offering. However, it’s still generally a good idea to shop around and compare your loan offers before deciding which lender to use.

LinkCapital medical resident refinance loan program

LinkCapital is an online lender that focuses on health care professionals. It offers student loan refinancing to medical professionals and has two student loan refinancing products for medical residents.

The standard resident refinancing loan is for graduates who have only completed one year their residency program. The contracted resident loan is for residents and fellows who are in their last year of training and have a signed contract to start working within the next 12 months.

Why we like LinkCapital

LinkCapital’s standard residency refinance program lets residents make $75 minimum monthly payments for up to up to 72 months while they’re in an eligible residency or fellowship program. The contracted resident refinance programs lets you make $75 monthly payments for up to 12 months. You also may be able to continue making $75 monthly payments during a three-month post-training grace period with either program.

If you refinance your student loans with LinkCapital’s standard resident refinance product, you could receive an automatic interest rate reduction after finishing your residency program.

Eligibility requirements

You must graduate with a medical professional master’s or doctorate degree and complete at least one year of your residency program before you can refinance your student loans with LinkCapital. You’ll also have to pass a credit check and be a U.S. citizen.

Although you don’t have to refinance all your student loans, you must refinance at least $40,000 in eligible student loans with LinkCapital.

Where LinkCapital may fall short

LinkCapital only offers fixed-rate loans. While fixed-rate loans are less risky than variable-rate loans because their interest rate can’t change in the future, they also generally have a higher starting interest rate than variable-rate loans.

The minimum loan requirement may be too high for some applicants, particularly if they’re only looking to refinance their private student loans.

You also have to wait until the end of your first year of residency before you can refinance your student loans. You may be able to save money by refinancing your loans with a different lender before that point.

Unlike some of the other lenders on this list, LinkCapital doesn’t offer an option to check your eligibility or estimated loan offer with a soft credit pull.

Splash Financial medical resident and fellow refinancing

Another online lender, Splash Financial offers student loan refinancing and medical resident student loan refinancing.

Why we like Splash Financial

Splash Financial lets borrowers make $1 monthly payments during an eligible residency or fellowship program. You can continue making the $1 monthly payments for up to 84 months, the longest advertised partial-payment period offered by the resident refinance loans we compared.

The high end of the advertised APR is relatively low compared with competitors’ fixed-rate medical residency refinance loans.

Eligibility requirements

You must start your residency program before you can apply for student loan refinancing with Splash Financial. Approval for refinancing, and your terms, will depend on your creditworthiness.

To refinance your student loans with Splash Financial, you must refinance at least $25,001 and no more than $346,000 in eligible federal and private student loans.

Where Splash Financial may fall short

Splash Financial only offers fixed-rate loans for medical residents.

Splash Financial only offers loans with a 10-year term, which begins after you finish your residency and fellowship programs. Other lenders let you choose from a variety of loan terms, which can influence your interest rate and monthly payments.

Unlike other lenders, Splash Financial doesn’t offer pre-approval with a soft credit check.

Additional options for refinancing med school loans

In addition to the medical residency student loan refinancing programs, you may want to consider refinancing your student loans with a non-resident-specific program from one of the lenders below. Non-resident programs won’t let you make lower monthly payments during your residency, but they could still lower your interest rate and monthly payment.

LenderTransparency ScoreMax TermFixed APRVariable APRMax Loan Amount 
SoFiA+

20


Years

3.25%% - 7.13%%


Fixed Rate*

2.56%% - 7.40%%


Variable Rate*

No Max


Undergrad/Grad
Max Loan

LEARN MORE Secured

on SoFi’s secure website

earnestA+

20


Years

3.25%% - 6.32%%


Fixed Rate

2.57%% - 5.87%%


Variable Rate

No Max


Undergrad/Grad
Max Loan

LEARN MORE Secured

on Earnest’s secure website

commonbond A+

20


Years

3.20%% - 7.25%%


Fixed Rate

2.54%% - 7.41%%


Variable Rate

No Max


Undergrad/Grad
Max Loan

LEARN MORE Secured

on CommonBond’s secure website

lendkey A+

20


Years

3.15%% - 8.12%%


Fixed Rate

2.58%% - 7.96%%


Variable Rate

$125k / $175k


Undergrad/Grad
Max Loan

LEARN MORE Secured

on LendKey’s secure website

A+

20


Years

3.37%% - 7.02%%


Fixed Rate

2.80%% - 5.90%%


Variable Rate

No Max


Undergrad/Grad
Max Loan

LEARN MORE Secured

on Laurel Road Bank’s secure website

A+

20


Years

3.50%% - 8.34%%


Fixed Rate

2.90%% - 8.00%%


Variable Rate

$90k / $350k


Undergraduate /
Graduate

LEARN MORE Secured

on Citizens Bank’s secure website

A+

20


Years

5.24%% - 8.24%%


Fixed Rate

4.74%% - 7.99%%


Variable Rate

$150k


Undergraduate /
Graduate

LEARN MORE Secured

on Discover Bank’s secure website

4 student loan mistakes residents make

As a medical student or resident, you have a lot on your plate already, and dealing with student loans could be down low on your priority list. Or, you may find yourself going along with whatever a friend or colleague does instead of considering all your options and choosing the path that’s best for your situation.

We’ve compiled a few of the common mistakes that residents and fellows might make when it comes to their student loans. Ryan Inman, a fee-only financial planner for physicians, also shared some insights into the best ways to deal with your loans, based on his experience working with residents and doctors.

1. Misunderstanding Public Service Loan Forgiveness requirements

The federal Public Service Loan Forgiveness (PSLF) program may forgive your remaining federal student loan balance after you make 120 qualified payments while working full time at an eligible employer, which may include government and nonprofit clinics and hospitals.

Inman said doctors could get confused about all the requirements for PSLF, or think they’re eligible simply because of where they work. If you took out private student loans, or if you refinanced your student loans with a private lender, those loans won’t be eligible. The program only applies to certain types of federal student loans.

In addition to reviewing the types of loans you have, you may want to apply for PSLF and resubmit an employment certification form every year to help ensure that your employer qualifies.

If you’re certain you want to use the PSLF program and you’re planning on working at an eligible employer for at least 10 years, you should also compare your federal loan repayment plan options.

“Make sure you choose the repayment plan that will allow you to qualify while paying the least amount on your loans every month,” said Inman. You can compare estimated monthly payments with this online tool.

2. Choosing the wrong federal repayment plan

Your federal student loans may be eligible for several different federal student loan repayment plans, including four income-driven repayment plans that base your monthly payments on your income, family size and where you live.

Choosing the plan that leads to the lowest monthly payment may be ideal if you have a tight budget, or you plan to go for PSLF. But if you don’t plan to get PSLF, perhaps because you want to work in a private practice, then the best repayment plan may not be so clear.

“Knowing that you aren’t going for PSLF, you should generally go with the plan that gives the largest interest subsidy, which is REPAYE,” said Inman, referring to the Revised Pay As You Earn plan.

With REPAYE, if your monthly payment doesn’t cover all the interest that accrues on your loan, the government will pay at least half of the difference between your monthly payment and the interest accrual.

“That could add up to tens of thousands of dollars if the loan balances are high enough,” said Inman, “and interest subsidies are not available through some other income-driven plans.”

3. Rushing into refinancing

Carefully consider the pros and cons of refinancing federal student loans. Once you refinance your federal loans, you’ll lose access to federal repayment plans and forgiveness, cancellation and discharge programs. Private student loans already aren’t eligible for these plans or programs, so there’s potentially less to lose by refinancing those loans.

If you do decide to refinance, remember that you don’t need to refinance all your loans. You can pick and choose, and refinance the ones that have the highest interest rates.

Also, before rushing and choosing a variable-rate loan because it offers a lower initial interest rate, consider how rising interest rates could affect your payments and budget. Inman said, “In this low-interest-rate environment, fixed rates are relatively cheap and may be the best option for a new physician.” He thinks variable-rate loans generally only make sense if you plan to pay off the loan within five years.

4. Not shopping before refinancing

Inman said many physicians either don’t have the time to shop around when they’re refinancing their student loans or they aren’t interested in the fine print. But this can be a big mistake. “Shopping a few companies for the best rates is critical if you want to make sure you’re getting the best deal,” said Inman.

You could compare many details, such as the fees that the lenders charge. The four resident-specific programs above don’t have origination or disbursement fees, but some other refinancing companies might charge these.

You can also compare lenders’ other benefits or drawbacks, such as the interest-rate types they offer, the length of their loan terms, repayment-plan options while you’re a resident and how they handle cosigners.

Once you’ve compared all the terms, you can submit applications with several lenders to see which one offers you the lowest interest rate. While a loan application can hurt your credit score, some credit scoring models count multiple student loan applications within a short period of time as a single hard inquiry, allowing you to apply with several companies to see which will save you the most money.

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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 Loans in 2018

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

Student loans are loans that you take out to help pay for educational expenses, such as tuition, fees, room, board, equipment and transportation to and from school. This guide covers the ins and outs of federal and private student loans, explains how to apply for student loans, discusses which option may be best for your circumstances and offers several alternatives to borrowing money.

PART I: Understanding student loans

As with other types of debt, you must agree to repay the money, plus interest.

However, student loans can differ from other types of loans. They may have less stringent credit or income requirements for students, and you may be able to delay making payments until after you leave school.

How do student loans work?

You can apply for a student loan from the federal government or from a private lender. The eligibility requirements and application process (discussed in detail later) are different for federal and private student loans, but the overall student loan process can be similar.

After applying and getting approved for a student loan, the lender will often send the money directly to your school. The school applies the money to your account to pay for tuition, fees and other expenses. If there’s money left over, the school will issue you a refund which you can use for additional educational expenses, such as off-campus housing and food. You can also return the excess funds.

With federal loans, you’ll need to reapply for financial aid once every year to remain eligible; the policies of private lenders vary. You may need to reapply each term, apply once for an academic year or apply once and fund multiple years. However, with both federal and private student loans, the loan will generally be split up and disbursed (i.e. sent) to the school at the beginning of each term.

Terms and repayment options

Your repayment term — the amount of time you have to repay the loan — and repayment plans can vary depending on the type of student loan. Many student loans, including federal student loans, let you defer payments while you’re enrolled at least a half-time in an eligible program, as well as during a six-month grace period after you graduate, leave school or drop below a half-time schedule. However, some private lenders require borrowers to make at least interest-only or $25 monthly payments once the loan is disbursed.

Federal student loans automatically enter a 10-year standard repayment plan. However, you can switch to a different plan for free. Other repayment plans may give you more time to repay your loans, which can decrease your monthly payments but lead to paying more interest over the loan’s lifetime.

You may also be eligible for an income-driven plan that bases your monthly payments on your income, family size and where you live. An income-driven plan could even lead to $0 monthly payments, and the remainder of your loan balance might be forgiven after you make monthly payments for 20 to 25 years. There are also federal student loan forgiveness and cancellation programs.

Private loans aren’t eligible for federal repayment, forgiveness or cancellation programs, and often you’ll choose your loan’s term or be assigned a term when you apply. Some lenders have different repayment plans, but with others the only way to change your private loan’s term is to refinance the student loan.

Interest rates

The interest rate on your student loan can impact your overall cost of borrowing and your monthly payment amount. It’s important to understand how a lender determines your interest rate, how interest accrues on your loan and what your options are before agreeing to take out a student loan.

Congress sets the interest rate on federal student loans. All federal student loans have a fixed interest rate, meaning the rate won’t change once the loan is disbursed.

By contrast, private student loans’ interest rates can vary greatly. Lenders may offer different rate ranges, and the rate you receive will depend on your creditworthiness (or the credit of your cosigner). Private lenders also offer fixed- and variable-rate loans. Variable-rate loans are riskier because the interest rate can change in the future, but they can be enticing because they often offer a lower initial interest rate than fixed-rate loans.

Many federal and private student loans begin accruing interest as soon as the loan is disbursed. The interest will continue to accrue while your loans are in deferment or a grace period, and then it will be added to your loan’s principal balance (i.e. capitalized) once you enter repayment. When this happens, more interest may accrue each month, as your interest rate will now apply to a higher principal loan balance.

PART II: Types of student loans

Students loans fall into one of two general categories: federal or private student loans.

Federal student loans

Federal student loans can offer borrowers simplicity and savings compared to private student loans. Although there are differences depending on the type of federal student loan or the degree the borrower is pursuing, federal student loans have uniform eligibility requirements, interest rates, loan terms, benefits and repayment options for every borrower.

Private student loans

On the other hand, private student loans — and their eligibility requirements, interest rates, loan terms, benefits and drawbacks — can vary depending on the lender. Carefully research different companies’ policies and the fine print on their loan agreements before agreeing to take out a loan.

Often, federal student loans are the best first choice for borrowers because of their standard terms and low barrier to entry. Even if you could get a lower rate with a private student loan, federal loans’ flexible repayment options and eligibility for federal repayment plans and forgiveness, cancellation, deferment and forbearance programs can make them a better option. Private lenders may not offer or guarantee similar options.

PART III: Federal student loan options

What is a federal student loan?

A federal student loan is a loan that’s funded by the federal government. There are currently three types of federal student loans available to new borrowers through the William D. Ford Federal Direct Loan (Direct Loan) Program: Direct Subsidized Loans, Direct Unsubsidized Loans and Direct PLUS Loans.

There are also Direct Consolidation Loans, which allow borrowers to combine multiple federal student loans. Previous borrowers may also be repaying other federal student loans that are no longer available to new borrowers.

All three types of federal student loans have the same basic eligibility requirements, including being enrolled at least half-time or accepted into an eligible degree or certificate program. In addition, the application process always starts with the Free Application for Federal Student Aid (FAFSA).

However, these loans are not identical. They may have different annual loan limits, aggregate loan limits and credit requirements. Loan details, such as eligibility for different repayment plans, can also vary depending on the borrower — whether they are an undergraduate, graduate or professional student, or the parent of a student.

The loans may have different interest rates and disbursement fees, a fee that’s subtracted from the amount that’s sent to your school. These fees depend on the loan type, the type of borrower and when the loan is disbursed.

The federal student loan interest rates in this guide are for federal loans disbursed from July 1, 2017 to June 30, 2018. The disbursement fees apply to federal student loans disbursed from Sept. 30, 2017 to Sept. 30, 2018.

Direct Subsidized Loan

 

Interest rate

Disbursement fee

Annual loan limit

Aggregate loan limit

Credit needed

Direct Subsidized Loans

4.45%

1.066%

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

$23,000

None

How does it work? Direct Subsidized Loans are only available to undergraduate students, and only if their school determines they have a financial need based on the school’s cost of attendance and their expected family contribution. The Direct Subsidized Loan loan limit increases during your second and third years. However, your offer could decrease if your financial need decreases.

The subsidy part comes into play after your loan is disbursed. Although the loan starts to accrue interest right away, the U.S. Department of Education will pay the interest while you’re in school at least half-time, during your grace period and if you later put the loan into deferment.

Pros and cons. If you plan to take out a federal student loan, the Direct Subsidized Loan’s relatively low disbursement fee and interest rate, and the subsidization, makes it the best option in most cases. Of course, it’s only an option if you qualify — the biggest drawback is that you may not be able to borrow enough to pay for all your educational expenses.

Direct Unsubsidized Loan

Direct Unsubsidized Loans

Interest rate

Disbursement fee

Annual loan limit

Aggregate loan limit

Credit needed

For dependent undergraduate students

4.45%

1.066%

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

The annual loan limits include Direct Subsidized Loans.

$31,000, including up to $23,000 in Direct Subsidized Loans.

None

For independent undergrads and dependent undergrads after a parent gets denied for a PLUS Loan

4.45%

1.066%

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

The annual loan limits include Direct Subsidized Loans.

$57,500, including up to $23,000 in Direct Subsidized Loans.

None

For graduate and professional students

6%

1.066%

$20,500

$138,500, including up to $65,500 in Direct Subsidized Loans.

None

How does it work? Undergraduate and graduate students may be able to borrow money with Direct Unsubsidized Loans, even if they don’t have a demonstrated financial need. The loans also have higher annual and aggregate loan limits than Direct Subsidized Loans, and the limit varies depending on your degree type and dependency status.

However, the loan limits include debt from both Direct Subsidized Loans and Direct Unsubsidized Loans loans. You also might not be offered the maximum amount, as your offer depends on several factors — these can include your school’s cost of attendance, your family’s expected contribution and how much money you’ve received from other sources of financial aid, such as scholarships.

Pros and cons. The higher loan limits and lack of a financial need requirement may make it easier to qualify for a Direct Unsubsidized Loan; for undergraduate students, these loans have the same interest rate and disbursement fee as the subsidized version. However, the biggest drawback may be the lack of the subsidy. Without the subsidy, you could leave school with significantly more debt than you initially borrowed, unless you make interest payments while you’re in school and during the grace period.

For graduate and professional students who aren’t eligible for Direct Subsidized Loans, the Direct Unsubsidized Loans offer a lower interest rate and disbursement fee than grad PLUS loans. However, graduate and professional students may have already established their creditworthiness, and so might be able to save money with a private student loan.

Parent PLUS loan

 

Interest rate

Disbursement fee

Annual loan limit

Aggregate loan limit

Credit needed

Parent PLUS loan

7%

4.264%

No limit

No limit

No adverse credit history

How does it work? Parent PLUS loans are Direct PLUS Loans that a parent borrows to help a dependent child pay for school. Parent borrowers must meet many of the same basic eligibility requirements as student borrowers; however, parent PLUS loans also require a credit check. The credit check looks for an adverse credit history in your credit reports, such as a recent bankruptcy or outstanding delinquent debts.

If you don’t pass the credit check, you may still be able to take out a parent PLUS loan if you have a creditworthy endorser (i.e. cosigner) or appeal the decision. Your child may also be able to take out additional Direct Unsubsidized Loans if you’re unable to qualify for a parent PLUS loan.

Loan payments begin immediately after the parent PLUS loan is disbursed, unless parents request a deferment. If you request a deferment, you may not have to make payments as long as your child is enrolled at least half-time and for the six months after they leave school or begin taking a less-than-half-time schedule. However, interest will accrue during the deferral period.

Pros and cons. As with other federal student loans, parent PLUS loan are eligible for different federal repayment plans, and forgiveness and cancellation programs. However, parent PLUS loans are only eligible for one of the four income-driven plans: the income-contingent plan — notably, this is only an option after the parent PLUS loan is consolidated with a Direct Consolidation Loan.

Direct PLUS Loans, including parent PLUS loans, also have the highest interest rate and disbursement fee of the federal student loans. The interest rate and fees may still be lower than what you could receive with a private student loan, but you should compare your options.

Another potential con is that parents can’t transfer the loan to their children, although a child may be able to take over the debt if they can qualify to refinance student loans with a private lender. The debt from the parent PLUS loan could also increase your debt-to-income ratio, which may affect your eligibility for other loans or financial products.

Grad PLUS loan

 

Interest rate

Disbursement fee

Annual loan limit

Aggregate loan limit

Credit needed

Grad PLUS loan

7%

4.264%

No limit

No limit

No adverse credit history

How does it work? Graduate and professional students can use grad PLUS loans to pay for educational expenses. They have the same fees, limits and credit-check requirements as parent PLUS loans (both loans are Direct PLUS Loan), but there are a few differences.

Grad PLUS loans are eligible for all four income-driven repayment plans, and unlike parent PLUS loans, grad PLUS loans are automatically placed into deferment until six months after you drop below a half-time schedule, graduate or leave school. However, you can make early payments if you want.

Pros and cons. Grad PLUS loans don’t have pre-set annual or aggregate loan limits; you can also borrow up to your school’s cost of attendance, minus your other financial aid awards. This means you may be able to fund all your educational costs with grad PLUS loans — but that doesn’t mean a grad PLUS loan should necessarily be your first choice.

Direct Unsubsidized Loans will have a lower interest rate and disbursement fee than grad PLUS loans, and they offer the same access to federal repayment plans and programs. You may also want to compare private student loans offers to your grad PLUS loan rates to determine which will save you the most money.

PART IV: Private student loans

What is a private student loan?

A private student loan is an educational loan issued by a non-government lender. As with federal student loans, borrowers must use the money for educational expenses.

Some federal laws apply to both federal and private student loans. For example, lenders aren’t allowed to charge you a fee for paying off your loans early — however, it can be difficult to discharge a federal or private student loan during a bankruptcy.

There are also important differences between federal and private student loans, and several pros and cons, to consider before taking out a private student loan.

Pros:

  • High loan limits. The federal student loans with the lowest interest rates also have pre-set annual and aggregate loan limits. By contrast, private student lenders may let you borrow up to your school’s cost of attendance.
  • Potentially lower interest rates. Creditworthy borrowers may qualify for a lower interest rate with a private lender than they’d receive with a federal student loan.
  • No funding fee. Federal student loans often have a disbursement fee; private student lenders generally don’t charge a disbursement or origination fee.
  • Variable-rate options. Private lenders may offer variable-rate loans, which generally start with a lower interest rate than fixed-rate loans. However, there’s a risk the rate will increase in the future.
  • Interest rate discounts. Federal and private student loans often offer a 0.25 percent interest rate discount if you sign up for autopay. Private lenders may offer additional discount opportunities.

Cons:

  • Credit requirements. Your income, credit score and other factors could impact your eligibility, interest rate and maximum loan amount.
  • No access to federal benefits or programs. Private student loans aren’t eligible for federal repayment plans or subsidies. They also aren’t eligible for forgiveness, cancellation, discharge, forbearance or deferment programs.
  • Fewer hardship options. Private lenders might not offer borrowers forbearance or deferment options when borrowers have trouble making payments.
  • Quicker defaults. Private student loans may default sooner than federal student loans if you stop making payments. When a loan defaults, you’ll immediately owe the entire loan balance. Federal student loans also offer ways to get your loan out of default and back onto a repayment plan, but private lenders may not give you similar options.
  • Limitations with loan repayment assistance programs. Some government and private student loan repayment assistance programs won’t help you repay private student loans.
  • Varied discharge policies. Private lenders may not discharge your loan balance if you become permanently and totally disabled or die. As a result, you may leave your estate or cosigner with a loan balance to pay. Federal student loans can be discharged when the borrower, or student in the case of parent PLUS loans, permanently and totally disabled or dies.

Where can you find private student loans?

Banks, credit unions, online lenders, schools and states all offer private student loans to students, and sometimes to students’ parents. Your school’s financial aid office may be able to recommend several options, but you can also look online or speak to friends and family members to get recommendations.

There’s no single best private student lender, and you should compare different lenders’ loan types, loan terms, repayment options, fees, discounts and fine-print restrictions, like if they let you release a cosigner. You could also read others’ reviews and recommendations to determine which private student lenders might be best for your situation.

Once you’ve narrowed down your list, you can then apply for a student loan with several lenders and compare your offers to determine which loan is best.

Who are private student loans best for?

Federal student loans are the best place to start for most borrowers, but there are some students who may want or need to take out private student loans. For example, if you’ve reached your annual or aggregate loan limit with federal student loans and you still need more money for school, you may want to consider a private student loan.

Parents and graduate or professional students who have established their creditworthiness may also want to consider private student loans as an alternative to federal student loans. Their federal loans have a higher interest rate and disbursement fee than undergraduate students’ federal loans, and older applicants may be able to qualify for a lower interest rate with a private lender. However, consider the big picture as there may be other drawbacks, such as lack of access to federal forgiveness programs and repayment plans.

PART V: How to get a student loan

Applying for federal student loans

You must complete and submit a Free Application for Federal Student Aid (FAFSA) every year to apply for, and remain eligible for, federal financial aid.

MagnifyMoney has a detailed guide on filling out the FAFSA. You can also find a PDF guide from the Education Department and free phone support at 1-800-4-FED-AID (1-800-433-3243).

Submitting your FAFSA early can help your financial aid situation, as some schools and states offer financial aid on a first-come, first-served basis based on information in your FAFSA. Even if you don’t plan on taking out loans, the FAFSA is a requirement for some grant and scholarship opportunities.

To begin the FAFSA process online, go to fsaid.ed.gov and create your FSA ID. The FSA ID will be your username and password for signing into your account and you’ll also use it to sign loan documents. Dependent students also need a parent to create an FSA ID, which the parent will use to sign the child’s FAFSA.

After you’ve created your FSA ID, you can start the online application at fafsa.gov. To complete the application, you’ll need:

  • Your Social Security number or alien registration number
  • Income-related forms, including recent W-2s and federal income tax returns
  • Copies of your bank, brokerage, and other financial account statements
  • Documents related to other income
  • If you’re a dependent student or you’re married, you may also need your parents’ or spouse’s Social Security number and income-related forms.

It generally takes under an hour to complete the FAFSA. Returning students will send the form to their school, while first-year students can send their FAFSA to the schools they’re considering.

After submitting your FAFSA, you will get a Student Aid Report (SAR) by mail or email; you should review this document to ensure all your information is correct. The SAR will list your expected family contribution amount, along with your FAFSA information. Schools and state agencies use this data to determine your financial aid eligibility and award amounts, and a mistake could lead to you being offered less aid.

Your school, or the schools you’re considering, will then send you an aid offer that lists the financial aid types and amounts that you can accept. Your aid package may include a combination of grants, scholarships, work-study funds, and/or several types of student loans.

You can choose which aid package offer to accept and how much money to borrow if you’re taking out a loan; the process can vary depending on your school. If you’re accepting a federal student loan offer, you will have to sign a promissory note, or loan contract. Keep in mind that you do not have to accept the full amount of federal loans you’re eligible to borrow — do the math to avoid unnecessary debt.

Applying for private student loans

Private student lenders may have different applications, and the application processes could vary. However, you can find some lenders that have a fairly simple and straightforward online application.

You won’t need to complete the FAFSA to apply for a private student loan, but you may want to gather similar personal and financial documents — you’ll likely need information from these documents during the application process, and you might have to submit copies for verification purposes.

You may also need personal and financial information from a cosigner if you’re adding one to your application; in some instances, the cosigner may be able to log in and submit his or her information directly.

If your application is approved, you might be able to pick from several loan terms with varying interest rates. Or, the lender may make you an offer and you can choose to accept or decline it.

At some point during the application process, the lender could contact your school to verify your eligibility and the school’s cost of attendance, which can determine your maximum loan limit. Alternatively, you could be asked to self-certify these numbers.

Alternatives to student loans

A loan shouldn’t necessarily be your first choice when it comes to financial aid. Scholarships and grants can offer money for school that you don’t need to pay back. Graduate or professional students may be able to get “free” money from fellowships. And you could look into different work opportunities.

If you submitted a FAFSA, you may get a work-study award as part of your financial aid offer. The federal work-study program pays a portion of work-study recipient’s wages, which could make it easier for you to find a job while you’re at school. However, only certain employers are eligible, such as the school, nonprofits and some for-profits if the work you’ll do aligns with your major.

Graduate and professional students may have opportunities to get an assistantship at the school. Depending on the program, you could receive a stipend, tuition waivers or even benefits in exchange for working part-time.

You can also look for work opportunities that aren’t part of a financial aid program. A part-time job while you’re at school, or a full-time job during the summers, might not earn you enough to cover all your educational costs — but every dollar you earn and put towards your education is one less dollar you need to borrow (and pay interest on).

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Louis DeNicola
Louis DeNicola |

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

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Best of, College Students and Recent Grads, Life Events

How to Find the Right 529 Savings Plan for You

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

It is never too early to think about saving for college, and a 529 savings plan can help you do just that.

No other savings or investment account offers the tax breaks that a 529 college savings plan offers, which means that every dollar you contribute can cover a greater share of college costs. That’s especially helpful considering the average net price of a private nonprofit university came in at $26,740 for the 2017-18 school year, and the cost of college is on the rise.

But with almost every state offering a 529 savings plan, and with many offering more than one, it can be challenging to figure out which plan is right for you.

If you’re already well-versed in this savings tool, you can see our roundup of the best options here:

The truth is that contributing to a 529 savings plan isn’t always the right move. You may be better off using a different college savings account or even focusing on other financial responsibilities first.

This guide will help you sort through all of that. You’ll learn what a 529 college savings plan is, how it works, how to choose the right plan for you and alternatives you should consider.

What is a 529 college savings plan and how does it work?

A 529 college savings plan is an investment account that offers a number of tax breaks when the money is used for qualified education expenses:

  • Contributions are made after taxes, though there are a number of states that allow either a deduction or a credit for state income tax purposes.
  • Your money grows tax-free while it is in the account.
  • Money can be withdrawn tax-free for qualified education expenses, which typically includes tuition at any eligible school from elementary onward, as well as fees, books and room and board at an eligible higher education institution. If you withdraw the money for any other type of expense, the earnings will be taxed and subject to a 10% penalty.

529 savings plans offer a preselected set of mutual funds and your account balance will rise and fall based on your contributions and the performance of your chosen investments. Most 529 savings plans also offer age-based investments that provide an all-in-one portfolio and automatically become more conservative as your child approaches college.

529 savings plans are administered by states, with every state except for Wyoming offering at least one plan. However, you do not have to use your home state’s plan, and in some cases, you may be better off going elsewhere.

Regardless of which 529 savings plan you choose, you can withdraw the money tax-free for expenses incurred at any eligible school in any state, and even for certain international schools.

Anyone can open a 529 savings plan and name anyone else, including himself, as the beneficiary. You can also change the beneficiary later on, as long as the new beneficiary is related to the old beneficiary.

In short, 529 savings plans allow you to save and invest for future education expenses in a tax-advantaged way.

Prepaid tuition plans vs. savings plans

In addition to 529 savings plans, some states also offer prepaid tuition plans that may be advantageous in certain situations.

Prepaid tuition plans allow you to buy units that each typically cover 1% of one year’s worth of college tuition at a public, in-state university. This essentially allows you to lock in the current cost of college, protecting you against the risk that tuition costs will continue to rise.

“The huge part of a prepaid tuition plan is that it’s guaranteed,” said Angie Furubotten-LaRosee, fee-only CFP and founder of Avea Financial Planning. “With a traditional 529 plan you have to worry about market fluctuations, and with these you don’t.”

There are downsides, though. The biggest of which is that while you can usually get your money back if your child wants to go to a private college or go out of state, the return is typically much smaller than what you would get from attending an in-state public school.

This is in contrast to a 529 savings plan, which allows you to use the money you’ve earned at any eligible institution.

“Prepaid plans are ideal for parents who have a good idea of where their child will attend college and who are willing to give up investment flexibility to lock in those costs,” said Kathleen Boyd, CFP and wealth adviser at Navigoe. “However, if you’re uncertain about your child’s future college plans, then a 529 savings plan may be the ideal option.”

Benefits of a 529 savings plan

1. Tax breaks

The tax breaks are the main advantage of 529 savings plans over other savings and investments accounts.

The growth and the ability to withdraw the money all tax-free for qualified education expenses mean that every dollar you contribute can multiply faster and cover a greater portion of your education expenses.

And if you live in one of the states that offers a state income tax break for contributions, you can potentially afford to make a bigger contribution without affecting your monthly budget, allowing you to get an even bigger head start.

“If you are in a state that offers good benefits, and some states even offer matching funds, it really is the right choice at that point because you aren’t going to get those benefits from any other option,” said Nannette Kamien, CFP and principal of Inspiration Financial Planning, a fee-only financial planning firm with expertise in helping families prepare for college financially.

2. High contribution limits

If you’d like to save a lot of money for education, a 529 savings plan will allow you to do it.

There is no annual contribution limit, though contributions are subject to gift tax rules, which means that you can effectively contribute $15,000 per year, per child, without exceeding the 2018 gift tax exemption. That limit is applied per donor, meaning that parents can combine their limits to contribute up to $30,000 per year, per child.

The tax code also allows you spread excess contributions over a 5-year period, meaning that as a couple, you could potentially contribute up to $150,000 in a single year without any gift tax consequences.

Most 529 savings plans do have lifetime contribution limits, but those limits are very high. For example, New York allows you to contribute up to $520,000 to any single beneficiary, and Utah allows up to $446,000 per beneficiary.

Additionally, there are no income restrictions on contributions, so anyone can take advantage of a 529 savings plan no matter how much money you make.

3. Mindset and accountability

One of the biggest benefits of contributing to a 529 plan is that it establishes saving for college as a real goal with progress that can be tracked along the way.

“Just having the 529 plan in and of itself solidifies that it’s an important priority for you and your family,” said Furubotten-LaRosee. “It’s now a budget item, it’s identified as money that’s earmarked for college, and I think that setting that habit is half the battle for a lot of people.”

4. Potential for long-term returns

By offering mutual funds that are invested in the stock and bond markets, 529 savings plans allow you to participate in the long-term, compounding returns that those investments offer. This can be especially powerful if you start when your child is young.

“Families who can invest over the long term are prime candidates for 529s,” said Boyd. “The earlier you start, the more time you have to take advantage of compound returns the markets provide over time.”

5. Low impact on financial aid

Many people are hesitant to save for college because of the potential impact on financial aid, but 529 savings plans have a relatively low impact.

As long as the account is held in a parent’s name, only up to 5.64% of the money in a 529 savings plan will be counted on the FAFSA. For example, if you have $100,000 in your 529 savings plan, only $5,640 will be considered for financial aid purposes.

In other words, there’s very little penalty for having money in a 529 savings plan. And the benefits of saving the money ahead of time will almost always outweigh any small decrease in financial aid.

6. Ability to change beneficiaries

529 savings plans allow a reasonable amount of flexibility when it comes to changing the beneficiary of the funds.

You are allowed to change the beneficiary as often as you like, and the only restriction is that the new beneficiary must be a family member of the old beneficiary. For the purposes of 529 plans, “family members” include siblings and stepsiblings, children, stepchildren, and grandchildren, parents, grandparents, nieces, nephews, first cousins and even in-laws.

All of which means that if the money isn’t needed for the original beneficiary, you can simply use it for another family member.

Pitfalls of 529 savings plans

1. Taxes and penalties if not used for education

The biggest downside to using a 529 savings plan is that if you withdraw money for anything other than qualified education expenses, the earnings will be subject to taxes and a 10% penalty.

This is one reason to be careful about over-contributing, and also to not contribute money that may be needed for other financial goals.

“That’s where that overarching financial plan comes into play,” said Furubotten-LaRosee. “You can always use other vehicles, like a Roth IRA, that come with more flexibility.”

2. Investment options can be narrow and confusing

Each 529 plan offers its own preselected set of investment options, and those options vary widely in terms of what they invest in and how much they cost. Sorting through all of those options and making the best choices for your needs can be difficult.

“Sometimes I see that parents are afraid to really invest the money and they don’t understand what the different investment options mean,” said Kamien. “Sometimes they get stuck in investments that are higher cost, and that really eats into the earnings that they could have gotten.”

Kamien said that she encourages people to look for “age-based index” options. These funds provide an all-in-one portfolio that automatically gets more conservative as your child approaches college, and they build the portfolio with index funds, which are generally low cost and have been shown to outperform actively managed funds the majority of the time.

3. Other financial responsibilities may be more important

While saving for college is a great goal, it’s often a good idea to handle other financial responsibilities first. This is especially important to consider before contributing money to a 529 savings plan because of the taxes and penalties on nonqualified withdrawals.

“I certainly would caution a parent or grandparent against sacrificing their own financial goals like saving for an emergency fund, paying off debt or retirement plans to contribute to a 529 plan,” said Boyd. “Saving for education is very important, but it’s also a luxury and a privilege for your children, and it shouldn’t come above your own financial security.”

How to compare 529 savings plans

When it comes to choosing a 529 savings plan, start by looking at the potential tax breaks offered by your home state’s plan, said Fred Amrein, a college funding expert and the founder of EFC Plus.

“You need to understand your in-state plan first, and if the beneficiary is in another state you need to understand their state’s plan next,” Amrein said. “In some cases, it may be more beneficial to gift the money to the beneficiary or the beneficiary’s parents and let them contribute the money.”

Even if your state does offer tax breaks, it’s not a given that your home state’s plan is the best option. There are a few more major variables you should consider as you compare 529 savings plans.

Here are the criteria we used to construct our list of best 529 plans.

Out of state

We evaluated each 529 savings plan from the perspective of an out-of-state resident. That means that state income tax breaks were not considered and that any 529 plans that are unavailable to out-of-state residents were ruled out.

Fees

Research has shown that cost is the best predictor of future investment performance, with lower costs leading to better returns. For that reason, we preferred 529 plans that minimized both investment and administrative fees.

We also filtered out adviser-selling 529 plans, which are specifically designed to be sold and managed by financial advisers and have higher fees in the form of commissions and management fees. Given that financial advisers can also advise on 529 plans that are sold directly to the consumer, and therefore cost less, we limited our search to those direct-sold plans.

Investment options

Investment portfolios built with index funds have been shown to outperform actively managed portfolios 80%-90% of the time, and we therefore only included 529 savings plans that offer index funds.

We also limited our list to 529 savings plans that offer age-based portfolios constructed with index funds, since these all-in-one portfolios simplify the investment process and automatically decrease your investment risk as your child nears college age.

Finally, we preferred 529 savings plans that offered access to individual index funds that allow investors to build custom portfolios if they so choose.

Minimum investment

Finding room in your budget for college savings can be difficult, so we did not consider any 529 savings plan that required a significant minimum investment.

None of the plans listed below require more than a $50 initial investment.

Other features

While most 529 savings plans offer most of the same basic features, we did consider additional features offered by certain plans that may be helpful for some investors.

The nine best 529 savings plans

Fidelity Arizona College Savings Plan

Arizona’s College Savings
Arizona’s College Savings Plan is managed by Fidelity, just like Delaware, Massachusetts and New Hampshire, which also appear on this list. Each of these states offers essentially the same plan.The index funds are high quality and low cost, and there are no other significant fees, though the presence of higher-cost actively managed funds could lead some people to pay more than they have to.

  • Investment options: Age-based portfolios constructed with Fidelity index funds, as well as access to individual Fidelity index funds if you’d like to customize your portfolio.
  • Fees: Age-based index funds range from 0.13%-0.16% per year. Individual index funds range from 0.13%-0.18% per year. There are no account maintenance fees.
  • Minimum initial investment: $15 with enrollment in automatic contributions. $50 otherwise.
  • Other features: None of note.
  • Website: https://www.fidelity.com/go/529-arizona/overview

California ScholarShare 529

ScholarShare 529
Managed by TIAA-CREF, California offers a selection of both index funds and actively managed funds. The lineup of passive age-based funds and individual index funds is strong.
  • Investment options: Age-based portfolios constructed with TIAA-CREF index funds, as well as access to individual TIAA-CREF index funds, if you’d like to customize your portfolio.
  • Fees: Age-based index funds range from 0.11%-0.17% per year. Individual index funds range from 0.08%-0.20% per year. There are no account maintenance fees.
  • Minimum initial investment: $15 with enrollment in automatic contributions. $25 otherwise.
  • Other features: None of note.
  • Website: https://www.scholarshare529.com

Delaware College Investment Plan

Delaware College Investment Plan

Delaware’s College Investment Plan is managed by Fidelity, just like Arizona, Massachusetts and New Hampshire. These states offer essentially the same plan.

The index funds are high-quality and low-cost and there are no other significant fees. The plan does offer higher cost actively managed funds, which could lead some people to pay more than they have to.

  • Investment options: Age-based portfolios constructed with Fidelity index funds, as well as access to individual Fidelity index funds if you’d like to customize your portfolio.
  • Fees: Age-based index funds range from 0.13%-0.16% per year. Individual index funds range from 0.13%-0.18% per year. There are no account maintenance fees.
  • Minimum initial investment: $15 with enrollment in automatic contributions. $50 otherwise.
  • Other features: None of note.
  • Website: https://www.fidelity.com/go/529-delaware/overview

Illinois Bright Start Direct-Sold College Savings Program

Illinois Bright Start Direct-Sold College Savings Program
The index age-based funds use Vanguard mutual funds with some of the lowest fees offered by any 529 savings plan. Even the higher-cost “multi-firm” age-based funds cost less than most actively managed funds offered by other plans.

  • Investment options: Age-based portfolios constructed with Vanguard index funds, as well as access to individual Vanguard index funds and DFA funds — a highly respected group of mutual funds that are typically only available through financial advisers — if you’d like to customize your portfolio.
  • Fees: Age-based index funds range from 0.12%-0.15% per year. Individual Vanguard index funds range from 0.10%-0.18% per year. There are no account maintenance fees.
  • Minimum initial investment: None
  • Other features: None of note.
  • Website: https://www.brightstartsavings.com

College Savings Iowa

College Savings Iowa
Every investment offered within Iowa’s 529 savings plan is managed by Vanguard and costs just 0.20% per year. And with a strong lineup of both age-based portfolios and individual mutual funds, you have plenty of room to personalize your investment plan.

  • Investment options: Age-based portfolios constructed with Vanguard index funds, as well as access to individual Vanguard index funds if you’d like to customize your portfolio.
  • Fees: Every investment option costs 0.20% per year. There are no account maintenance fees.
  • Minimum initial investment: $15 with enrollment in automatic contributions. $25 otherwise.
  • Other features: None of note.
  • Website: https://www.collegesavingsiowa.com

Massachusetts U.Fund College Investing Plan

Massachusetts U.Fund College Investing Plan
Massachusetts U.Fund College Investing Plan is managed by Fidelity. The plan is essentially the same as Arizona’s, Delaware’s and New Hampshire’s.

It offers high-quality, low-cost index funds with no other significant fees, though the presence of higher cost actively-managed funds could lead some people to pay more than they have to.

  • Investment options: Age-based portfolios constructed with Fidelity index funds, as well as access to individual Fidelity index funds if you’d like to customize your portfolio.
  • Fees: Age-based index funds range from 0.13%-0.16% per year. Individual index funds range from 0.13%-0.18% per year. There are no account maintenance fees.
  • Minimum initial investment: $15 with enrollment in automatic contributions. $50 otherwise.
  • Other features: None of note.
  • Website: https://www.fidelity.com/529-plans/massachusetts

New Hampshire UNIQUE College Investing Plan

New Hampshire UNIQUE College Investing Plan
New Hampshire’s UNIQUE College Investing Plan is managed by Fidelity, just like Arizona, Delaware and Massachusetts. Each of these states’ plans are on this list and are basically the same.

New Hampshire’s plan offers high-quality, low-cost index funds with no other significant fees. However, the plan offers higher cost actively-managed funds, which could lead some people to pay more than they have to.

  • Investment options: Age-based portfolios constructed with Fidelity index funds, as well as access to individual Fidelity index funds if you’d like to customize your portfolio.
  • Fees: Age-based index funds range from 0.13%-0.16% per year. Individual index funds range from 0.13%-0.18% per year. There are no account maintenance fees.
  • Minimum initial investment: $15 with enrollment in automatic contributions. $50 otherwise.
  • Other features: None of note.
  • Website: https://www.fidelity.com/529-plans/new-hampshire

New York’s 529 College Savings Program

New York’s 529 College Savings Program
Like Iowa, New York’s 529 College Savings Program offers only Vanguard index funds and index age-based funds, and in this case, the cost of each fund is even lower at 0.15% per year.

If your priority is minimizing fees and accessing Vanguard funds, this is likely the plan for you.

  • Investment options: Age-based portfolios constructed with Vanguard index funds, as well as access to individual Vanguard index funds if you’d like to customize your portfolio.
  • Fees: Every investment option costs 0.15% per year. There are no account maintenance fees.
  • Minimum initial investment: $0.
  • Other features: None of note.
  • Website: https://www.nysaves.org

Utah my529

Utah my529

Utah’s my529 offers possibly the most noteworthy set of features of any 529 savings plan:

  1. You can create your own age-based portfolio from the underlying funds offered by the plan, which include Vanguard index funds as well as DFA funds that are typically only offered by financial advisers.
  2. If you are working with a financial adviser, you can give him or her access to your 529 plan in order to manage your investments.

The fees are slightly higher than the other 529 savings plans listed here — though they are still very low — but the investment capabilities are second to none.

  • Investment options: A wide variety of age-based portfolios, Vanguard index funds and DFA funds.
  • Fees: Age-based index funds range from 0.169%-0.202% per year. Vanguard individual index funds range from 0.22%-0.40% per year and DFA funds range from 0.37%-0.72% per year. There are no account maintenance fees.
  • Minimum initial investment: $0.
  • Other features: Customized age-based portfolios and financial adviser access.
  • Website: https://my529.org

How to enroll in a 529 savings plan

Once you know which 529 savings plan you want to use, it’s time to open an account and make your first contribution. And while every plan will have a slightly different process, there are a few steps that are likely to be similar across the board:

  1. Have the necessary information ready for the account owner:
    1. Social Security number
    2. Birth date
    3. Mailing address
    4. Physical address
    5. Bank account number and routing number for making contributions
  2. Have the necessary information ready for the beneficiary
    1. Social Security number
    2. Birth date
    3. Mailing address
    4. Physical address
  3. Read the program description, which can be found on the 529 plan’s website
  4. Choose an investment strategy. You can review the options on the 529 plan’s website and in the program description.
  5. Start the application process online or submit the appropriate paperwork.

How to use 529 plans to pay for K-12 private education

The recently passed Tax Cuts and Jobs Act expanded the flexibility of 529 savings plans by allowing investors to withdraw up to $10,000 per year, per child tax-free and penalty-free for tuition for elementary or secondary school.

This opens up more opportunities for parents to use 529 funds for their child’s education. But given how new the law is, it’s a good idea to proceed carefully.

According to Amrein, the tax implications of withdrawing 529 money for K-12 tuition are straightforward on the federal side but are yet to be determined on the state side.

“What a lot of states are dealing with is a lot of them had incentive programs for college contributions,” said Amrein. “What I’m hearing is some of the states are either going to withdraw that incentive or, if you use it for K-12 expenses, there may be a clawback provision that they can rescind that tax break you received for previous contributions.”

If you live in a state that offers tax breaks for 529 plan contributions, and if you’ve taken advantage of those tax breaks, you may want to speak to an accountant before using your 529 funds for K-12 tuition.

Alternatives to 529 savings plans

While the tax breaks offered by a 529 savings plan are hard to beat if you’re saving money specifically for education, there are a number of other savings and investment accounts that can be more advantageous, depending on the specifics of your situation.

Here are some of the major alternatives to consider.

Roth IRA

While Roth IRAs are technically retirement accounts, they have a few characteristics that make them attractive college savings accounts:

  • They offer tax-deferred growth while the money is inside the account.
  • You can withdraw up to the amount you’ve contributed at any time and for any reason without tax or penalty.
  • Early withdrawals of Roth IRA earnings used for higher education are taxed but are not subject to the typical 10% penalty.
  • If you don’t need the money for college, you can keep it in the Roth IRA and use it tax-free for retirement.

“I’m a big proponent of incorporating a Roth into college planning, especially when you have a teenager who is hopefully earning money,” said Furubotten-LaRosee. “Starting the savings habit is a biggie, and if you don’t use it for college it’s available for retirement or any other goal.”

The big downsides are that Roth IRAs are not as tax-efficient as 529 savings plans when used for college and that by dedicating your Roth IRA for college savings, you’re using up valuable retirement space.

Still, the flexibility is often worth it.

Taxable investment account

A regular, taxable investment account doesn’t offer any tax advantages, but it does provide maximum flexibility to invest in whatever you’d like and to use the money at any time and for any reason.

“As a parent, sometimes you need flexibility with your money,” said Furubotten-LaRosee. “You need the ability to control things as life progresses, and not having it tied into a 529 plan means you can access it when you need to.”

Coverdell ESA

The primary benefit of a Coverdell Education Savings Account (ESA) used to be the ability to allocate the money for K-12 expenses, but that benefit is much less relevant now that 529 savings plans can also be used for the same purpose.

Coverdell ESAs also come with stricter contribution limits than 529 savings plans. Contributions are limited to $2,000 per year, per child across all contributors. Once your Modified AGI (adjusted gross income with certain deductions like student loan interest added back) exceeds $110,000 for individuals or $220,000 for married couples filing jointly, you can no longer contribute.

According to Amrein, the main benefit of a Coverdell ESA at this point is the ability to choose from a much wider range of investment options than you can get from a 529 plan.

“It’s kind of like comparing a 401(k) to an IRA,” said Amrein. “Most 529 plans are very restrictive, with maybe five to 10 investment options to choose from. On the Coverdell side, you can invest in anything you want, but you’re limited to $2,000 per year.”

Savings account

While a savings account can’t offer the long-term returns that you might get from a 529 savings plan, Roth IRA or Coverdell ESA, it is a simple and safe choice that can make sense either as a starting point or if your child will be starting college soon.

And Furubotten-LaRosee argues that no matter which account you choose, the main priority should simply be to separate your college savings from your regular checking and savings accounts.

“Even if it’s just in a separate savings account, the main thing is having it really separate and earmarked for college,” said Furubotten-LaRosee. “That gives it a little protection from your day-to-day spending.”

Choosing the right 529 savings plan for you

529 savings plans allow you to save a lot of money while being tax-efficient for your child’s education, which can help defray the rising costs of college.

The first step is always understanding your home state’s plan to see what kind of tax breaks are available. Then, you can compare it with other states to determine which 529 savings plan will allow you to minimize costs and access the best investment options.

Finally, you can make your decision within the context of your entire financial plan. Saving for college is a fantastic goal, and 529 savings plans are a powerful way to do it, but it shouldn’t come at the expense of other financial responsibilities.

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College Students and Recent Grads, Student Loan ReFi

5 Best Private Student Loans for 2018

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

private student loans
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Taking out private student loans to pay for college is one of the most expensive ways to borrow for school, yet many college students make the mistake of turning to private loans first before pursuing other financing options.

Nearly half (47%) of undergraduates who took out private student loans during the 2011-12 school year didn’t use the maximum available in federal loans, according to a 2016 report by The Institute for College Access and Success (TICAS).

The danger with private loans is in how costly they can be — interest rates on private student loans were as high as 14.24% in September 2017 vs. 4.45% for federal student loans — and how few flexible repayment options they carry for borrowers who struggle to pay them back.

It’s generally best to find ways to fund your education for free with grants and scholarships, turn to your savings and then exhaust your federal student aid. Federal student loans tend to offer lower interest rates and more lenient repayment plans than private student loans, which is why federal aid is often a good first choice.

However, federal loans can only go so far, especially if you are pursuing a postgraduate degree that requires many more years of schooling. Once you’ve tapped out all your access to federal aid and you still need money to cover educational costs, a private student loan could help you fill the gap.

While federal student loans offer a fairly uniform application process and loan terms, private student loan terms can vary widely from one lender to another. If you’re thinking about paying for school with a private student loan, it’s important to compare lenders’ offerings and find the one that’s best for you.

How we ranked the best private student loans

There’s a lot to compare when you’re considering taking out a student loan from a private lender. Your annual percentage rate (APR), fees and loan term could impact how much you pay in interest over the lifetime of the loan. But other features, such as a straightforward application process and the option to apply for cosigner release, can also be important to borrowers.

We started the search for the best private student loan companies by identifying the 10 largest national private student loan lenders. Each lender’s undergraduate student loan got graded on seven important factors:

Private lenders offering loans with varying interest rates depending on the applicant’s creditworthiness. However, they do advertise an interest-rate range that you can use to compare one lender with another. Each lender was assigned grades based on its lowest and highest APRs compared with the average lowest and highest APRs for all 10 lenders. Each lender received four scores, as they all offer variable-rate and fixed-rate loans, and the lenders with below-average APRs received top marks.

Lenders may charge a fee to submit an application or an origination fee that’s based on your loan balance. Only one of the top 10 lenders charges an origination fee, and it didn’t make the top five list.

All the lenders offer an online application, but the clarity and ease of use can vary. The lenders with a simple and easy-to-understand process got the best grades.

Many private student lenders, including all 10 of the lenders we compared, offer a 0.25% interest rate discount if you enroll in autopay from your bank account. A few lenders earned extra points for offering a 0.50% interest rate discount with autopay, or an additional interest rate discount if you have an eligible account with the lender when you take out a student loan.

Most of the private student loans we compared offered several repayment terms with a maximum of 15 years. Lenders that cap their loan’s term below 15 years didn’t score as well. A long repayment term could increase the total amount of interest you pay, but it will also lower your monthly payments and there’s no penalty for prepaying student loans if you find you can afford more.

Most students have a creditworthy cosigner, who can help you qualify for a loan or lower your interest rate. Some private student loan lenders let you apply to release your cosigner after you make consecutive, on-time full principal and interest payments, and pass a credit check. Twelve payments set the bar for a top score as that’s the shortest option available among the lenders we compared.

You may be able to choose from different repayment plans, such as making interest-only payments while you’re in school or fully deferring payments until your post-school grace period ends. Lenders that offer full interest and principal deferment got top marks.

A few lenders earned extra credit because they offer something extra, such as a principal rate reduction or cash back when you graduate.

After assigning the lenders a score for each factor, we compared their average scores and ranked them from highest to lowest. Here are the resulting top five student loan lenders:

Our top picks for private student loan companies

 

SunTrust Custom Choice Loan

Wells Fargo Collegiate Loan

Sallie Mae Smart Option Student Loan

LendKey Private Student Loan

Citizens Bank Student Loan

Ranking

No. 1

No. 2

No. 3

No. 4

No. 5

Borrowing limit

$150,000

$120,000

School-certified cost of attendance

Varies by lender

$120,000

Variable APR*

3.75-12.75%

5.40-10.84%

4.00-8.91%

4.53-9.59%

4.65-11.45%

Fixed APR*

5.35-14.05%

6.84-11.67%

5.74-8.56%

5.36-9.69%

5.99-11.45%

Application fees

None

None

None

None

None

Online application

Good

Good

Good

Very good

Good

Interest rate discounts

0.25% with autopay, or 0.50% if you autopay from a SunTrust Bank account.

0.25% with autopay. Additional 0.25% to 0.50% interest rate deduction if you have an eligible Wells Fargo account when you get your student loan.

0.25% with autopay

0.25% with autopay, you may have to pay from an account with the lender to qualify.

0.25% with autopay. Additional 0.25% interest rate deduction if you have an
eligible Citizens Bank account when
you get your student loan.

Repayment terms

5, 7, or 15 years

15 years

5 - 15 years

10 years

5, 10 or 15 years

Cosign release option

Yes, you can apply after 36 to 48 consecutive full payments

Yes, you can apply after 24 consecutive full payments. Or, after 48 consecutive full payments if your first payment is late.

Yes, you can apply after
12 consecutive full payments

Yes, you can apply after 12 to 36 consecutive full payments

Yes, you can apply after 36 consecutive full payments

Max deferment

Full deferment

Full deferment

Full deferment

$25 monthly payments

Full deferment

Bonus

Request a 1% principal (the loan amount that was disbursed) reduction after you graduate.

None.

None.

None.

None.

*Rates are current as of May 1, 2018, and may include a 0.25% autopay discount.

#1 SunTrust Custom Choice Loan

SunTrust Bank took the top spot in our comparison of the top private student loan lenders with its Custom Choice Loan. The bank also offers Union Federal Private Student Loans through a partnership with Cognition Lending.

Why we like SunTrust

There are several savings opportunities that help SunTrust’s Custom Choice Loan that help it stand out from the competition. First, as of April 1, 2018, SunTrust had the lowest possible fixed interest rate of the 10 lenders we compared.

Additionally, you can get a 0.50% interest rate discount if you sign up for autopay from a SunTrust Bank account, or a 0.25% interest rate discount with autopay from a different account. And SunTrust Bank will reduce your loan balance by 1% of the disbursed loan amount when you apply for the reduction and show proof of graduation with a bachelor’s degree or higher.

Borrowers can also choose from four different repayment plans: start making full payments immediately, make interest-only payments, pay $25 a month or fully defer payments.

Where SunTrust may fall short

The one big drawback to the SunTrust’s Custom Choice Loan is that you’ll have to make 36 or 48 consecutive full payments before you can apply to release a cosigner.

#2 Wells Fargo Collegiate Student Loan

You’ll likely recognize Wells Fargo, as it’s one of the largest banks in the U.S., but you may not have realized that it offers student loans. In fact, the company actually has several different student loan programs, with offerings for community college students, undergraduates or graduates and professional school students.

Why we like Wells Fargo

Like many other lenders, Wells Fargo offers a 0.25% interest rate discount if you enroll in autopay. In addition, you can get a permanent 0.25% to 0.50% interest rate reduction if you or your cosigner have an eligible Wells Fargo student loan, consumer checking account or Portfolio by Wells Fargo relationship.

Where Wells Fargo may fall short

You have to choose a 15-year term for your student loan, and if you stick to making your required payment amount you could wind up paying more in interest than if you took out a shorter loan elsewhere.

Also, be sure that you make your first full payment on time. If it’s late, you’ll need to make 48 consecutive full payments (rather than 24) before you can apply to release a cosigner.

#3 Sallie Mae Smart Option Student Loan

Sallie Mae offers a wide range of student loans to undergraduate, graduate and professional students, and their parents. That may not come as a surprise though, Sallie Mae is one of the most widely known private student loan companies.

Why we like Sallie Mae

The undergraduate Smart Option Student Loan has a few standout benefits, such as the option to release a cosigner after making 12 consecutive monthly payments. You can also choose from three repayment plans: full deferment, $25 monthly payments or interest-only payments. And if you’re having trouble making payments after graduation, you can request to make 12 interest-only payments.

Borrowers also get non-loan related perks, such as quarterly access to one of their FICO credit scores. You can also choose to get 120 minutes of free tutoring from Chegg Tutors or free access to Chegg Study for four months (or a combination of the two).

Where Sallie Mae may fall short

Overall, Sallie Mae offers borrowers a variety of choices and benefits. However, it doesn’t offer as many potential discounts as some of the other top lenders. Still, if you find you qualify for a lower pre-discount rate with Sallie Mae than another lender, Sallie Mae could indeed be a smart option.

#4 LendKey Private Student Loan

LendKey stands apart from the other lenders on the top five list because it technically doesn’t loan you money. Instead, LendKey has created a centralized, uniform (and easy-to-use) application that you fill out to get student loan offers from regional banks and credit unions.

Why we like LendKey

Being able to fill out a single application and compare multiple loan options can help you find a low rate, plus the application is quick and easy to fill out. Additionally, some of LendKey’s lenders may let you release a cosigner after making 12 consecutive full payments, which ties for the fewest number of required payments among the top lenders.

LendKey particularly stands because the high-end APR rate for variable- and fixed-rate loans from its lending network are 2% to 3% lower than other competitors. That may not seem like a big difference, but it could lower your monthly payments and lead to saving hundreds to thousands of dollars over the lifetime of the loan.

Where LendKey may fall short

Regional banks and credit unions may not offer student loans nationally, so the interest rate ranges that LendKey advertises may not be available to every borrower. The fine print and eligibility requirements could also vary from one lender to another.

For example, some lenders may require you use autopay from an account with the lender to qualify for a 0.25% interest rate discounts (others may let you qualify with autopay from any account). And how many consecutive payments you need to make before you can apply for a cosigner release, if you can apply at all, could also vary.

All LendKey lenders only offer a 10-year loan term. Other lenders offer a shorter term, which sometimes corresponds with lower interest rates, or you want to lower your monthly payment by choosing a longer term from a different lender.

Also, LendKey student loans don’t offer full deferment and you’ll have to make $25 monthly payments once your loan is disbursed. This could lower your total cost of borrowing compared with full deferment, but if you don’t have any income while you’re at school, it could be difficult to afford the monthly payment.

#5 Citizens Bank Student Loan

Citizens Bank is a large traditional bank with over 1,000 branches in the Midwest and along the East Coast. It offers student loans to undergraduate and graduate students, their parents and student loan refinancing.

Why we like Citizens Bank

Citizens Bank’s lowest possible variable-rate APR is the lowest of our top five lenders, but even if you don’t qualify for the lowest rate it’s worth considering. And if you or your cosigner have a qualifying bank account or loan from Citizens Bank, as that could make you eligible for a permanent 0.25% interest rate reduction on your student loan.

You may also qualify for multi-year approval if you have more than a year left before you graduate. Often, you may need to apply for a student loan at the start of each term. But with multi-year approval, you could choose (there’s no obligation) to borrow additional money for another term without having to fill out a new application.

Where Citizens Bank may fall short

The primary drawback is the 36-payment requirement to apply to release a cosigner. This aside, Citizens Bank offers competitive rates, a variety of loan terms and interest rate discounts that are in line or could be better than many of the other private student loan companies.

Determine if a private student loan is right for you

After comparing your options, you may be able to identify the private student loan lender that offers you the best overall loan. However, you may want to take a step back and consider all your options before committing.

Federal student loans. Often, federal student loans should be a borrower’s first choice if he or she has to borrow money. In part, this is because federal student loans offer loan forgiveness programs, repayment plans and guaranteed options to defer payments or put your loans in forbearance that aren’t available from private student lenders.

Also, if you haven’t built credit of your own and don’t have a creditworthy cosigner, federal student loans could be your only option. Most don’t have a credit requirement, and the federal loans for graduate or professional students and parents that have a credit check don’t vary their interest rate based on your credit. By contrast, even with a creditworthy cosigner, you may wind up with higher interest rate if you take out a private student loan.

However, there may be times when a private student loan makes sense or be a necessity. For example, undergraduate federal student loans have annual ($5,500-$7,500) and aggregate (up to $31,000) borrowing limits that may not be enough to cover your educational expenses.

Even if your unsure about whether you’re going to take out federal or private student loans, you may want to fill out and submit the Free Application for Federal Student Aid (FAFSA) every year. In addition to being a requirement for federal student loans and work-study aid, you may need to submit the FAFSA to qualify for some grants and scholarships.

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

Louis DeNicola
Louis DeNicola |

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

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College Students and Recent Grads, Pay Down My Debt

7 Best Options to Refinance Student Loans – Get Your Lowest Rate

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

Updated: May 1, 2018

Are you tired of paying a high interest rate on your student loan debt? You may be looking for ways to refinance your student loans at a lower interest rate, but don’t know where to turn. We have created the most complete list of lenders currently willing to refinance student loan debt. We recommend you start here and check rates from the top 7 national lenders offering the best student loan refinance products. All of these lenders (except Discover) also allow you to check your rate without impacting your score (using a soft credit pull), and offer the best rates of 2018:

LenderTransparency ScoreMax TermFixed APRVariable APRMax Loan Amount 
SoFiA+

20


Years

3.25% - 7.13%


Fixed Rate*

2.56% - 7.40%


Variable Rate*

No Max


Undergrad/Grad
Max Loan
Learn more Secured
earnestA+

20


Years

3.25% - 6.32%


Fixed Rate

2.57% - 5.87%


Variable Rate

No Max


Undergrad/Grad
Max Loan
Learn more Secured
commonbond A+

20


Years

3.20% - 7.25%


Fixed Rate

2.54% - 7.41%


Variable Rate

No Max


Undergrad/Grad
Max Loan
Learn more Secured
lendkey A+

20


Years

3.15% - 8.12%


Fixed Rate

2.58% - 7.96%


Variable Rate

$125k / $175k


Undergrad/Grad
Max Loan
Learn more Secured
A+

20


Years

3.37% - 7.02%


Fixed Rate

2.80% - 5.90%


Variable Rate

No Max


Undergrad/Grad
Max Loan
Learn more Secured
A+

20


Years

3.50% - 8.34%


Fixed Rate

2.90% - 8.00%


Variable Rate

$90k / $350k


Undergraduate /
Graduate
Learn more Secured
A+

20


Years

5.24% - 8.24%


Fixed Rate

4.74% - 7.99%


Variable Rate

$150k


Undergraduate /
Graduate
Learn more Secured

You should always shop around for the best rate. Don’t worry about the impact on your credit score of applying to multiple lenders: so long as you complete all of your applications within 14 days, it will only count as one inquiry on your credit score.

We have also created:

But before you refinance, read on to see if you are ready to refinance your student loans.

Can I get approved?

Loan approval rules vary by lender. However, all of the lenders will want:

  • Proof that you can afford your payments. That means you have a job with income that is sufficient to cover your student loans and all of your other expenses.
  • Proof that you are a responsible borrower, with a demonstrated record of on-time payments. For some lenders, that means that they use the traditional FICO, requiring a good score. For other lenders, they may just have some basic rules, like no missed payments, or a certain number of on-time payments required to prove that you are responsible.
LenderMinimum credit scoreEligible degreesEligible loansAnnual income
requirements
Employment
requirement
 
SoFi

Good or Excellent
score needed

Undergraduate
& Graduate

Private, Federal,
& Parent PLUS

None

Yes


(or signed job offer)
Learn more Secured
earnest

660

Undergraduate
& Graduate

Private, Federal,
& Parent PLUS

None

Yes


(or signed job offer)
Learn more Secured
commonbond

660

Undergraduate
& Graduate

Private, Federal,
& Parent PLUS

None

Yes


(or signed job offer)
Learn more Secured

680

Undergraduate
& Graduate

Private & Federal

$24K

Yes

Learn more Secured

Not published

Undergraduate
& Graduate

Private, Federal,
& Parent PLUS

None

Yes


(or signed job offer)
Learn more Secured

680

Undergraduate
& Graduate

Private, Federal,
& Parent PLUS

$24K

Yes

Learn more Secured

Not published

Undergraduate
& Graduate

Private & Federal

None

Yes

Learn more Secured

If you are in financial difficulty and can’t afford your monthly payments, a refinance is not the solution. Instead, you should look at options to avoid a default on student loan debt.

This is particularly important if you have Federal loans.

Don’t refinance Federal loans unless you are very comfortable with your ability to repay. Think hard about the chances you won’t be able to make payments for a few months. Once you refinance student loans, you may lose flexible Federal payment options that can help you if you genuinely can’t afford the payments you have today. Check the Federal loan repayment estimator to make sure you see all the Federal options you have right now.

If you can afford your monthly payment, but you have been a sloppy payer, then you will likely need to demonstrate responsibility before applying for a refinance.

But, if you can afford your current monthly payment and have been responsible with those payments, then a refinance could be possible and help you pay the debt off sooner.

Is it worth it to refinance student loans?

Like any form of debt, your goal with a student loan should be to pay as low an interest rate as possible. Other than a mortgage, you will likely never have a debt as large as your student loan.

If you are able to reduce the interest rate by refinancing, then you should consider the transaction. However, make sure you include the following in any decision:

Is there an origination fee?

Many lenders have no fee, which is great news. If there is an origination fee, you need to make sure that it is worth paying. If you plan on paying off your loan very quickly, then you may not want to pay a fee. But, if you are going to be paying your loan for a long time, a fee may be worth paying.

Is the interest rate fixed or variable?

Variable interest rates will almost always be lower than fixed interest rates. But there is a reason: you end up taking all of the interest rate risk. We are currently at all-time low interest rates. So, we know that interest rates will go up, we just don’t know when.

This is a judgment call. Just remember, when rates go up, so do your payments. And, in a higher rate environment, you will not be able to refinance your student loans to a better option (because all rates will be going up).

We typically recommend fixing the rate as much as possible, unless you know that you can pay off your debt during a short time period. If you think it will take you 20 years to pay off your loan, you don’t want to bet on the next 20 years of interest rates. But, if you think you will pay it off in five years, you may want to take the bet. Some providers with variable rates will cap them, which can help temper some of the risk.

Diving Deeper: The best places to consider a refinance

If you go to other sites they may claim to compare several student loan offers in one step. Just beware that they might only show you deals that pay them a referral fee, so you could miss out on lenders ready to give you better terms. Below is what we believe is the most comprehensive list of current student loan refinancing lenders.

You should take the time to shop around. FICO says there is little to no impact on your credit score for rate shopping as many providers as you’d like in a single shopping period (which can be between 14-30 days, depending upon the version of FICO). So set aside a day and apply to as many as you feel comfortable with to get a sense of who is ready to give you the best terms.

Here are more details on the 7 lenders offering the lowest interest rates:

1. SoFi

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on SoFi’s secure website

Read Full Review

SoFi : Variable rates from 2.56% and Fixed Rates from 3.25% (with AutoPay)*

SoFi was one of the first lenders to start offering student loan refinancing products. More MagnifyMoney readers have chosen SoFi than any other lender. The only requirement is that you graduated from a Title IV school. In order to qualify, you need to have a degree, a good job and good income.

Pros Pros

  • Borrowers can refinance private, federal and Parent PLUS loans together: Through SoFi, borrowers have the ability to combine all of their student loans (private, federal and Parent PLUS) when refinancing. Along with the ability to refinance Parent PLUS loans, parents can also transfer the PLUS loans into their child’s name.
  • Access to career coaches: SoFi offers their borrowers access to their Career Advisory Group who work one-on-one with borrowers to help plan their career paths and futures.
  • Unemployment protection: SoFi offers some help if you lose your job. During the period of unemployment they will pause your payments (for up to 12 months) and work with you to find a new job. However, just remember that any unemployment protection offered by SoFi would be weaker than the income-driven repayment options of federal loans.

Cons Cons

  • No cosigner release: While they offer you the opportunity to refinance with a cosigner, it is important to know that SoFi does not offer borrowers the opportunity to release a cosigner later on down the road.
  • You lose certain protections if you refinance a federal loan: This con is not unique to SoFi (and you will find it with all other private lenders). Federal loans come with certain protections, including robust income-driven payment protection options. You will forfeit those protections if you refinance a federal loan to a private loan.

Bottom line

Bottom line

SoFi is really the original student loan refinance company, and is now certainly the largest. SoFi has consistently offered low interest rates and has received good reviews for service. In addition, SoFi invests heavily in building a “community” – which means you can start to get other benefits once you are a SoFi member.

SoFi has taken a radical new approach when it comes to the online finance industry, not only with student loans but in the personal loan, wealth management and mortgage markets as well. With their career development programs and networking events, SoFi shows that they have a lot to offer, not only in the lending space but in other aspects of their customers lives as well.

2. Earnest

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on Earnest’s secure website

Read Full Review

Earnest : Variable Rates from 2.57% and Fixed Rates from 3.25% (with AutoPay)

Earnest focuses on lending to borrowers who show promise of being financially responsible borrowers. Because of this, they offer merit-based loans versus credit-based ones. 

Pros Pros

  • Flexible repayment options: Earnest offers some of the most flexible options when it comes to repayment. They allow you to choose any term length between 5-20 years. You can choose your own monthly payment, based upon what you can afford (to the penny). Earnest also offers bi-weekly payments and “skip a payment” if you run into difficulty.
  • Ability to switch between variable and fixed rates: With Earnest, you can switch between fixed and variable rates throughout the life of your loan. You can do that one time every six months until the loan is paid off. That means you can take advantage of the low variable interest rates now, and then lock in a higher fixed rate later.
  • Loans serviced in-house: Earnest is one of just a few lenders that provides in-house loan servicing versus using a third-party servicer.

Cons Cons

  • Cannot apply with a cosigner: Unlike many of the other lenders, Earnest does not allow borrowers to apply for student loan refinancing with a cosigner.
  • No option to transfer Parent PLUS loans to Child: If you are a parent that is looking to refinance your Parent PLUS loan into your child’s name, it is important to note that this cannot be done through refinancing with Earnest.
  • You lose certain protections if you refinance a federal loan: When refinancing with any private lender, you will give up certain protections if you refinance a federal loan to a private loan.

Bottom line

Bottom line

Earnest, who was recently acquired by Navient, is making a name for themselves within the student refinancing space. With their flexible repayment options and low rates, they are definitely an option worth exploring.

3. CommonBond

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on CommonBond’s secure website

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CommonBond : Variable Rates from 2.54% and Fixed Rates from 3.20% (with AutoPay)

CommonBond started out lending exclusively to graduate students. They initially targeted doctors with more than $100,000 of debt. Over time, CommonBond has expanded and now offers student loan refinancing options to graduates of almost any university (graduate and undergraduate).

Pros Pros

  • Hybrid loan option: CommonBond offers a unique “Hybrid” rate option in which rates are fixed for five years and then become variable for five years. This option can be a good choice for borrowers who intend to make extra payments and plan on paying off their student loans within the first five years. If you can a better interest rate on the Hybrid loan than the Fixed-rate option, you may end up paying less over the life of the loan.
  • Social promise: CommonBond will fund the education of someone in need in an emerging market for every loan that closes. So not only will you save money, but someone in need will get access to an education.
  • “CommonBridge” unemployment protection program: CommonBond is here to help if you lose your job. Similar to SoFi, they will pause your payments and assist you in finding a new job.

Cons Cons

  • Does not offer refinancing in the following states: Idaho, Louisiana, Mississippi, Nevada, South Dakota and Vermont.
  • You lose certain protections if you refinance a federal loan: When refinancing with any private lender, you will give up certain protections if you refinance a federal loan to a private loan.

Bottom line

Bottom line

CommonBond not only offers low rates but is also making a social impact along the way. Consider checking out everything that CommonBond has to offer in term of student loan refinancing.

4. LendKey

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on LendKey’s secure website

Read Full Review

LendKey : Variable Rates from 2.58% and Fixed Rates from 3.15% (with AutoPay)

LendKey works with community banks and credit unions across the country. Although you apply with LendKey, your loan will be with a community bank. Over the past year, LendKey has become increasingly competitive on pricing, and frequently has a better rate than some of the more famous marketplace lenders.

Pros Pros

  • Opportunity to work with local banks and credit unions: LendKey is a platform of community banks and credit unions, which are known for providing a more personalized customer experience and competitive interest rates.
  • Offers interest-only payment repayment: Many of the lenders on LendKey offer the option to make interest-only payments for the first four years of repayment.

Cons Cons

  • Rates can vary depending on where you live: The rate that is advertised on LendKey is the lowest possible rate among all of its lenders, and some of these lenders are only available to residents of specific areas. So even if you have an excellent credit report, there is still a possibility that you will not receive the lowest rate, depending on geographic location.
  • No Parent PLUS refinancing available: Unlike several of the other student loan refinancing companies, borrowers do not have the ability to refinance Parent PLUS loans with LendKey.
  • You lose certain protections if you refinance a federal loan: As when refinancing federal loans with any private lender, you will give up your federal protections if you refinance your federal loan to a private one.

Bottom line

Bottom line

LendKey is a good option to keep in mind if you are looking for an alternative to big bank lending. If you prefer working with a credit union or community bank, LendKey may be the route to uncovering your best offer.

5. Laurel Road Bank

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on Laurel Road Bank’s secure website

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Laurel Road Bank : Variable Rates from 2.80% and Fixed Rates from 3.37% (with AutoPay)

Laurel Road Bank offers a highly competitive product when it comes to student loan refinancing.

Pros Pros

  • Forgiveness in the case of death or disability: They may forgive the total student loan amount owed if the borrower dies before paying off their debt. In the case that the borrower suffers a permanent disability that results in a significant reduction to their income,Laurel Road Bank may forgive some, if not all of the amount owed.
  • Offers good perks for Residents and Fellows: Laurel Road Bank allows medical and dental students to pay only $100 per month throughout their residency or fellowship and up to six months after training. It is important for borrowers to keep in mind that the interest that accrues during this time will be added on to the total loan balance.

Cons Cons

  • Higher late fees: While many lenders charge late fees,Laurel Road Bank’s late fee can be slightly steeper than most at 5% or $28 (whichever is less) for a payment that is over 15 days late.
  • You lose certain protections if you refinance a federal loan: While not specific to Laurel Road Bank, it is important to keep in mind that you will give up certain protections when refinancing a federal loan with any private lender.

Bottom line

Bottom line

As a lender,Laurel Road Bank prides itself on offering personalized service while leveraging technology to make the student loan refinancing process a quick and simple one. Consider checking out their low-rate student loan refinancing product, which is offered in all 50 states.

6. Citizens Bank

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on Citizens Bank’s secure website

Read Full Review

Citizens Bank : Variable Rates from 2.90% and Fixed Rates from 3.50% (with AutoPay)

Citizens Bank offers student loan refinancing for both private and federal loans through its Education Refinance Loan.

Pros Pros

No degree is required to refinance: If you are a borrower who did not graduate, with Citizens Bank, you are still eligible to refinance the loans that you accumulated over the period you did attend. In order to do so, borrowers much no longer be enrolled in school.

Loyalty discount: Citizens Bank offers a 0.25% discount if you already have an account with Citizens.

Cons Cons

Cannot transfer Parent PLUS loans to Child: If you are looking to refinance your Parent PLUS loan into your child’s name, this cannot be done through Citizens Bank.

You lose certain protections if you refinance a federal loan: Any time that you refinance a federal loan to a private loan, you will give up the protections, forgiveness programs and repayment plans that come with the federal loan.

Bottom line

Bottom line

The Education Refinance Loan offered by Citizens Bank is a good one to consider, especially if you are looking to stick with a traditional banking option. Consider looking into the competitive rates that Citizens Bank has to offer.

7. Discover

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on Discover Student Loans’s secure website

Discover Student Loans : Variable Rates from 4.74% and Fixed Rates from 5.24% (with AutoPay)

Discover, with an array of competitive financial products, offers student loan refinancing for both private and federal loans through their private consolidation loan product.

Pros Pros

  • In-house loan servicing: When refinancing with Discover, they service their loans in-house versus using a third-party servicer.
  • Offer a variety of deferment options: Discover offers four different deferment options for borrowers. If you decide to go back to school, you may be eligible for in-school deferment as long as you are enrolled for at least half-time. In addition to in-school deferment, Discover offers deferment to borrowers on active military duty (up to 3 years), in eligible public service careers (up to 3 years) and those in a health professions residency program (up to 5 years).

Cons Cons

  • Performs a hard credit pull: While most lenders do a soft credit check, Discover does perform a hard pull on your credit.
  • No Parent PLUS refinancing available: Discover does not offer borrowers the option of refinancing their Parent PLUS loans.
  • You lose certain protections if you refinance a federal loan: Be careful when deciding to refinance your federal student loans because when doing so, you will lose access federal protections, forgiveness programs and repayment plans.

Bottom line

Bottom line

If you’re looking for a well-established bank to refinance your student loans, Discover may be the way to go. Just keep in mind that if you apply for a student loan refinance with Discover, they will do a hard pull on your credit.

 

Additional Student Loan Refinance Companies

In addition to the Top 7, there are many more lenders offering to refinance student loans. Below is a listing of all providers we have found so far. This list includes credit unions that may have limited membership. We will continue to update this list as we find more lenders:

Traditional Banks

  • First Republic Eagle Gold. The interest rates are great, but this option is not for everyone. Fixed rates range from 1.95% – 3.95% APR. You need to visit a branch and open a checking account (which has a $3,500 minimum balance to avoid fees). Branches are located in San Francisco, Palo Alto, Los Angeles, Santa Barbara, Newport Beach, San Diego, Portland (Oregon), Boston, Palm Beach (Florida), Greenwich or New York City. Loans must be $60,000 – $300,000. First Republic wants to recruit their future high net worth clients with this product.
  • Wells Fargo: As a traditional lender, Wells Fargo will look at credit score and debt burden. They offer both fixed and variable loans, with variable rates starting at 4.74% and fixed rates starting at 5.24%. You would likely get much lower interest rates from some of the new Silicon Valley lenders or the credit unions.

Credit Unions

  • Alliant Credit Union: Anyone can join this credit union. Interest rates start as low as 4.75% APR. You can borrow up to $100,000 for up to 25 years.
  • Eastman Credit Union: Credit union membership is restricted (see eligibility here). Fixed rates start at 6.50% and go up to 8% APR.
  • Navy Federal Credit Union: This credit union offers limited membership. For men and women who serve (or have served), the credit union can offer excellent rates and specialized underwriting. Variable interest rates start at 4.07% and fixed rates start at 4.70%.
  • Thrivent: Partnered with Thrivent Federal Credit Union, Thrivent Student Loan Resources offers variable rates starting at 3.63% APR and fixed rates starting at 3.99% APR. It is important to note that in order to qualify for refinancing through Thrivent, you must be a member of the Thrivent Federal Credit Union. If not already a member, borrowers can apply for membership during the student refinance application process.
  • UW Credit Union: This credit union has limited membership (you can find out who can join here, but you had better be in Wisconsin). You can borrow from $5,000 to $150,000 and rates start as low as 3.57% (variable) and 3.99% APR (fixed).

Online Lending Institutions

  • Education Loan Finance:This is a student loan refinancing option that is offered through SouthEast Bank. They have competitive rates with variable rates ranging from 2.69% – 6.01% APR and fixed rates ranging from 3.09% – 6.69% APR. Education Loan Finance also offers a “Fast Track Bonus”, so if you accept your offer within 30 days of your application date, you can earn $100 bonus cash.
  • EdVest: This company is the non-profit student loan program of the state of New Hampshire which has become available more broadly. Rates are very competitive, ranging from 4.29% – 7.89% (fixed) and 3.85% – 7.45% APR (variable).
  • IHelp : This service will find a community bank. Unfortunately, these community banks don’t have the best interest rates. Fixed rates range from 4.75% to 9.00% APR (for loans up to 15 years). If you want to get a loan from a community bank or credit union, we recommend trying LendKey instead.
  • Purefy: Purefy lenders offer variable rates ranging from 2.88%-8.23% APR and fixed interest rates ranging from 3.20% – 9.64% APR. You can borrow up to $150,000 for up to 15 years. Just answer a few questions on their site, and you can get an indication of the rate.
  • RISLA: Just like New Hampshire, the state of Rhode Island wants to help you save. You can get fixed rates starting as low as 3.49%. And you do not need to have lived or studied in Rhode Island to benefit.

You can also compare all of these loan options in one chart with our comparison tool. It lists the rates, loan amounts, and kinds of loans each lender is willing to refinance. You can also email us with any questions at info@magnifymoney.com.

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

Nick Clements
Nick Clements |

Nick Clements is a writer at MagnifyMoney. You can email Nick at nick@magnifymoney.com

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Advertiser Disclosure

College Students and Recent Grads

Top Checking Accounts for College Grads

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

Top Checking Accounts for College Grads
iStock

For many college students, their default banking option while in school is a student checking account, which is typically free. Unfortunately, when you graduate you lose those benefits. Many student checking accounts will begin to charge you monthly maintenance fees unless you meet certain requirements.

So, where do you go from there?

Few young adults would turn to their parents for fashion or dating advice and, yet, one of the most common ways we’ve found young people choose their bank account is by going with whichever bank their parents already use. This could be a bigger faux pas than stealing your dad’s old pair of parachute pants.

The bank your parents use may carry fees or have requirements that don’t meet your lifestyle or budget, and make accounts expensive to use.

But where do you even begin to choose the right checking account?

When you’re nearing graduation, start planning your bank transition.

Many banks send a letter in the mail a few months prior to your expected graduation date informing you that your student checking account is going transition to a non-student account. If you’re not careful and you disregard the letter, you may be transitioned into an account that charges a fee if you don’t meet certain requirements.

You can always call the bank and ask to switch to a different account or you can choose a new account that offers more benefits, like interest and ATM fee refunds.

The 5 key things you should look for in a checking account

When you’re shopping around for a new checking account, there are several things you should look for to ensure you’re getting the most value from your account:

  1. A $0 monthly fee: Sometimes banks may say they don’t charge a monthly fee but read the fine print — they may require a minimum monthly balance in order to avoid it. There are plenty of free checking accounts available for you to open, so there’s no reason to stay stuck with an account that charges a monthly fee. Take note some accounts may require you to meet certain criteria to maintain a free account like using a debit card, enrolling in eStatements or maintaining a minimum daily balance.
  2. No minimum daily balance: Accounts without minimum daily balances mean you can have a $0 balance at any given time. This may allow you to have a free account without meeting balance requirements — note, other terms may apply to maintain a free account.
  3. APY: Annual Percentage Yield is the total amount of interest you will earn on balances in your account. Opening an account that earns you interest on your balance is an easy way to be rewarded for money that would typically sit without earning anything. Some checking accounts earn interest, albeit rarely, but you should definitely aim to earn a decent APY on your savings account.
  4. ATM fee refunds: You may not be able to access an in-network ATM at all times, so accounts providing ATM fee refunds can reimburse you for ATM fees you may incur while using out-of-network ATMs. Those $3 or $5 charges add up!
  5. No or low overdraft fees: Most banks charge you an overdraft fee of around $35 if you spend more money than you have available in your account. Therefore, it’s a good idea to choose an account that has no or low overdraft fees.

Top overall checking accounts for college grads

The best checking accounts will have a number of features that are both simple and low cost. For the top overall checking accounts, we chose accounts that have no monthly service fees, no ATM fees, refunds for ATM fees from other banks, interest earned on your deposited balances and with strong mobile banking apps. While there is no all-inclusive account that contains every benefit, the accounts below are sure to provide value whether you want a high interest rate, unlimited ATM fee refunds or 24/7 live customer support.

1. Aspiration – The Aspiration Summit Account

Monthly Fee

Minimum Monthly Balance

Amount to Open

ATM Fee Refunds

APY

$0

$0

$10

Unlimited

0.25% APY on balances up to $2,499.99

1.00% APY on balances $2,500+

The Aspiration Summit Account offers a wide range of benefits for account holders and has few fees. The amount to open is fairly low, and once you open your account there is no minimum monthly balance to maintain — though the more money you keep in your account, the more interest you’ll earn.

Another helpful feature is unlimited ATM fee refunds. That means you can either use in-network ATMs (filter by checking “SUM”) and avoid fees, or use any other ATM and be reimbursed for any fees incurred at the end of the month. If you’re looking for an interest checking account with no ATM fees, the Aspiration Summit Account is a solid choice.

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on Aspiration’s secure website

2. nbkc bank – Personal Account

Monthly Fee

Minimum Monthly Balance

Amount to Open

ATM Fee Refunds

APY

$0

$0

$5

Up to $12 a month

0.90% APY on all balances

nbkc has several locations in the Kansas City region. Anyone can sign up for an account, however. This just means if you don’t reside nearby, you’ll have to rely on their online banking system.

The nbkc Personal Account earns interest on your balances and has no hidden fees. Typical checking accounts charge overdraft fees and stop payment fees, among others, but nbkc doesn’t.

The two fees that may apply are for less common transactions — $5 to send domestic wires and $45 to send or receive international wires.

You can use 24,000+ MoneyPass® ATMs in the U.S. for free, and if you use out-of-network ATMs you’ll be reimbursed up to $12 a month. This account is a good choice if you want a checking account that has minimal fees and earns interest.

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on nbkc bank’s secure website

3. Ally Bank – Interest Checking Account

Monthly Fee

Minimum Monthly Balance

Amount to Open

ATM Fee Refunds

APY

$0

$0

$0

Up to $10 per statement cycle

0.10% on daily balances less than $15,000

0.60% on daily balances $15,000+

Ally Bank is an overall great online bank and their Interest Checking Account is a standout choice if you want to open an account without depositing any money. There are some standout perks with this card like 24/7 live customer care and the ability to send money with Zelle®.

There are also no ATM fees at U.S. Allpoint® ATMs, and you’ll receive up to $10 per statement cycle for fees charged at other ATMs nationwide. This account earns at a lower interest rate than the two mentioned earlier, but it’s still better than typical banks. Ally Bank’s Interest Checking Account provides account holders with a well-rounded experience and the ability to earn interest.

LEARN MORE Secured

on Ally Bank’s secure website

Member FDIC

Check out our full list of the best checking accounts.

Top free checking accounts for college grads

Free checking accounts are a great way to save on the monthly service fees many banks charge if you don’t meet deposit or balance requirements. The checking accounts listed below are all free, and if there are requirements, they’re minor like enrolling in eStatements or using a debit card. These accounts can be a good choice if you often have a fluctuating or low account balance and don’t want to worry about maintaining the requirements big banks impose to keep their accounts free.

1. Atlantic Stewardship Bank – Cash Back Checking

Monthly Fee

Minimum Monthly Balance

Amount to Open

ATM Fee Refunds

APY

$0

$0

$1

Unlimited

Does not earn interest. But it does offer 0.50% cash back if you meet requirements*

Atlantic Stewardship Bank is headquartered in New Jersey and donates 10% of its profits annually to Christian and nonprofit organizations. Its Cash Back Checking account has a minor opening deposit and basic requirements for you to meet to get the added perks.

*When you make 12 debit card transactions each cycle and enroll in online banking and eStatements, you can receive unlimited ATM fee refunds and the chance to earn rewards at 0.50% cash back on debit card purchases.

2. Radius Bank – Radius Hybrid Checking

Monthly Fee

Minimum Monthly Balance

Amount to Open

ATM Fee Refunds

APY

$0

$0

$10

Unlimited

0.85% on balances $2,500+

Radius Bank is a community bank headquartered in Boston. The Radius Hybrid Checking account is free as long as you open the account with the required deposit and meet three simple requirements: Enroll in online banking, receive eStatements and choose to receive a debit card. Unlike other checking accounts that require you to make a certain number of debit card transactions a month, Radius Bank does not. In addition to simple requirements, there are unlimited ATM fee refunds at the end of each statement cycle.

LEARN MORE Secured

on Radius Bank’s secure website

Member FDIC

3. Bay State Savings Bank – Free Kasasa Cash®

Monthly Fee

Minimum Monthly Balance

Amount to Open

ATM Fee Refunds

APY

$0

$0

$0

Unlimited

0.05% if qualifications are not met

(2.01% up to $20,000 if you meet requirements listed below*)

Bay State Savings Bank was founded in Worcester, Mass., and is an independent community bank with the goal of maintaining long-term relationships with consumers and giving back to the community via the Bay State Savings Charitable Foundation.

If you want a free account that is always free — meaning no requirements for you to meet — check out their the Free Kasasa Cash® account.

There’s a small minimum deposit to open the account and you automatically earn interest on your balances.

*If you want the added perks of unlimited ATM fee refunds and a higher 2.01% APY, you need to enroll in electronic statements and online banking, as well make 12 PIN-based debit card transactions each month.

If you don’t meet those requirements, you’ll still earn 0.05% APY, but will have to pay $0.75 per ATM transaction (plus any fee the ATM operator charges). There are thousands of surcharge-free ATMs provided by the SUM® ATM network.

LEARN MORE Secured

on Bay State Savings Bank’s secure website

Check out our full list of the best free checking accounts.

Top high-yield checking accounts for college grads

Since most checking accounts offer little to no interest, high-yield checking accounts are a great way for you to maximize the money that typically would just sit in your account without earning interest. These accounts often offer interest rates that fluctuate depending on how much money you have in the account. However, in order to earn interest, there are some requirements that you may have to meet such as making a certain number of debit card transactions and enrolling in eStatements.

1. First Financial Credit Union – High 5 Checking

Monthly Fee

Minimum Monthly Balance

Amount to Open

ATM Fee Refunds

APY

$0

$0

$0

Up to $10 per statement cycle

5.00% APY on balances up to $2,500

0.10% APY on balances of $2,500.01 or more

The High 5 Checking account from First Financial Credit Union is a free account that has fewer requirements for you to follow to qualify for the interest rates compared with other high-yield checking accounts. That’s why it tops our list.

All you need to do is enroll in eStatements and complete 15 signature-based debit card transactions in the statement period. In addition, there are surcharge-free STAR® ATMs to use, plus out-of-network ATM fee refunds of up to $10 per statement cycle. You can also earn Buzz® Points with your debit card that can be redeemed as statement credit, gift cards and other rewards.

LEARN MORE Secured

on First Financial Credit Union’s secure website

2. America’s Credit Union – Affinity Checking

Monthly Fee

Minimum Monthly Balance

Amount to Open

ATM Fee Refunds

APY

$0

$0

$0

None

5.00% APY on balances up to $1,000

0.10% APY on balances between $1,000.01 - $15,000

0.25% APY on balances over $15,000

Like most high-yield checking accounts, you’ll need to jump through a few hoops before you qualify for the higher rate. Here are the four requirements:

  • Have $15,000 in combined loans or deposits with ACU
  • Have a $500 direct deposit each month
  • Sign up for eStatements
  • Complete 10 debit transactions in-store that post and settle during the monthly statement period

In addition, there are 30,000+ surcharge-free ATMs for you to use, and while there are no ATM fee refunds, you receive 10 free ATM fee withdrawals per month — that means America’s Credit Union will not charge you for using an out-of-network ATM, but you will have to pay whatever fee the ATM operator charges.

LEARN MORE Secured

on America's Credit Union’s secure website

3. La Capitol Federal Credit Union – Choice Plus Checking

Monthly Fee

Minimum Monthly Balance

Amount to Open

ATM Fee Refunds

APY

$2, waived if you enroll in eStatements

$0*

$50

Up to $25 per month

4.25% APY on balances up to $3,000

2.00% APY on balances $3,000-$10,000

0.10% APY on balances over $10,000 (or on all balances if you don’t make 15 or more posted non-ATM debit card transactions per month)

This checking account has a $2 monthly service fee, which can easily be waived if you enroll in eStatements.

*While the terms state a minimum balance requirement of $1,000 and a low balance fee of $8, the fee can be waived if you make 15 or more posted non-ATM debit card transactions per month.

To earn the top interest rate on your checking balance, you just need to make at least 15 or more posted non-ATM debit card transactions per month. There are numerous surcharge-free La Capitol ATMs for you to use, and after signing up for eStatements you can receive up to $25 per month in ATM fee refunds when you use out-of-network ATMs.

LEARN MORE Secured

on La Capitol Federal Credit Union’s secure website

Check out our full list of the best high-yield checking accounts.

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

Alexandria White
Alexandria White |

Alexandria White is a writer at MagnifyMoney. You can email Alexandria at alexandria@magnifymoney.com

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Best of, College Students and Recent Grads, Credit Cards

Best Student Credit Cards May 2018

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

Getting a credit card while you’re in college might seem dangerous or confusing. But if you are able to use a student credit card responsibly, you do not need to be afraid, and you can set yourself up for financial success after you leave school.

Fortunately, learning how to choose and use the right student credit card is relatively simple. Make sure you avoid annual fees and go with a bank or credit union you can trust. When you get the card, make sure you use it responsibly and pay the balance in full and on time every month. If you do these things consistently over time, you can leave school with an excellent credit score. And if you want to rent an apartment or buy a car, having a good credit score is very important.

Our Top Pick

Discover it<sup>®</sup> for Students

APPLY NOW Secured

on Discover Bank’s secure website

Rates & Fees

Read Full Review

Discover it® for Students

Annual fee
$0
Cashback Rate
5% cash back at different places each quarter like gas stations, grocery stores, restaurants, Amazon.com, or wholesale clubs up to the quarterly maximum each time you activate. 1% unlimited cash back automatically on all other purchases.
Regular APR
14.49%-23.49%

Variable

Credit required
fair-credit
Fair

Best for Commuter Students

Bank of America® Cash Rewards credit card for Students

APPLY NOW Secured

on Bank Of America’s secure website

Bank of America® Cash Rewards credit card for Students

Annual fee
$0 For First Year
$0 Ongoing
Cashback Rate
1% cash back on every purchase, 2% at grocery stores and wholesale clubs, and 3% on gas for the first $2,500 in combined grocery/wholesale club/gas purchases each quarter
Regular Purchase APR
14.49%-24.49%

Variable

Credit required
fair-credit

Average

Best Flat-Rate Card

Journey<sup>®</sup> Student Rewards from Capital One<sup>®</sup>

APPLY NOW Secured

on Capital One’s secure website

Read Full Review

Journey® Student Rewards from Capital One®

Annual fee
$0
Cashback Rate
Earn 1% cash back on all your purchases. Pay on time to boost your cash back to a total of 1.25% for that month.
Regular Purchase APR
24.99%

Variable

Credit required
fair-credit
Average

Best Intro Bonus

Wells Fargo Cash Back College℠ Card

Annual fee
$0 For First Year
$0 Ongoing
Cashback Rate
up to 3%
Regular Purchase APR
12.65%-22.65%

Variable

Credit required
fair-credit
Fair Credit

Best Credit Union Card

Altra Federal Credit Union Student Visa

APPLY NOW Secured

on Altra’s secure website

Read Full Review

Altra Federal Credit Union Student Visa

Annual fee
$0 For First Year
$0 Ongoing
Rewards
1 point per dollar spent
Regular Purchase APR
15.15%

Fixed

Credit required
zero-credit
New to Credit

Best for Studying Abroad

Bank of America® Travel Rewards credit card for Students

APPLY NOW Secured

on Bank Of America’s secure website

Bank of America® Travel Rewards credit card for Students

Annual fee
$0 For First Year
$0 Ongoing
Rewards
1.5 points per dollar spent
Regular Purchase APR
16.49%-24.49%

Variable

Credit required
fair-credit
Fair Credit, Limited Credit history

Best Secured Card

Discover it<sup>®</sup> Secured Card - No Annual Fee

APPLY NOW Secured

on Discover Bank’s secure website

Rates & Fees

Read Full Review

Discover it® Secured Card - No Annual Fee

Annual fee
$0
Minimum Deposit
$200
Regular APR
24.49%

Variable

Credit required
bad-credit
Bad

Best for No Credit History

Deserve Edu Mastercard

APPLY NOW Secured

on Deserve’s secure website

Deserve Edu Mastercard

Annual fee
$0 For First Year
$0 Ongoing
Cashback Rate
1% on all purchases
Regular Purchase APR
20.24%

Variable

Credit required
zero-credit
New to Credit

Also ConsiderAlso Consider

Golden 1 Platinum Rewards for Students

Golden 1 Credit Union Platinum Rewards for Students:

This credit card offers a snazzy rewards program: rather than accumulate points, you’ll get a cash rebate instead. All you have to do is make a purchase. At the end of the month, you’ll get a rebate of 3% of gas, grocery, and restaurant purchases, and 1% of all other purchases deposited back into your Golden 1 savings account at the end of the month. You can join Golden 1 by joining the Financial Fitness Association for $8 per year and keeping at least $5 in a savings account.

What should I look for in a student credit card?

The most important thing to consider when looking for a student credit card is that it charges no annual fee. You should never have to pay to build your credit score. Fortunately, most student cards don’t charge you an annual fee, but it’s still something to watch out for.

The second most important thing you should keep an eye out for are tools that help you learn about credit or even promote good credit-building habits. For example, some student credit cards will give you a free monthly FICO score update. You can use this freebie to see in real time how your credit score changes as you build credit history by keeping the card open, or paying down your credit card balance, for example.

The last thing you should be considering when picking out a student credit card is the rewards program. I know, I know, it seems counterintuitive. But stick with me — I’ll show you why in the next question.

Why shouldn’t I be concerned about maximizing my rewards while in college?

Rewards cards are nice to have. But if you’re a college student, here’s the truth: you probably won’t spend enough to earn meaningful rewards.

Why? With a good rewards program, you can earn points or cash back. A small percentage of your monthly spending can add up quickly. However, given the tight budget that most college students live on, it will probably take a while to earn meaningful rewards. For example, if you earn 1.25% cash back and spend $300 a month on your card, you would earn $45 of cash back during the year.

College students are very good at making good use of $45. And our favorite card offers a great cash back rewards program. Just don’t expect to earn a lot of cash back, given the tight budget of a college student.

Why should I get a credit card as a college student?

There are a lot of great reasons why you should get a credit card, as long as you can commit to using it responsibly.

The single biggest reason why you should get a credit card as a college student is because you can start establishing a credit history now. When you graduate from college, you will need a good credit score to get an apartment. And your future employer will likely check your credit report. Building a good credit history while still in college will help prepare you for life after graduation.

Getting a credit card while in college can also train you to develop good credit habits now. But you need to be honest with yourself. If you find that you can’t avoid the temptation of maxing out your credit card, you might want to switch to a debit card or cash.

Finally, getting a credit card now can be the motivation you need to start learning about credit. These skills aren’t hard to learn, and they could save you thousands or even hundreds of thousands of dollars later in life (when you want a mortgage, for example).

What is the CARD Act and why should I care about it?

Many years ago, credit card companies would market on college campuses. You could get a free beer mug or t-shirt in exchange for a credit card application. And you would be able to qualify for a credit card without having any income. The Credit Card Accountability Responsibility and Disclosure (CARD) Act was signed into law in May 2009 to change a number of practices.

How did the CARD Act change student credit cards?

The CARD Act made a lot of changes in how credit card issuers do business with students. One of the biggest changes was requiring students to be able to demonstrate an ability to pay. If you are under 21 and do not have sufficient income (a campus job, for example), you would need to get a co-signer.

In addition, colleges must now limit the amount of credit card marketing on campus. The days of free t-shirts and pizzas in exchange for credit card applications are gone. But that doesn’t mean it is impossible for a college student to get a credit card. Some highly reputable banks and credit unions still offer student cards. And building a good credit score while still in college is still highly recommended.

How can I protect myself from racking up debt?

When used properly, credit cards are a very convenient method of repayment. However, when not used properly, you can end up deep in credit card debt. It is important to establish a healthy relationship to credit now, with your first credit card.

You should try to ensure that you pay off your credit card bill in full and on time every month. Ideally, you should set up an automatic monthly payment. And to keep yourself on track, take advantage of alerts offered by most credit card companies. You can even get daily text messages reminding you of your balance.

How can I automate my credit card usage?

If all of this sounds confusing, don’t worry. There’s actually a way you can automate your payments so you never even have to bother with the hassle of using a credit card. All it takes is a few minutes of upfront work.

First, you’ll need at least one recurring monthly bill of the same amount, such as Netflix or Spotify. Log in to your account and set up an automatic payment each month using your credit card. Make a note of how much your monthly bill costs.

Next, log in to your bank account. Set up a second automatic payment to go to your credit card each month for the same amount as the bill. If your bank doesn’t offer the option to set up automatic payments, you may also be able to set up your credit card to automatically withdraw the amount of the bill from your bank.

Because you know this bill will be for the same amount each month (barring any price increases), you can literally just leave this running in the background each month on autopilot. You don’t even have to carry your credit card in your wallet if you don’t want to. Then, when you graduate, you’ll automatically have an improved credit score!

What happens to my student credit card when I graduate?

Congratulations! You’ve made it to the finish line. But what about your student credit card? You will have a few options once you graduate and we detail them here.

Here is a summary of our favorite cards:

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

Lindsay VanSomeren
Lindsay VanSomeren |

Lindsay VanSomeren is a writer at MagnifyMoney. You can email Lindsay here

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College Students and Recent Grads

A Beginner’s Guide to Using a Credit Card

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

secured credit cards
iStock

Are you thinking about opening a credit card? Or have you recently opened a card? You may be overwhelmed by the various terms associated with credit cards, but worry not — we’ve compiled a guide to walk you through the common fees you may encounter as well as how to use your credit card beneficially.

How credit cards work

On a basic level, credit cards are lines of credit that you can use over and over again as long as you pay off your balance. They’re a handy way to pay for purchases and can help you build credit when used responsibly. Credit cards usually have detailed terms and conditions that list fees, rewards, benefit restrictions and more. As a new cardholder, you may be confused by these terms, but we’re here to help you understand common features so you can avoid unnecessary fees.

Typical credit card terms

  • Annual fee: This is the fee you will be charged each year — if your card has one.
  • Credit limit: The maximum amount of credit you can charge on your card.
  • APR: This is the annual percentage rate or, simply, the interest rate you will be charged on balances carried. Since the rate is annual, divide it by 12 to get your monthly interest rate. Most often, this rate is variable and fluctuates with the prime rate, so your APR may change at any time.
  • Cash advance APR: If you use your card to take out cash, you will be charged at a higher interest rate versus regular purchases.
  • Penalty APR: This is a higher APR than you are typically charged and is often the result of a late payment or returned payment. The penalty APR can be in effect for several months or indefinitely, depending on the issuer.
  • Intro 0% period: You may be fortunate to have a credit card that offers an introductory period — upward of six months — where you can benefit from carrying a balance and not being charged interest during that time. The terms for these intro periods vary.
  • Late payment fee: If you pay late, you will incur a fee typically greater than $30.
  • Returned payment fee: Payments you submit that aren’t approved may be subject to a fee usually upward of $30.
  • Foreign transaction fee: Some cards charge a fee for purchases made outside the U.S. that is typically around 3%.
  • Cash advance fee: Cash advances you request most likely will be charged a 3%-5% fee of the amount requested.
  • Balance transfer fee: Any balances you transfer from an existing credit card to an eligible new card may be subject to a balance transfer fee, on average 3%-5% of the amount transferred.

Other common credit card features

  • Sign-up bonus: Your card may offer a sign-up bonus, which typically requires you to spend a certain amount within a given time period (usually three months) to receive a bonus.
  • Rewards: Many credit cards offer rewards programs that can earn you cash back, points and miles for purchases. This can be a great way to be rewarded for your spending, but don’t overspend and risk falling into debt for the sake of earning rewards.
  • Alerts: Issuers often let you set up fraud or balance limit alerts and reminders when it’s time for a payment.
  • Autopay: If available, set this up so you avoid late or missed payments.

Choose a card that fits your needs

There are numerous credit cards available for a wide range of needs from building credit to earning rewards, to getting out of debt and more. You should decide what your goal is with a credit card, then compare cards from various issuers prior to applying. Some issuers allow you to fill out a pre-qualification form that performs a soft pull on your credit to see if you may qualify for a card. This does not affect your credit score and is a great way to shop around for the best deals. One note: Pre-qualification is not a guarantee of approval.

Read our list of the best credit cards in a variety of categories to find a card for your needs.

Read the terms and conditions

An important step prior to applying for a credit card is to review the cardmember agreement. Each card has different rates and fees that vary based on any number of reasons, including credit history, actions you take (or don’t take), the prime rate in the market and more. It’s key to review the cardmember agreement so you’re aware of any fees you may be charged as well as how the card works. On our site, we’ve reviewed cards from top issuers as well as lesser known cards to help you make sense of some of the terms you face — but still be sure to read the cardmember agreement before you apply.

Practice responsible credit behavior

Make on-time payments. Perhaps the most important part of maintaining a credit card is to make timely payments. By doing so, you avoid late payment fees and penalty APRs that hurt your credit score. Autopay is a helpful feature to ensure your bill is paid on time, or you can set up reminders.

Pay your balance in full. A great goal is to always pay your bill in full so you don’t carry a balance. Any unpaid balance will be charged interest (unless associated with a promotion) and can cause you to rack up debt. This also negatively affects your credit score.

Avoid overspending. It’s common for people to mismanage their credit cards and be tempted to overspend, but with proper budgeting, you can avoid falling into debt. A good rule of thumb is to only spend what you can afford to pay at the time of purchase — this way you know you can pay off your balance. Also, if you have a rewards card, don’t overspend just to earn rewards because the debt you incur will counteract any rewards.

Keep a low utilization rate. The percentage of available credit you use is known as utilization, and is a factor in your credit score. It’s important to keep a low utilization rate so issuers see you’re not a risk. Constantly maxing out your card raises concerns for issuers and can cause you to fall into debt.

Check your monthly statements. By simply reviewing your monthly statements, you can proactively notice any fraud that may occur on your account and isn’t flagged by your credit card company. Most companies send notifications if they think there’s fraud on your account, but they don’t catch every instance of suspicious behavior.

Check your credit score and credit report. Checking your credit score on a monthly basis is a good habit to get into and can promote positive credit behavior. Read our guide for where to access your free credit score and other credit tips. It’s also a good idea to check your credit report every few months to make sure everything checks out and no unknown accounts are open in your name. Annualcreditreport.com is the only source for authorized credit reports from the three major credit bureaus and you can run one report every year for each bureau — we recommend spacing them out every four months.

Secure your card. Don’t leave your card unattended and don’t loan it to friends since neither of those actions have a positive result. Your card is your responsibility and should be treated with care. If you happen to lose your card or it’s stolen, contact your issuer immediately and put a hold on your account until your card is found or replaced.

Don’t request a cash advance. Cash advances are notorious for high fees and tricky terms than can draw you into debt, so it’s best to avoid them at all costs. If you need cash, look to personal loans, which may have better terms.

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

Alexandria White
Alexandria White |

Alexandria White is a writer at MagnifyMoney. You can email Alexandria at alexandria@magnifymoney.com

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College Students and Recent Grads

Everything You Need to Know About the TEACH Grant

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

iStock

A March government study found that about 12,000 recipients of the TEACH Grant, a grant for college students who agree to teach needed subjects at lower-income areas, had their grants converted into loans.

This happens sometimes because students didn’t fulfill their service obligations, and other times it was due to minor process errors, according to the U.S. Department Education’s study of the TEACH Grant program.

The report said 63 percent of TEACH Grant recipients who began their teaching service before July 2014 had their grants converted to a loan, either because they had not met the service requirements or the annual certification requirements. When TEACH Grant recipients first received their grants, the study says, 89 percent participants thought they were likely or very likely to meet the service requirements.

Ashley Norwood, consumer and regulatory adviser at American Student Assistance, a nonprofit organization dedicated to helping students complete the financing and repayment of higher education, told MagnifyMoney she has seen more grant recipients face the grant-loan-conversion issue as more students have signed up for the program, and it happened for various reasons.

“I don’t think anyone is all at fault. I think that it’s a combination of errors,” said Norwood.

The program is complicated — the amount of paperwork and procedures required to administer and participate in the TEACH Grant is onerous, she said. Oftentimes, schools don’t offer rigorous upfront counseling about the grant due to a lack of resources or personnel. And on the students’ part, they don’t always stay on top of the service obligations and other requirements they agreed to, Norwood said.

In this guide, we offer expert tips for getting the grant and avoiding the grant-loan conversion. We also provide actionable advice for grant recipients whose grants have been converted to loans.

What is a TEACH grant?

Since 2008, the federal government has been offering TEACH grants to college students who commit to teach in a needed field, like math and science, at a school that serves students from lower-income families.

A student can receive a Teacher Education Assistance for College and Higher Education (TEACH) Grant of up to $4,000 a year, but budget cuts reduced the maximum award in recent years:

  • For any 2017–18 TEACH Grant first disbursed on or after Oct. 1, 2016, and before Oct. 1, 2017, the maximum award was $3,724.
  • For any 2017–18 TEACH Grant first disbursed on or after Oct. 1, 2017, and before Oct. 1, 2018, the maximum award is $3,736.

Recipients must complete coursework needed to begin their career as a qualifying teacher, and must sign an agreement to teach at least four years in an eight-year time frame after graduation. After finishing their program, they must provide an annual certification that they are currently teaching in a high-need field and a low-income school or intend to do so. Those who do not meet the requirements will see their TEACH Grants be converted to unsubsidized loans.

How to get the TEACH grant

Step 1: Do the research

If you are interested in applying for TEACH Grant, you should contact the financial aid office at your school to find out whether your school participates in the TEACH Grant and which courses of study are TEACH Grant-eligible. The financial aid office staff should be able to walk you through the benefits and service requirements.

As of the first quarter of the 2017-18 academic year, 572 higher education institutions participated in the grant, according to the American Association of Colleges for Teacher Education. Schools determine which programs are TEACH Grant-eligible.

It’s not as simple as an English major hoping to teach English after graduation being eligible for the grant. A program of study that’s eligible for the TEACH Grant is a specific program designed to prepare students qualified to teach in a high-need subject. You want to make sure you are enrolled in the right program. It could be an undergraduate, graduate or post-baccalaureate program.

A post-baccalaureate program is not TEACH Grant-eligible if your school also offers a bachelor’s degree in education.

Step 2: Apply

Once you decide to participate in the program and are enrolled in the right program, you will need to apply for a TEACH Grant by completing a FAFSA form.

Step 3: Complete counseling

Then you will need to complete TEACH Grant Initial Counseling, which occurs online and explains the terms and conditions of the TEACH Grant service obligation.

This is an important task because you will learn what exactly you are signing up for during the process. It takes about 20 minutes to complete the counseling, and you will need a FSA ID and your school name for it. You must complete the counseling process every year you receive a TEACH Grant, and you can do so here.

Step 4: Sign the agreement

The last step in the grant application process is completing an Agreement to Serve, a legally binding document that explains the service obligations and conditions of the TEACH Grant, as well as your rights and responsibilities if the grant is converted to a loan. You commit to those terms when signing the Agreement to Serve.

Each year you receive a TEACH Grant, you must sign an Agreement to Serve. A read-only version of the agreement can be accessed here. You can sign the document here. Your school will be notified once you submit your Agreement to Serve.

An additional note

It is important to keep a copy of all of your TEACH Grant paperwork and correspondence with your grant servicer for your records.

What to do while you’re still in school

You only qualify for a grant if your score is in the top 25th percentile on college admissions tests, and you need to maintain a cumulative 3.25 GPA to maintain your eligibility for the funds, according to the American Association of Colleges for Teacher Education. Remember to complete the counseling and the Agreement to Serve each year that you receive a TEACH Grant.

When you’re looking for employment, make sure that you are going to teach full time in a high-need subject in a school serving low-income families.

Experts suggest grant recipients be cognizant that this grant can turn into a loan if you are not careful.

Norwood said if you decide that you are not going to teach or you are not going to serve in a low-income area, you may return the grant, but you have very little time to make that decision. You can cancel the full grant or a portion of it the first day of the school’s payment period or 14 days after your school sends you a notification stating your right to cancel. If you do so during the timeframe, your school will return to the Department of Education your awarded funds, which won’t be converted to a loan.

How to prevent the TEACH grant from turning into a loan

Meet all the service requirements

Once you complete your education, you have to meet all the requirements stated in your Agreement to Serve:

1. You must teach in high-need fields

They are identified by the federal government or a local education agency. Common high-need fields include bilingual education, science, reading specialist, math and foreign language. The subject you teach must be listed within the Teacher Shortage Area Nationwide Listing for the state in which you teach, either when you begin your service or when you sign the Agreement to Serve, according to the Department of Education. The most recent list is here.

Norwood said that it’s fine if teachers bounce around qualifying subjects, but if you teach any of the fields not considered a high-need one, then you’re not performing the required service.

2. You must work full time in qualified fields for at least 4 years

They don’t have to be four consecutive years, but you need to finish your teaching service within eight years of graduating. And more than half of the classes you teach each school year are in high-need fields.

3. You must teach in a school serving low-income families

You must perform the teaching service as a highly qualified teacher (defined by Title IX) at a low-income elementary school, secondary school (public or private) or educational service agency.

Qualified schools are listed in the department’s annual Teacher Cancellation Low-Income Directory. Schools operated by the U.S. Department of the Interior’s Bureau of Indian Education (BIE) or on Indian reservations by Indian tribal groups under contract or grant with the BIE qualify as low-income schools. That list is here.

4. You must provide your TEACH Grant servicer with documentation of service performance process

Within 120 days of completing the education for which you received a TEACH Grant, you must tell your TEACH Grant servicer in writing that you are working as a full-time teacher (or that you plan to do so), according to the terms and conditions of the TEACH Grant service obligation.

Complete the annual certification

Every year, you have to offer your grant servicer paperwork documenting your teaching service. You can obtain the required form from your servicer. The paperwork must be signed off by the chief administrative officer or an authorized official at the school where you taught for the year being certified. The official must confirm you performed qualified service in the right school and more than half of your classes were in high-need fields.

If you have completed your education but are not employed in a qualifying teaching position, you must notify your grant servicer at least once each year that you still intend to satisfy your service obligation.

Your TEACH Grant servicer is supposed to contact you periodically to confirm your intent to satisfy your obligation, but experts said you need to be on top of providing annual information. Take it upon yourself to make regular contact with your servicer, particularly if you don’t start your qualified service immediately after finishing your education.

At the latest, you should start your qualified teaching service four years after completing the program where you received the TEACH Grant, Norwood said.

If you don’t meet any of the service requirements, your grant will be converted to a direct unsubsidized loan. Read more about conditions that convert a TEACH Grant to a loan here.

Common problems

Norwood said many people encountered issues because they didn’t get the right paperwork to keep the servicer updated of their progress, possibly because they didn’t keep their address up-to-date with their servicer. It could also be that they didn’t complete the form correctly or missed the deadline to submit their annual certification.

“If I had a piece of advice, I would say just to students to make sure they really pay attention to what they’re signing, and open mail from the Department of Education or a servicer as soon as it comes,” Norwood said. “Don’t ignore it.”

A staff member at the American Federation of Teachers spoke on background that sometimes the grant is converted to a loan because the recipient made a minor error in their paperwork, but there is no appeal process with the servicer, and so the teacher can’t correct it.

Because the servicer is very particular and exact about details, the American Federation of Teachers advises educators to carefully review all the forms they send to the servicer.

What to do if you feel you your grant is wrongly converted to a loan

The Department of Education contracts servicers to handle the TEACH Grant, and FedLoan Servicing currently services TEACH Grants. It monitors the process to make sure recipients do everything correctly and, after you complete the paperwork certifying that you’ve met all the qualifications, you send over the documentation. In the event that a grant must convert to a loan, FedLoan Servicing will execute it, apply interest retroactively and begin loan servicing.

If you think you have done everything correctly and met all the requirements but your grant is converted to a loan, experts suggest you engage with your grant servicer first.

Norwood advised grant recipients in this situation to reach out to the people whom you have been working with on the grant. If that doesn’t work, you can then seek help from the servicer’s ombudsman, an impartial mediator who will take a look at the situation, identify problems and help settle the issue, Norwood said.

If FedLoan Servicing’s ombudsman can’t help solve the problem, you can then file a dispute with the Federal Student Aid Ombudsman Group with the education department. The ombudsman is established as a neutral party to help fix problems that include grant-loan conversion.

You can reach the ombudsman online, by phone at (877) 557-2575, or at:
Office of the Ombudsman
U.S. Department of Education
830 First Street NE, Mail Stop 5144
Washington, D.C. 20201-5144

Depending on specific situations, Norwood said issues caused by recipients, such as missing a deadline, may not get much sympathy. But if processing errors occurred on either side, there may be some leeway there, and a loan may revert back to a grant, Norwood said.

How to repay a TEACH grant that converted to a loan

If the grant converts to a loan, you will be given the opportunity to pay the interest that accrued before it capitalizes.

“If you can make extra payments,” Norwood said, “I would make extra payments to help pay down that interest.”

But if you can’t, interest capitalizes when the loan enters repayment at the end of a 6-month grace period, which starts the day after your grant is converted to a loan.

Norwood advises you make sure to get on a repayment plan that works for you. If you have other federal loans in your name, you may consolidate them.

Interest rates

The loan servicer will retroactively apply interest, which accrues from the time you received your first grant, as if you signed a loan instead of received a grant.

For instance, if you signed the agreement in September 2013, it would be subject to the interest rate applied to unsubsidized direct loans disbursed in September 2013. The servicer will calculate your outstanding interest as if it had accrued over the last five years.

If the grant is wrongly converted to a loan, Norwood suggests the recipient still make payments, because you could always get refunded later.

You can also ask for the loan to be placed in forbearance while your case is being investigated by the Department of Education. This way, you can put off making payments until you’ve received a resolution. If the grant was indeed wrongly converted to a loan, Norwood said you won’t need to get a refund because you haven’t paid anything upfront. But if the loan doesn’t revert back to a grant, you at least paid the interest that accrued during the forbearance.

Repayment plans

The repayment plans for a student loan converted from a TEACH Grant are the same for all other federal loans. You can go with the standard repayment plan, graduated plan or income-driven plan, among others. Your loan servicer will be FedLoan Servicing.

Consolidate and refinance

You can consolidate the loan with other eligible federal loans, but there’s no refinancing option in the federal loan program. However, you could refinance with a private lender, Norwood said. Just remember you will lose all of the federal benefits such as Public Service Loan Forgiveness, deferment, forbearance and income-driven repayment plans if you are out of the federal student loan system.

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Shen Lu
Shen Lu |

Shen Lu is a writer at MagnifyMoney. You can email Shen Lu at shenlu@magnifymoney.com

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