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College Students and Recent Grads, Life Events, Pay Down My Debt

What is a 401(k) Loan and How Does it Work?

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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If you’re in need of money and your savings account balance is low, you may be tempted to use the handy little loan provision that most 401(k) plans offer. That’s right! You can probably borrow money from your 401(k). Right from your own account! It’s a nifty feature, but is it a good idea?

Today we’re going to start examining that question by diving into what exactly a 401(k) loan is and how it works. The next post in this series will look at a few situations in which borrowing from your 401(k) can work in your favor.

Let’s get into it!

Quick note: Every 401(k) plan has different terms and conditions and some plans don’t allow for loans at all. Consult your Summary Plan Description for specific details about how your plan handles loans.

What Is a 401(k) Loan?

When you borrow from your 401(k) you are actually borrowing money directly from yourself.

The loan is taken directly out of your 401(k) account balance. Then a repayment plan is created based on the amount you borrowed and the interest rate and those payments are made back into your 401(k) account, typically through an automatic payroll deduction.

In other words, you are borrowing from yourself and paying yourself back. Both the principal and the interest on the loan eventually make their way back into your 401(k).

How Much Can You Borrow?

Figuring out how much you can borrow from your 401(k) can be a little tricky, but here’s a quick summary.

If you haven’t had any outstanding 401(k) loan balance within the past 12 months, you are allowed to borrow the lesser of:

  • $50,000, or
  • 50% of your vested 401(k) balance. If that amount is less than $10,000 then you can borrow up to $10,000, but never more than your total account balance.

Sounds simple, right? But wait, there’s more…

If you have had an outstanding 401(k) balance within the past 12 months, the amount you’re allowed to borrow is reduced by the largest balance you had over that period.

Let’s look at a few examples:

  • Example #1: Joe has $25,000 in his 401(k) and has not had a 401(k) loan balance within the past 12 months. He is allowed to borrow up to $12,500.
  • Example #2: Theresa has $15,000 in her 401(k) and has not had a 401(k) loan balance within the past 12 months. She is allowed to borrow up to $10,000.
  • Example #3: Becca has $150,000 in her 401(k) and has not had a 401(k) loan balance within the past 12 months. She is allowed to borrow up to $50,000.
  • Example #4: Steve has $25,000 in his 401(k) and did have a 401(k) loan balance of $5,000 within the past 12 months. He is allowed to borrow up to $7,500.

What Is the Interest Rate?

Each 401(k) plan is allowed to set their own loan interest rate. You should consult your Summary Plan Description or ask your HR rep for details about your specific plan.

However, the most common interest rate is the prime rate plus 1%.

What Can the Money Be Used For?

In many cases there are no restrictions on how you use the money. It can be put to work however you want.

But some plans will only lend money for certain needs, such as education expenses, medical expenses, or a first-time home purchase.

How Long Do You Have to Pay the Loan Back?

Typically, your 401(k) loan must be paid back within 5 years. If the loan is used to help buy a house, the term may be extended up to 10-15 years.

The catch is that if your employment ends for any reason, the entire remaining loan balance is typically due within 60 days. If you aren’t able to pay it back within that time period, the loan defaults.

What Happens If You Default on the Loan?

A 401(k) loan defaults any time you aren’t able to comply with the terms of the loan. That could be failing to make your regular payments or failing to repay the remaining loan balance within 60 days of leaving the company.

When that happens, the remaining loan balance is counted as a distribution from your 401(k). That has two big consequences:

  1. Unless you’re already age 59.5 or meet other special criteria, that money will be taxed and hit with a 10% penalty.
  2. The defaulted amount is not eligible to be rolled over into an IRA or other employer retirement plan. So there’s no way to avoid the taxes and penalty.

The good news is that the default is not reported to the credit bureaus and therefore has no impact on your credit score. Though if you’re applying for a mortgage or other loan, the lenders may ask about any 401(k) loan defaults and factor that into their decision.

How Do You Apply for a 401(k) Loan?

And as long as you have a vested 401(k) balance, the process loan application process is typically pretty simple.

Other than adhering to any specific restrictions your plan may enforce (see above), it’s usually as easy as requesting the loan. That can often be done online or at worst with a little paperwork through your human resources department.

There is no credit check for 401(k) loans, which can make them easier to get than other types of loans. And loans must be available to all employees, so you should be able to get approved no matter what your position is in the company.

Other Considerations

Here are a few other things to consider as you weigh the pros and cons of taking out a 401(k) loan:

  • Other than the possibility of default, the biggest potential cost is the missed investment returns while the money is out of your 401(k). Depending on the size of the loan and the market returns during the life of the loan, that could be significant.
  • Your spouse often has to sign off on the loan.
  • You can have more than one 401(k) loan out at a time, but the total loan balance can’t exceed the limits described above.
  • There may be a fee involved with taking out the loan.
  • Your loan payments do not count as 401(k) contributions, and your employer may or may not allow you to keep contributing to your 401(k) while your loan is outstanding.
  • Because the loan is not reported to credit agencies, a 401(k) loan is not a way to build your credit history or increase your credit score.
  • You typically cannot take a loan from a 401(k) you still have with an old employer.

Is a 401(k) Loan a Good Idea?

Those are the nuts and bolts of 401(k) loans, so is taking out a 401(k) loan a good idea? The answer is a definite maybe. There are times where it can be the best option, times where it’s a bad idea, and times where it can actually increase your overall investment return. Regardless, you should be sure to do a deep analysis and determine if you will definitely be able to pay the loan back in a timely manner before utilizing the 401(k) loan.

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

Matt Becker
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Matt Becker is a writer at MagnifyMoney. You can email Matt here

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College Students and Recent Grads

How to Understand Your Student Loan Amortization Schedule

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.

obama student loan forgiveness
Source: iStock

Paying off your student loans is no easy feat. It can be hard enough to fit the minimum monthly payments into your budget. And if you want to pay them off earlier, you’re left to navigate the various types of loans and interest rates in order to determine your best options.

One helpful step in cutting through the confusion, getting organized and creating a repayment plan is understanding your various student loan “amortization tables.”

An amortization table breaks down every single one of your student loan payments over the life of your loan, showing how each payment is split between principal and interest. It also shows you how much interest you’ll pay over the life of the loan and how quickly your loan will be paid off.

It’s vital information if you want to pay off your student loans as quickly as possible. Read on to find out how amortization tables can help you do just that.

Understanding a student loan amortization schedule

Amortization is simply the process by which your loan payments are split between interest and principal. That split determines how quickly your loan is paid off and how much interest you pay over that period.

“When you take out a student loan, you’re borrowing a certain amount of money that needs to be paid back,” said Lauryn Williams, CFP and founder of Worth Winning. “And the lender also needs to get some kind of return, which is where interest comes into play. So your payments have to balance paying back the loan and paying interest, so that by the end of the loan term the entire debt is paid.”

The catch is that each payment differs in how it’s split between principal and interest. This happens for two main reasons:

  1. Each payment is first used to pay off any interest that has accrued since the last payment, with the remainder used to reduce the loan principal.
  2. The accrued interest is typically highest at the beginning of the loan repayment period, when the loan balance is also at its highest.

What that means is that a significant portion of your initial payments will go toward interest. But over time, as you continue making payments that decrease the loan balance, less interest accrues between payments, and so more of each payment can go toward paying down the principal.

An amortization table is simply a graphic that shows you exactly how each payment will be split between principal and interest over the life of the loan.

Here’s an example that shows the first six payments and last six payments of a $10,000 student loan with a 6.8% interest rate during a 10-year repayment period:

Sample Student Loan Amortization Table

Based on someone with a $10,000 student loan at a 6.8% interest rate over a 10-year (120-month) repayment period.

Month

Your monthly payment

Portion of the payment that goes toward principal

Portion of the payment that goes toward interest

Total interest paid so far

Remaining loan balance

1

$115.08

$58.41

$56.67

$56.67

$9,941.59

2

$115.08

$58.74

$56.34

$113.00

$9,882.84

3

$115.08

$59.08

$56.00

$169.01

$9,823.76

4

$115.08

$59.41

$55.67

$224.67

$9,764.35

5

$115.08

$59.75

$55.33

$280.00

$9,704.60

6

$115.08

$60.09

$54.99

$335.00

$9,644.52

...

115

$115.08

$111.24

$3.84

$3,799.99

$565.75

116

$115.08

$111.87

$3.21

$3,803.19

$453.87

117

$115.08

$112.51

$2.57

$3,805.76

$341.36

118

$115.08

$113.15

$1.93

$3,807.70

$228.22

119

$115.08

$113.79

$1.29

$3,808.99

$114.43

120

$115.08

$114.43

$0.65

$3,809.64

$0.00

As you can see, the initial payments are split roughly 50-50 between principal and interest. But by the time those last few payments are made, the amount going toward principal has increased to almost 100% of the monthly payment.

A full amortization table would show exactly how much is going toward principal and interest for each of the 120 payments, as well as what your remaining loan balance is along the way. This helps you understand exactly how your student loan will be paid off over time.

A student loan amortization table also helps you understand the total amount of money you’ll be spending over the life of the loan. In the example above, you can see that you would pay a total $3,809.64 in interest over 10 years, in addition to the $10,000 needed to pay back the principal.

“You really need to think about the long-term cost of the money you’re borrowing,” said Williams. “An amortization table makes it easy to see the true cost of the loan in a way that you can understand.”

That cost can be incredibly high, especially if you’re borrowing large amounts of money and paying it off over extended 20- to 25-year time periods. Clint Gossage, CFP and founder of CMG Financial Consulting, sees this often with professionals who have borrowed hundreds of thousands of dollars.

“In some cases, the total amount of student loan payments may be several times your current balance by the time it’s all paid off in the end,” said Gossage. “It’s important to understand how long it’s really going to take to pay back your loans and how much it’s going to cost.”

Amortization and income-driven repayment plans

If you’re enrolled in an income-driven repayment plan, your payment is based on your monthly income, and it may fluctuate over time.

This can lead to unpredictable amortization, and in some cases your monthly payment might not be enough to cover all of the interest that accrues. That’s called negative amortization, and how it’s handled depends on the type of loan and the repayment program you’re participating in.

  • For subsidized loans under REPAYE, the government will pay all remaining interest for up to three consecutive years from the start of your REPAYE plan. After that, the government will pay half of the remaining interest on subsidized loans.
  • For unsubsidized loans under REPAYE, the government will pay half of remaining interest during the entire life of the loan.
  • For subsidized loans under PAYE or Income-Based Repayment (IBR), the government will pay all remaining interest for up to three consecutive years at the beginning of your repayment plan. After that, unpaid interest will accrue without any government assistance.
  • For unsubsidized loans under PAYE or IBR, unpaid interest will accrue from the beginning without any government assistance.

Steps to beating the student loan amortization schedule

If you’re looking at your student loan amortization table thinking that it will either take too long or cost too much to pay off your student loans, there are a few strategies that could accelerate your repayment. Doing so can not only save you money, but it can free up money for other goals.

“The biggest benefit of paying off your student loans early is that it frees up cash flow to do the things that you want to do with it, whether those are lifestyle choices or investing for your future,” said Gossage. “Not to mention the big relief that comes from having the weight of those loans off your shoulders.”

Here are some strategies that could help you beat your student loan amortization table and pay your loans off faster.

1. Cut back on other expenses

One of the best ways to find more room for student loan payments is to simply look at your other expenses and find places to scale back.

“I find that your car and housing are two big expenses that people are able to cut back on,” said Williams. “If you can get a roommate or trade in your $700 per month car payment for a $3,000 jalopy, it can make it a lot easier to pay off your loan.”

Williams said that while these changes might be difficult to make, the long-term benefit can be huge.

“You have more time than you might think for other goals if you really focus on this for a short time period,” Williams said. “If you do what you need to do to get those student loans off your back, you can free yourself up to really do the things you want to do.”

2. Automate extra payments

If you have the room in your budget to make regular extra payments toward your student loans, automating those payments helps to make sure they happen consistently.

“One of the best things you can do is make sure that every time you get paid, the first thing you do is send a payment to your student loan,” said Williams. “If you can do that with just a few clicks, then why not?”

Automating your payments allows you to make consistent progress and it frees you from the burden and stress of having to remember to manually make those payments each month. And if you have private student loans, lenders will often give you a discount on your interest rate if you sign up for autopay.

3. Refinance (with caution)

If your student loans have higher interest rates, refinancing could be a good option to explore.

“Interest rates are very high if you have federal loans, typically between 6% and 8%,” said Gossage. “If you use one of the private lenders out there, you could get a much more competitive rate.”

You need to be cautious, however, especially before deciding to refinance federal loans. Federal student loans include a number of protections that aren’t typically offered by private student loans, such as the ability to enroll in income-driven repayment programs, have some of your debt forgiven and temporarily postpone payments if you run into financial difficulty.

“Once you’ve moved your loans from federal to private, that’s a forever move, and you need to be really committed to paying your loans off,” said Williams. “If you owe more than 1.5 times your annual salary in student loans, then refinancing from federal to private might not be a good idea.”

However, the decision to refinance is a lot easier if you’re starting with private loans.

“If you already have private loans in place and you’re thinking about refinancing, you should usually go for it if you can get a better interest rate,” said Williams.

Check out our top picks for refinancing your student loans.

4. Prioritize higher interest-rate loans

There are two schools of thought when it comes to paying off debt.

The debt snowball approach argues for paying the lowest balance loans first, since doing so will provide the motivation you need to keep going. The debt avalanche approach argues for paying the highest interest-rate loans first, since doing so will save you the most money and pay off your loans more quickly.

“It really depends on how you’re mentally ready to deal with your loans,” said Williams. “A lot of people enjoy paying the smallest loan off first so that you can feel like you got a big win. But if you have the ability, it’s usually best to go after the highest interest rate first.”

You can use this tool to run the numbers yourself, but directing extra payments to your student loan with the highest interest rate is generally the most efficient route.

5. Take advantage of income-driven repayment

You may be eligible for income-driven repayment if you have federal student loans. These programs adjust your monthly payment based on your income. They also offer the opportunity to have some of your loan balance forgiven down the line, and they can make it easier to prioritize your payments toward your most expensive loans.

“Staying on an income-driven plan like REPAYE can give you a low monthly payment, and then any free cash flow you have can go toward the highest interest rate first,” said Gossage. “That’s a good way to make progress if you only have a little bit of extra cash flow to put toward your student loans.”

Gossage also stressed the potential benefits of student loan forgiveness under these plans, especially if you qualify for Public Service Loan Forgiveness.

“It still takes 10 years to get your loans forgiven, but in that time you can be in an income-driven plan that minimizes your payments and frees up cash flow to do other things,” said Gossage. “Instead of putting all your money toward student loans, you could be saving for retirement, saving for a down payment on a house or making progress toward one of your other long-term goals.”

Making student loan amortization work for you

Student loan amortization isn’t the most exciting topic in the world, but it is key to understanding the long-term cost of your student loans, as well as how to pay them off as quickly and efficiently as possible.

With the right payments to the right loans at the right times, you can save money and get to being debt-free a whole lot sooner.

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.

Matt Becker
Matt Becker |

Matt Becker is a writer at MagnifyMoney. You can email Matt here

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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: September 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

3.90% - 7.80%


Fixed Rate*

2.57% - 6.61%


Variable Rate*

No Max


Undergrad/Grad
Max Loan
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EarnestA+

20


Years

3.89% - 6.32%


Fixed Rate

2.47% - 5.87%


Variable Rate

No Max


Undergrad/Grad
Max Loan
Learn more Secured
CommonBondA+

20


Years

3.20% - 7.25%


Fixed Rate

2.48% - 7.00%


Variable Rate

No Max


Undergrad/Grad
Max Loan
Learn more Secured
LendKeyA+

20


Years

3.49% - 8.72%


Fixed Rate

2.47% - 8.03%


Variable Rate

$125k / $175k


Undergrad/Grad
Max Loan
Learn more Secured
Laurel Road BankA+

20


Years

3.50% - 7.02%


Fixed Rate

2.80% - 6.22%


Variable Rate

No Max


Undergrad/Grad
Max Loan
Learn more Secured
Citizens BankA+

20


Years

3.75% - 8.69%


Fixed Rate

2.57% - 8.17%


Variable Rate

$90k / $350k


Undergraduate /
Graduate
Learn more Secured
Discover Student LoansA+

20


Years

5.24% - 8.24%


Fixed Rate

4.87% - 8.12%


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
LendKey

680

Undergraduate
& Graduate

Private & Federal

$24K

Yes

Learn more Secured
Laurel Road Bank

Not published

Undergraduate
& Graduate

Private, Federal,
& Parent PLUS

None

Yes


(or signed job offer)
Learn more Secured
Citizens Bank

680

Undergraduate
& Graduate

Private, Federal,
& Parent PLUS

$24K

Yes

Learn more Secured
Discover Student Loans

Not published

Undergraduate
& Graduate

Private & Federal

None

Yes

Learn more Secured

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 2.57% and Fixed Rates from 3.90% (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

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Earnest : Variable Rates from 2.47% and Fixed Rates from 3.89% (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 2.48% 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 2.47% and Fixed Rates from 3.49% (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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Laurel Road Bank : Variable Rates from 2.80% and Fixed Rates from 3.50% (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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Citizens Bank (RI) : Variable Rates from 2.57% and Fixed Rates from 3.75% (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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Discover Student Loans : Variable Rates from 4.87% 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% – 4.45% 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 3.50% 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 4.13% 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 3.87% (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 2.55% – 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 4.05% – 7.65% 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 4.00% to 8.00% 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 2.57%-8.17% APR and fixed interest rates ranging from 3.25% – 9.66% 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.

Is it worth it to refinance student loans?

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.

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.

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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Best of, College Students and Recent Grads, Credit Cards

Best Student Credit Cards September 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® Student Cash Back

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Rates & Fees

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Discover it® Student Cash Back

Annual fee
$0
Rewards 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
14.74% - 23.74% Variable
Credit required
fair-credit
Fair Credit

Magnify Glass Pros

  • Good Grades Reward program: Did you study extra hard this year? If you’ve gotten a 3.0 GPA or higher for an entire school year, Discover will reward you with an extra $20 statement credit. You can get this reward for up to five years in a row as long as you’re still a current student when you apply.
  • Free FICO® score: Just like how you have grades for your classes, your FICO® score is your “grade” for your credit. Credit cards have a huge effect on your FICO® score. You can watch how your new credit card affects your score over time with a free FICO® score update on your monthly statement.
  • 5% cash back : You can earn up to 5% cash back at different places that change each quarter, on up to $1,500 in purchases every quarter that you activate. Past categories have included things like Amazon purchases, restaurants, and ground transportation. Even if you don’t buy something in the bonus category, you’ll still earn 1% cash back on all other purchases.
  • Cash back match at end of your first year: In addition to rotating 5% cash back categories, new cardmembers will also get an intro bonus. When your first card anniversary comes around, Discover will automatically match your cash back rewards you earned during your first year.

Cons Cons

  • Remember to sign up for bonus places: Even though this card comes with a great cash back rewards program, it comes with a catch: you’ll need to manually activate the bonus places each quarter. You can do this by calling Discover or logging in to your account online. If you forget, you’ll still earn 1% cash back if you make any purchases in the qualifying categories.
  • Gift certificates only available at certain levels: You can redeem your rewards for many things such as Amazon purchases, a statement credit, or a donation to a charity, to name a few. But, if you’d like to get a gift card instead, you’ll need a cash back balance of at least $20 saved up in your account.
Bottom line

Bottom line

The Discover it® Student Cash Back offers great perks for college students, such as a rewards program for good grades and a free FICO® score so you can learn about your credit firsthand. Its cash back rewards program is our favorite. No other card for students (that we could find) offers the opportunity to earn up to 5% cash back. And with no annual fee, this is our top pick.

Read our full review of the Discover it® Student Cash Back

Best for Commuter Students

Bank of America® Cash Rewards Credit Card for Students

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on Bank Of America’s secure website

Bank of America® Cash Rewards Credit Card for Students

Annual fee
$0
Rewards 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
14.99% - 24.99% Variable
Credit required
good-credit

Good

Magnify Glass Pros

  • Cashback program: You’ll earn 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. The higher rate you get for gas purchases is great for students who commute to class.
  • Redemption bonus: If you’re a Bank of America customer, you’ll receive a 10% customer bonus every time you redeem your cash back into a Bank of America® checking or savings account. The bonus is even better if you’re a Bank of America Preferred Rewards client — you could get a 25-75% bonus. Cardholders who redeem this way will maximize their cash back.
  • Free FICO® Score: A large part of getting a credit card in college is to build your credit score. The hope is that monitoring your FICO® Score on a monthly basis will let you see your score rise through proper credit behavior.

Cons Cons

  • Foreign transaction fee: This card has a foreign transaction fee of 3% of the U.S. dollar amount of each transaction, not suitable for students who travel abroad. You will negate any cash back earned while using this card outside the U.S.
Bottom line

Bottom line

The Bank of America® Cash Rewards Credit Card for Students is a great option for students who commute to class and spend on groceries. This card has an added redemption bonus for Bank of America® checking or savings accountholders that is a great way to increase your cash back.

Best Flat-Rate Card

Journey® Student Rewards from Capital One®

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Journey® Student Rewards from Capital One®

Annual fee
$0
Rewards Rate
1% Cash Back on all purchases; 0.25% Cash Back bonus on the cash back you earn each month you pay on time
Regular Purchase APR
24.99% (Variable)
Credit required
bad-credit
Average/Fair/Limited

Magnify Glass Pros

  • 1.25% cash back if you pay on time: Each purchase you make earns a flat-rate 1% Cash Back on all purchases; 0.25% Cash Back bonus on the cash back you earn each month you pay on time. This makes it handy for people who want as simple a card as possible. And it rewards great behavior.
  • Higher credit lines after on-time payments: If you’re approved for this card, you’ll receive a credit line of at least $300. If you make five on-time payments in a row, you can call Capital One and ask them to increase your credit line.
  • No foreign transaction fee: This is a great card to take overseas, because you won’t have to pay any foreign transaction fees. Most cards charge an average 3% foreign transaction fee, but Journey allows you to use your card abroad without being charged extra fees.

Cons Cons

  • High APR: This card carries an APR of 24.99% (Variable). That’s almost twice as high as some other student credit cards, such as the Wells Fargo Cash Back CollegeSM Card with a rate as low as 12.90% - 22.90% Variable APR. It’s just one more incentive to pay off your bill in full each month.
Bottom line

Bottom line

We really like this card because it actively rewards you for developing good credit-management behavior by offering a small cash back bonus for on-time payments. In addition, the cash back program is straightforward with no confusing categories to remember or opt into, making this card a good option for students who want a simple, flat-rate card.

Read our full review of the Journey® Student Rewards from Capital One®

Best Intro Bonus

Wells Fargo Cash Back CollegeSM Card

Annual fee
$0
Rewards Rate
3% cash rewards on gas, grocery, and drugstore purchases for the first 6 months, 1% cash rewards on virtually all other purchases
Regular Purchase APR
12.90% - 22.90% Variable
Credit required
fair-credit
excellent-credit
Good/Excellent

Magnify Glass Pros

  • Interest rates as low as 12.90% - 22.90% Variable APR: Depending on your credit, your interest rate could be between 12.90% - 22.90% Variable APR, but there is no guarantee you’ll receive the lower rate. This is a lower variable APR range than most student cards, and can help if you aren’t able to pay your balance in full one month.
  • Intro Rewards Bonus: 3% cash rewards on gas, grocery, and drugstore purchases for the first 6 months, 1% cash rewards on virtually all other purchases
  • Access to credit education: Wells Fargo provides you with all sorts of tools and information to learn about things like credit, budgeting, and expense tracking. While this is a nice feature, it’s not exclusive to Wells Fargo. You can get this information from free tools such as Mint, or even reading books and blogs. But it is pretty handy having it right at your fingertips when logged in to your account.

Cons Cons

  • Need to be a Wells Fargo member to apply online: You can go into any one of the 6,000+ branches and apply for the card. You can also apply online, but you’ll need to be an existing Wells Fargo customer. However, anyone can open a checking account online with a minimum deposit of $25.
  • High bars for some cash back redemption options: There are a lot of redemption options available through Wells Fargo’s own online cash back rewards mall. However, if you’d just like straight cash, you have a few options. You can request a direct deposit into your Wells Fargo checking account, savings account, or Wells Fargo credit card (if applicable) in $25 increments, or request a paper check in $20 increments. That can take a long time to accumulate if you’re not spending much with your card.
Bottom line

Bottom line

The Wells Fargo Cash Back CollegeSM Card is a relatively simple card with a great intro bonus of 3% cash rewards on gas, grocery, and drugstore purchases for the first 6 months, 1% cash rewards on virtually all other purchases In addition, the low variable APR is handy for those who think they’ll be carrying a balance on their credit card from month to month at some point in the future. This is generally something we recommend against, but if you can’t avoid it, the Wells Fargo Cash Back CollegeSM Card is your best bet.

Read our full review of the Wells Fargo Cash Back CollegeSM Card

Altra Federal Credit Union Student Visa® Credit Card

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Altra Federal Credit Union Student Visa® Credit Card

Annual fee
$0
Rewards Rate
Earn double Reward Points on every dollar of purchases in the first 60 days after opening your new account, then 1 point per dollar spent.
Regular Purchase APR
15.65% Fixed

Magnify Glass Pros

  • $20 reward for good credit card usage: If you can maintain your account in an “exceptional way” for your first year, you’ll get a bonus $20 reward on your card’s anniversary. All you have to do is not have any late payments, don’t charge over your card’s limit, and use your card for at least six out of twelve months.
  • Up to $500 random winner each quarter: It’s like playing the lottery, except you don’t have to buy a lottery ticket. Each quarter Altra will choose one student cardholder at random and pay back all of their purchases from the previous month, anywhere between $50 to $500.
  • Earn rewards: For the first 60 days after you open your account, you’ll earn 2 points per dollar spent. After that you’ll earn 1 point per dollar spent. You can redeem these points for cash back, merchandise through their online rewards mall, or travel.
  • Redeem points for a lower interest rate: If you’ll need a car in the future, this might be a good credit card to get. You can trade in 5,000 points for a 0.25% reduction, or 10,000 points for a 0.50% reduction on an auto loan through Altra Federal Credit Union. That could end up saving you a ton of cash in the long run.

Cons Cons

  • 1% foreign transaction fee: This is definitely one card to leave at home if you’ll be traveling or studying abroad. Most credit cards charge a 3% foreign transaction fee, so this is on the low side. Still, it’s not too hard to find a student credit card with no foreign transaction fee, such as the Discover it® Student Cash Back or the Journey® Student Rewards from Capital One® card.
  • Must join Altra Federal Credit Union: Luckily, anyone can join, but it might take a bit of legwork on your part compared to a bank. If you don’t meet certain membership eligibility criteria, you can join the Altra Foundation for $5. Then you’ll need to open a savings account with a minimum $5 deposit that must remain in the account while you have your card open.
Bottom line

Bottom line

If you’re a student who doesn’t mind working with a credit union, Altra provides a card that has several rewards benefits. This card is a good option if you may be taking out an auto loan in the next few years, since you’ll benefit from a reduced interest rate by trading in your rewards points. In addition to earning rewards, using this card responsibly can help you build credit.

Read our full review of the Altra Federal Credit Union Student Visa® Credit Card

Best for Studying Abroad

Bank of America® Travel Rewards Credit Card for Students

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on Bank Of America’s secure website

Bank of America® Travel Rewards Credit Card for Students

Annual fee
$0
Rewards Rate
Earn unlimited 1.5 points for every $1 you spend on all purchases everywhere, every time and no expiration on points.
Regular Purchase APR
16.74% - 24.74% Variable
Credit required
good-credit
Excellent/Good

Magnify Glass Pros

  • Chip + PIN technology: Most credit cards have chip + signature technology, and while this is good inside the U.S. you may face issue when traveling abroad. That’s where a card with chip + PIN functionality is the safest bet when traveling outside the U.S.
  • No foreign transaction fees: When you travel abroad you will not be charged additional fees like other cards.
  • Cashback rewards: You will earn unlimited 1.5 points for every $1 you spend on all purchases everywhere, every time and no expiration on points. This is a decent flat-rate that isn’t limited to bonus categories.
  • Redemption bonus: Bank of America customers will receive a 10% customer bonus every time cash back is redeemed into a Bank of America® checking or savings account. The bonus is even better if you’re a Bank of America® Preferred Rewards client — you could get a 25% – 75% bonus. Redeeming this way allows you to maximize your cash back rewards.
  • Free FICO® Score: The main reason to get a credit card as a student is to boost your credit score. So, actually being able to see your credit score is a huge help, especially as you can watch it climb over time with good credit management.

Cons Cons

  • Subpar cashback rate: The cash back rate for this card is lower than other cards. However, cards with higher cash back rates often charge foreign transactions fees, not making them ideal for students traveling abroad.
Bottom line

Bottom line

Students who are interested in studying abroad should consider the Bank of America® Travel Rewards Credit Card for Students. You’ll earn a good cash back rate on all purchases and will not be charge a foreign transaction fee on purchases made outside the U.S.

Best Secured Card

Discover it® Secured

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on Discover Bank’s secure website

Rates & Fees

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Discover it® Secured

Annual fee
$0
Minimum Deposit
$200
Regular APR
24.74% Variable
Credit required
bad-credit
Poor/New to Credit

Magnify Glass Pros

  • Cashback program: This card has a feature uncommon to other secure cards — a cashback program. You earn 2% cash back at restaurants or gas stations on up to $1,000 in combined purchases each quarter. Plus 1% cash back on all other credit card purchases.
  • Cashback Match™: Discover will match ALL the cash back you’ve earned at the end of your first year, automatically. There’s no signing up. And no limit to how much is matched (new cardmembers only). This is a great added bonus that increases your cash back in Year 1.
  • Automatic monthly reviews after eight months: Discover makes it easy for you to transition to an unsecured card with monthly reviews of your account starting after eight months. Reviews are based on responsible credit management across all of your credit cards and loans.

Cons Cons

  • Security deposit: You need to deposit a minimum of $200 in order to open this card. This will become your credit line, so a $200 deposit gives you a $200 credit line. If you want a higher credit limit, you need to increase your deposit. The security deposit is refundable, meaning you will receive your deposit back if you close the card, as long as your account is in good standing.
Bottom line

Bottom line

The Discover it® Secured is great for students who want to build credit. This card easily transitions you to an unsecured card when the time is right, and you can earn cash back. With proper credit behavior, you’ll soon be on your way to an unsecured card.

Read our full review of the Discover it® Secured

Best for No Credit History

Deserve® EDU Mastercard

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on Deserve’s secure website

Deserve® EDU Mastercard

Annual fee
$0
Rewards Rate
1% unlimited cash back on ALL purchases
Regular Purchase APR
20.49% Variable
Credit required
bad-credit
Fair/Good Credit or No Credit

Magnify Glass Pros

  • No credit history required: You can qualify for this card without any credit history, making this a great option for students new to credit. You don’t even need a Social Security number when applying.
  • Reimbursement for Amazon Prime Student*: This card will reimburse you for the cost of a year of Amazon Prime Student (valued at $49). You need to charge your membership to this card to qualify, and you will not be reimbursed for subsequent years’ membership fees.
  • No foreign transaction fee: Whether you travel abroad or study abroad, you can rest easy: There are no foreign transaction fees with this card.

Cons Cons

  • Low cash back rate: The rewards program has a subpar 1% unlimited cash back on ALL purchases. You can do better with some of the other cards mentioned in this post. Though as a student, rewards shouldn’t be your primary focus — instead, build your credit so you can qualify for better non-student cards.
Bottom line

Bottom line

The Deserve® Edu Mastercard for Students is a great choice for students who are looking to build credit. Deserve markets their cards for those who may have trouble qualifying for credit, and students who fall into this category may more easily qualify for this card than for cards from traditional banks. You can earn cash back, and receive a great promotional offer of a year of Amazon Prime Student for free*.

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

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
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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.

LEARN MORE Secured

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.

LEARN MORE Secured

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

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.

LEARN MORE Secured

on Atlantic Stewardship Bank’s secure website

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

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 CU (IL)’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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College Students and Recent Grads

Can’t Pay Your Student Loans? You Can Lose Your License in These 16 States

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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In many states, failing to repay student loans could cost one a professional license to perform a job, and in the case of Iowa and South Dakota, even losing a driver’s license.

Sens. Elizabeth Warren (D-Mass.) and Marco Rubio (R-Fla.) in June introduced legislation that would prevent states from suspending, revoking or denying state licenses because borrowers default on their student loans, in the hopes of alleviating some of the financial burdens on Americans who are already saddled with student loan debt.

Americans owe a whopping $1.53 trillion in student loan debt, and almost 11 percent of the debt was at least 90 days delinquent or in default at the end of the first quarter of 2018, according to the Federal Reserve Bank of New York. Meanwhile, almost 30 percent of workers in the United States need a professional license to perform their job, according to The Brookings Institution.

In recent years, six states — North Dakota, Washington, New Jersey, California, Oklahoma and Virginia — have repealed laws that allowed states to suspend or revoke professional licenses as a penalty for student loan default. The Warren-Rubio bill exercises such efforts at the federal level.

After reading state laws, MagnifyMoney found that as of Aug. 24, 2018, at least 16 states deny, suspend or revoke state-issued professional or driver’s licenses if loan borrowers default on their student loans. In some states, such laws impact a wide range of professions requiring a state license, such as teachers, nurses and barbers; in others, only certain jobs are affected. Here are the states where these penalties exist and may be enforced:

Alaska

Overview of the law

When borrowers default on student loans (payments are 180 or more days past due) made by the Alaska Commission on Postsecondary Education, the state’s higher education agency may order licensing entities to not renew the debtors’ licenses. The licensing authority can take action to stop granting a license renewal once they receive notice of unpaid student loans.

Jobs affected

All jobs that require state-issued professional licenses, certificates, permits to perform, including teachers, nurses, pharmacists, security guards and pesticide applicators.

If you lost your license because of student loan debt

The licensing agency will notify you of the refusal of non-renewal. Within 30 days of receiving the notice, you may request a review by the commission. However, in order to have your license renewed after the review, you have to prove that: 1) you have paid off the entire loan, including interest and principal, along with all the collection costs; or 2) you have entered into a payment plan with the commission and have made on-time payments in full for the four most recent and consecutive months under the plan.

Arkansas

Overview of the law

The Arkansas State Medical Board may revoke or suspend a license, impose penalties or refuse to issue a license when a physician in this state has breached a Rural Medical Practice Student Loan and Scholarship contract. Recipients of rural medical practice loans are obligated to practice medical care in rural Arkansas full time and follow the terms in the contract they signed with the state’s student loan and scholarship Board.

Jobs affected

Physicians on Rural Medical Practice Student Loan and Scholarship contracts.

If you lost your license because of student loan debt

The loan recipients who get their medical licenses suspended won’t be able to practice for a period of time equivalent to the time they failed to follow their loan obligations. They can’t get their licenses back until they pay off their loan and penalties.

Florida

Overview of the law

In Florida, the Department of Health may suspend a state-licensed health care practitioner who has failed to repay a student loan issued or guaranteed by the state or the federal government. The borrower will be fined 10 percent of the defaulted loan amount.

Jobs affected

More than 50 professions that require state health department licenses, including nurses, medical physicists, body piercers, septic tank contractors and dentists. See the full list here.

If you lost your license because of student loan debt

To lift the suspension, the borrower has to enter a new payment term agreed by all parties of the loan and pay the fine within 45 days after he/she was notified of the suspension.

Georgia

Overview of the law

A professional licensing board can suspend the license of anyone who has defaulted on any federal education loan. Authorities may also suspend licenses of people who failed to comply with service obligations under any service-conditional scholarship program.

Jobs affected

More than 40 professions that require state-issued professional licenses. A few examples: chiropractors, dietitians, librarians and physical therapists. See a full list on this page, under the drop-down menu “Boards and Licensed Professions.”

If you lost your license because of student loan debt

When the licensing board receives written notification that you are making payments on the loan or satisfying the service, it can restore your license.

Hawaii

Overview of the law

Hawaii licensing authorities can deny a license application or a renewal or suspend a professional license if you default on a student loan made or guaranteed by the state, state agencies or the federal government. License suspension can also occur if you are not complying with obligations under a student loan repayment contract or a scholarship contract. Your license could also be in jeopardy if you are at least 60 days past due with payments under a repayment plan.

Jobs affected

Jobs that require professional licenses issued under 25 state licensing boards.

If you lost your license because of student loan debt

Your license can be renewed or reinstated when the licensing authority is notified that you are making payments or satisfying the terms of the student loan, student loan repayment contract or scholarship contract and are no longer in default or breach of the loan or contract.

Illinois

Overview of the law

The Division of Professional Regulation of the Department of Financial and Professional Regulation can deny licenses or renewals to those who have defaulted student loans or scholarships provided or guaranteed by the Illinois Student Assistance Commission, any governmental agency of the state or any federal government agency. Your license can also be suspended or revoked if you are proven to have failed to make satisfactory repayments for a delinquent or defaulted loan after a hearing.

Jobs affected

Jobs that require state-issued professional licenses. The professions include physicians, nurses, pharmacists, physical therapists, dentists, barbers, accountants and more. Check out the full list of state-licensed occupations in Illinois here.

If you can’t apply for a license because of student loan debt

If you have established a “satisfactory repayment record,” the department may issue a license or renewal.

Iowa

Overview of the law

Any license authorized by state laws, including a driver’s license, can be denied, revoked or suspended if a borrower has defaulted on a loan owed to or collected by the Iowa College Student Aid Commission.

Licenses affected

Professional licenses issued by the state that workers need to engage in a trade, profession or business. There’s no single, full list of affected licenses, but such licenses include those for massage therapists, social workers and interior designers; those who drive; and recreational licenses for hunting, fishing, boating or other activities.

If you lost your license because of student loan debt

You can get a license approved or reinstated if you schedule a conference with the commission to enter into an agreed on a repayment plan or pay off the debt within 20 days after you receive a mailed notice about your alleged loan default or a notice of suspension, revocation, denial of issuance or non-renewal of a license.

Kentucky

Overview of the law

In Kentucky, licensing agencies may not issue or renew a professional or vocational license to someone who’s in default or has failed to meet any repayment obligation under any financial assistance program administered by the Kentucky Higher Education Assistance Authority.

Jobs affected

Jobs that require state-issued professional licenses, including home inspectors, athlete agents, alcohol and drug counselors and more.

If you lost your license because of student loan debt

You should receive a notice either from the Kentucky Higher Education Assistance Authority or from a relevant licensing authority giving you a deadline to respond to the notice and enter into a “satisfactory” repayment agreement. Assuming you do, the authority will send the licensing agency a notice certifying that you are no longer in default and have made satisfactory repayments, repaid the loan in full or have been waived from repaying the debt. At that point, you may resume your professional or occupational license.

Louisiana

Overview of the law

The state of Louisiana can deny an application for or renewal of any professional or occupational license to anyone who has defaulted on a federal student loan guaranteed by the Louisiana Student Financial Assistance Commission (LOSFA).

Jobs affected

Jobs that require state-issued professional licenses, which include dentists, nurses, physical therapists, insurance agents and more.

If you lost your license because of student loan debt

LOSFA has entered into a contract with the Educational Credit Management Corp. (ECMC) for the servicing its LOSFA-guaranteed federal student loans. LOSFA advises borrowers to contact ECMC to enter a payment arrangement with ECMC or repay the loan. LOSFA needs to confirm compliance with your loan obligations for your license to be released.

Massachusetts

Overview of the law

A professional or occupational license can be denied for any applicant who is in default on an educational loan under any program administered by the Massachusetts Education Financing Authority (MEFA) or the Massachusetts Higher Education Assistance Corp. (MHEAC). MEFA offers loans to students who are residents of or attend college in Massachusetts. MHEAC, known as American Student Assistance, provides federal student loan programs.

Jobs affected

Nearly 170 jobs that require state-issued professional licenses from 39 boards of registration. The professions include architects, psychologists, physicians and more. See a full list of state licensing boards here.

If your license is denied because of student loan debt

You should receive a notice of denial and can then ask your loan agency for a review of the alleged default within 30 days of receiving the notice. If you enter into a repayment agreement or other arrangement with the loan agency, or if the agency determines that the notice of default was in error, the educational loan agency will notify the relevant licensing authority, which will then issue the license to you.

Minnesota

Overview of the law

In Minnesota, health professionals who have defaulted on a federally secured student loan or failed to fulfill a repayment or service obligation can face denial of a license by a health-related licensing board. The board can also take disciplinary action against the debtor.

Jobs affected

Health-related professionals, including physicians, nurses, dentists, therapists and barbers. See a full list of the state’s health licensing boards here.

If your license application is denied because of student loan debt

A licensing board has to consider the reasons for the default. It cannot impose disciplinary action against anyone with total and permanent disability or long-term temporary disability lasting longer than a year.

Mississippi

Overview of the law

When certain health care practitioners and hospital employees fail to comply with an educational loan contract obtained through a state-paid educational leave program, their professional licenses can be revoked. Grantees of the paid education leave program entered a contract with a state health institution, where they agreed to work in a health care profession, such as a physical therapist, or as a licensed practical nurse in the same sponsoring institution for a period of time equivalent to the amount of time when the applicant receives paid leave compensation.

Jobs affected

Health-related professionals and hospital workers who earned their licenses through educational paid leaves offered by state health institutions. This includes nurses, nurse practitioners, speech pathologists, psychologists, occupational therapists, physical therapists and any other needed professions determined by the sponsoring state health institution.

If your license is revoked because of student loan debt

A revoked license will be restored if you can prove that your contract is no longer in default.

New Mexico

Overview of the law

Under the state law, New Mexico barbers and cosmetologists may face denial of issuance or renewal, suspension or revocation of their occupation licenses if they have defaulted on a student loan. The state statute doesn’t specify what kind of student loans they are. (Repeal of this rule was scheduled in 2014 but delayed to 2020.)

Jobs affected

Barbers and cosmetologists.

If your license is denied renewal because of student loan debt

Before the Board of Barbers and Cosmetologists takes any action against your license, you can request a hearing within 20 days after being served a written notice about the default. After the hearing, the board will take steps to impose a fine up to $999 or take other disciplinary actions, which may include suspension, revocation or refusal to renew a license. The state statute doesn’t offer information about resolutions for those who’ve lost their licenses because of student loan default. The New Mexico Board of Barbers and Cosmetologists has not responded to MagnifyMoney’s inquiry regarding the remedies.

South Dakota

Overview of the law

South Dakota established the Obligation Recovery Center in 2015 to recover debts owed to the state, including unpaid university tuition or fees. The state law demands a number of licenses, registrations and permits, including a driver’s license, be withheld from anyone who owes money to the state. While South Dakota is not in the student loan business, students have reportedly had their driver’s licenses suspended because their unpaid student debt got transferred to the Obligation Recovery Center, which at that point became debt owed to the state.

Affected licenses

Driver’s licenses, a hunting or fishing license, a state park or camping permit, a registration for a motor vehicle, motorcycle or boat.

If you lost your license because of student loan debt

In order to restore the license or permit, the debtor has to either pay the debt in full or has entered into a payment plan with the center and be current on payments.

Tennessee

Overview of the law

State licensing authority may suspend, deny or revoke the license of anyone defaulted on a repayment or service obligation under any state or federal student loan or service-conditional scholarship program.

Jobs affected

Jobs that require government-issued professional licenses, including teachers, dentists, massage therapists, nurses, barbers, geologists, accountants and many more. (There is no single, full list of affected licenses.)

If you lost your license because of student loan debt

Within 90 days after you receive notification of the alleged default, you can keep your license if you pay off the debt, enter into a payment plan or service obligation or comply with an approved repayment plan.

Texas

Overview of the law

Licensing agencies in Texas can deny a renewal for a license to anyone who has defaulted on a student loan or a repayment agreement guaranteed by the Texas Guaranteed Student Loan Corp.

Affected jobs

All professions that require state-issued professional licenses. The rule applies to auctioneers, electricians, midwives, physicians and many more.

If you can’t renew your license because of student loan debt

Your license can be renewed if the Texas Guaranteed Student Loan Corp. issues a certificate to clarify that you have entered a repayment agreement or the loan is not in default anymore.

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College Students and Recent Grads

Is College Worth It? Here’s What to Consider

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

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

Is college worth the cost?

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

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

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

Advantages of attending college

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A degree could help you get a job

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

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

Having a degree could lead to higher lifetime earnings

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

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

There could be other financial and personal benefits

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

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

You can expand your personal and professional networks

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

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

Drawbacks of attending college

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

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

Student loans could impact many areas of your life

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

Some people leave college with debt but no degree

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

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

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

Is college worth it for you?

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

Are you prepared for the cost?

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

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

Are you ready for the academic rigor?

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

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

Have you identified your career goals?

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

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

Does your desired degree increase your earning potential?

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

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

Do you have a plan for repaying student loans?

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

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

Will you make the most of your time at college?

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

Alternatives to a traditional college education

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

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

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

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

Attend a community college

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

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

Enroll in a technical college

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

Become an apprentice

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

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

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

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

Join the military

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

Start your own business

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

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

Take a gap year

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

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

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

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College Students and Recent Grads

Paying Off Student Loans Faster: A How-to Guide

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

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

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

Pros of paying off student loans quickly

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

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

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

Cons of paying off student loans quickly

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

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

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

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

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

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

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

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

9 ways to pay off student loans quickly

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

#1 Make additional payments on your loans

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

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

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

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

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

#2 Start making payments as soon as you can

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

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

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

#3 Avoid deferment and forbearance

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

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

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

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

#4 Increase your income and cut expenses

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

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

#5 Consider consolidating your federal student loans

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

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

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

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

#6 Stay on the standard federal repayment plan

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

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

#7 Look into loan forgiveness programs and options

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

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

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

#8 Sign up for automatic payments

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

#9 Refinance your student loans

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

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

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

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

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

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

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

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

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College Students and Recent Grads

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

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

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

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

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

There are also several other types of direct loans:

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

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

What is a direct subsidized loan?

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

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

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

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

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

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

What is a direct unsubsidized loan?

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

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

Borrower’s status

Annual loan limit

Aggregate loan limit

Dependent undergraduate students

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

The limit includes your subsidized loans.

$31,000

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

Independent undergraduate students

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

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

The limit includes your subsidized loans.

$57,500

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

Graduate and professional students

$20,500

$138,500

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

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

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

How does the subsidy work?

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

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

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

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

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

The value of the subsidy

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

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

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

Rates and fees

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

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

Subsidized vs. unsubsidized student loan

Loan type

Borrower type

Interest rate

Disbursement fee

Subsidized

Undergraduate

5.05%

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


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

Unsubsidized

Undergraduate

5.05%

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


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

Unsubsidized

Graduate / professional

6.60%

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


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

What about other types of student loans?

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

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

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

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

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

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

Which type is right for you?

Undergraduate students

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

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

Graduate and professional students

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

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

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

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

Louis DeNicola
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

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

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

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

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

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

Can a parent PLUS loan be transferred to the student?

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

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

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

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

Steps for children who want to take over parent PLUS loans

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

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

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

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

1. Review your budget

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

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

2. Find lenders that offer parent PLUS loan transfers

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

3. See if you’re eligible

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

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

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

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

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

4. Compare your loan offers and complete a loan agreement

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

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

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

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

Pros of transferring your parent PLUS loans

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

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

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

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

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

Cons of transferring parent PLUS loans

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

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

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

Additional parent PLUS loan repayment options

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

Consider a different federal repayment plan

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

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

Look into federal forgiveness and discharge options

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

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

Additional student loan forgiveness or repayment programs

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

Refinance the loan in your name

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

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

Louis DeNicola
Louis DeNicola |

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

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