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How to Find the Right 529 Savings Plan for You

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

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

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

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

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

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

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

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

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

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  • Money can be withdrawn tax-free for qualified education expenses, which typically includes tuition at any eligible school from elementary onward, as well as fees, books and room and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

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

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

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

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

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

Prepaid tuition plans vs. savings plans

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

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

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

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

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

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

Benefits of a 529 savings plan

1. Tax breaks

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

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

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

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

2. High contribution limits

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

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

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

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

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

3. Mindset and accountability

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

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

4. Potential for long-term returns

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

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

5. Low impact on financial aid

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

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

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

6. Ability to change beneficiaries

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

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

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

Pitfalls of 529 savings plans

1. Taxes and penalties if not used for education

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

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

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

2. Investment options can be narrow and confusing

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

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

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

3. Other financial responsibilities may be more important

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

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

How to compare 529 savings plans

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

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

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

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

Out of state

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

Fees

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

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

Investment options

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

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

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

Minimum investment

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

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

Other features

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

The nine best 529 savings plans

Fidelity Arizona College Savings Plan

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

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

California ScholarShare 529

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

Delaware College Investment Plan

Delaware College Investment Plan

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

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

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

Illinois Bright Start Direct-Sold College Savings Program

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

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

College Savings Iowa

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

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

Massachusetts U.Fund College Investing Plan

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

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

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

New Hampshire UNIQUE College Investing Plan

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

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

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

New York’s 529 College Savings Program

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

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

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

Utah my529

Utah my529

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

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

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

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

How to enroll in a 529 savings plan

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

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

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

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

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

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

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

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

Alternatives to 529 savings plans

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

Here are some of the major alternatives to consider.

Roth IRA

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

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

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

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

Still, the flexibility is often worth it.

Taxable investment account

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

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

Coverdell ESA

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

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

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

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

Savings account

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

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

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

Choosing the right 529 savings plan for you

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

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

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

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

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

Sample Goodwill Letter to Remove a Late Student Loan Payment from Your Credit Report

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

Businessman Holding Document At Desk

If you’ve pulled your credit report recently and discovered that there’s been a late payment reported on your student loans, you might be wondering what you can do to recover. Late payments can damage your credit, especially if you stop paying your loans for an extended period of time.

We’ve already gone over the repercussions of delinquency and default, but now let’s take a look at another method of repairing your credit report — sending a goodwill letter to your creditor.

What is a goodwill letter?

A “goodwill letter” is a simple way to repair your credit report, and it can be used for both federal and private loans. The purpose of a goodwill letter is to restore your credit to good standing by having a lender or servicer erase a lateness on your credit report.

Typically, those who have experienced financial hardship due to unexpected circumstances have the most success with goodwill letters. They allow you to ask if your student loan servicer can empathize with the situation that caused the lateness and erase it from your report.

It can also be used when you think the late payment is an error — for example, if you were in deferment or forbearance during the time of the late payment and weren’t required to make any payments, or if you know you’ve never been late on a payment before.

What makes a convincing goodwill letter?

If you’ve been looking for a goodwill letter that will work well, we have some tips on what you should include in your letter:

1. An appreciative tone

It’s important that the entire tone of your letter comes off as thankful and conscientious. If you were actually late on your payments due to extenuating circumstances, taking an angry tone probably won’t help your case.

2. Take responsibility

You want to be convincing and honest. Take responsibility for the late payment, and explain why it happened. They need to sympathize with you. Saying you just forgot isn’t going to win you any points.

3. A good recent payment history

Besides sympathy, you want to gain their trust that you will continue to make payments. If your lender sees payments being made on time before and after the period of financial hardship, it might be more willing to give you a break. When you have a pattern of late payments, on the other hand, it’s more difficult to convince them that you’re taking this seriously.

4. Proof of any errors and relevant documents

If you’re writing about a mistake that occurred, still be friendly in tone, but back up the errors with documentation. You’ll need proof that what you’re saying is true. Unfortunately, errors are often made on credit reports, and it may have been a clerical error on behalf of your servicer. If you have any written correspondence with them, you’ll want to include it.

5. Simple and to the point

The last thing to keep in mind is to craft a short and simple letter. Get straight to the point while telling your story. The people reviewing your letter don’t want to read an essay, and the easier you make their lives, the better.

Sample goodwill letter No. 1

Below is a sample goodwill letter for student loans to give you an idea of how to structure your own:

To whom It may concern:

Thank you for taking the time out of your day to read this letter. I just pulled my credit report, and discovered that a late payment was reported on [date] for my account [loan account number].

During that time, my mother fell terminally ill, and I was the only one left to care for her. As such, I had to leave my job, and my savings went toward her health care expenses. I fell on very rough times after she passed away, and was unable to make my student loan payments.

I realize I made a mistake in falling behind, but up until that point, my payment history with you had been spotless. When I was able to gain employment once again, I quickly resumed paying my student loans, making them a priority.

I’m not proud of this black mark on my record, but it’s the only one I have, and I would be extremely grateful if you could honor this request to remove the lateness from my credit report. It would help me immensely in securing other lines of credit so that I can further improve my credit score.

If the lateness cannot be removed entirely, I would still be appreciative if you could make a goodwill adjustment.

Thank you.

Sample goodwill letter No. 2

If you’re writing a letter because the lateness on your credit report is inaccurate, then try something similar to this:

To whom it may concern:

Thank you for taking the time to read this letter. I recently pulled my credit report and found that [Loan servicer] reported a late payment regarding my account [loan account number].

I am requesting that this late payment be assessed for accuracy.

I believe this reporting is incorrect because [list the supporting facts you have]. I have included the documentation to prove that [I made payments during this time / that my loans were in forbearance/deferment and didn’t require any payments].

Please investigate this matter, and if it is found to be inaccurate, remove the lateness from my credit report.

Thank you.

Make sure you provide as many personal details as possible — without making the letter too long, of course. You should also include your name, address and phone number at the top of the letter in case your loan servicer needs to reach you immediately.

Where to send your goodwill letter

Now that your letter is written, it’s time to send it. This can be done either by fax or by mail. Most student loan servicers have their contact information on their website, but you can also look on your billing statements to see if they specify a different address.

Additionally, you can try calling the credit bureau where the lateness was reported to see if they can give you the contact information you need.

It’s important to mention that goodwill letters are not a means to immediate success. Unfortunately, it often takes several attempts to correspond with servicers and lenders to get them to acknowledge that they received a letter from you.

Your best bet is to get a personal contact at the company who has the power to erase the late payment from your credit report.

If all else fails, try as many different communication methods as possible. Phone, mail, fax, live chat (if your servicer offers it) and email them. Several people who have tried this report that it’s possible to wear your servicer down with a decent amount of requests.

Addresses and fax numbers to try

Here are some addresses and fax numbers for several of the larger servicers, as listed on their websites. Again, it may also be worth phoning your servicer to get the name of someone there that can help you. If you have federal student loans, you can also check this Federal Student Aid page for more contact information.

Nelnet

Documents related to deferment, forbearance, repayment plans or enrollment status changes:

Attn: Enrollment Processing

P.O. Box 82565

Lincoln, NE 68501-2565

Fax: 877-402-5816

Great Lakes

Great Lakes

P.O. Box 7860

Madison, WI 53707-7860

Fax: 800-375-5288

Sallie Mae

Sallie Mae

P.O. Box 3229

Wilmington DE 19804-0229

Fax: 855-756-0011

Navient

For anything other than federal loans, check here

Navient – U.S. Department of Education Loan Servicing

P.O. Box 9635

Wilkes-Barre, PA 18773-9635

Fax: 866-266-0178

Cornerstone

P.O. Box 145122

Salt Lake City, UT

84114-5122

Fax: 801-366-8400

FedLoan

For letters and correspondence

FedLoan Servicing

P.O. Box 69184

Harrisburg, PA 17106-9184

Fax: 717-720-1628

EdFinancial

For FFELP and private loans, check here

Edfinancial Services

P.O. Box 36008

Knoxville, TN 37930-6008

Fax: 800-887-6130

Documents to include with your goodwill letter

Don’t let your efforts go to waste by forgetting to send documentation with your letter. Here’s a quick checklist of what you should include:

  • The account number for your loan
  • Your name, address, phone number and email
  • Statements showing proof that you paid (if you’re disputing a late payment)
  • Documentation showing that you’ve paid on time at all other points aside from when you experienced financial hardship (if that’s the case)
  • Identifying documentation so your servicer knows you sent the request

Also note that if you’re mailing anything, you should send it by certified mail with a receipt requested. This way you’ll know whether your letter made it to the servicer.

What to expect after submitting your goodwill letter

Once you submit your goodwill letter, you should hear back from your creditor with a decision in a few weeks. If two to three weeks have passed without word, follow up via email or phone call.

As you know, there’s no guarantee that your goodwill letter will work. The decision to remove a negative mark from your credit report is entirely in the hands of your creditor.

If your creditor rejects your petition, you’ll have to accept the ding on your credit report and take other steps to boost your credit. But if they agree to repair your credit, you should see the delinquency removed from your report and your credit score increase as a result.

A higher credit score can make life a lot easier, whether you want to take out a loan, open a credit card or, in some cases, even rent an apartment. For student loan borrowers, a strong credit score also opens the door to student loan refinancing, a savvy strategy that lets you restructure your debt, possibly changing your monthly payment and potentially saving money on interest.

If your credit score rebounds and you want to take proactive steps to conquer your student debt, refinancing could be the answer you’ve been looking for, so long as you no longer need the protections that come with federal loans.

Either way, though, make sure to keep up with student loan payments so you don’t end up with a delinquent account dragging down your newly repaired credit score.

Resources

If you’re interested in exploring goodwill letters further — and the results that others have had — check out these websites:

  • Ed.gov: They cover disputes, what to do about them and how to go about rectifying them here.
  • ConsumerFinance.gov: If you have loans with a private lender, and your lender had reported you as late when you weren’t, you can file a complaint with the Consumer Financial Protection Bureau (CFPB) to see if they can help you.
  • myFico Forums: The forums on myFico are populated with helpful individuals that might be able to give you contact information for certain servicers. There are some people reporting success with goodwill letters, and they may be willing to share their letters with others upon request.

It’s worth the time to write a goodwill letter

If you’ve discovered that a late payment has been reported on your credit, and it’s because you fell on hard times or is inaccurate, it’s worth trying to get it erased. These dings on your credit are there to stay for seven to 10 years. That’s a long time, especially if you’re young and hoping to buy a house or a car in the near future. It’s a battle worth fighting.

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

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College Students and Recent Grads

FedLoan Consolidation or Refinancing: Which Is Best for Your Student Loans?

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

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If your FedLoan Servicing repayment isn’t going as you had hoped, you might be staring at two seemingly similar options: Both FedLoan consolidation and private loan refinancing would consolidate or group your federal education debt, making for a more straightforward repayment.

But that’s where similarities between consolidation and refinancing end. If you’re unsure about which to go with, read on for the details.

What to know about FedLoan consolidation

Consolidation involves taking out a direct consolidation loan to repay your original federal student loan debt, and it could solve a number of problems.

Most notably, you could make a single monthly payment to one servicer instead of a handful of them (if you have multiple federal loans serviced by various companies). Although that won’t save you any money, it could bring you much appreciated simplicity.

Through federal loan consolidation, you could also expect the following benefits:

  • Choose your new loan servicer, whether that’s FedLoan or a competitor.
  • Become eligible or retain eligibility for Income-Driven Repayment (IDR) plans and Public Service Loan Forgiveness (PSLF).
  • Lower your monthly payment by switching from the 10-year standard repayment plan to an IDR plan.
  • Lock in a fixed interest rate (if any of your older federal loans were tagged with a variable rate).

The benefits aren’t bereft of fine print, however. When you consolidate loans you’ve already started repaying, for example, you reset the clock on any progress toward forgiveness via IDR or PSLF. Also, none of your private loan debt (if you have any) can be combined via a direct consolidation loan.

How to undertake FedLoan consolidation

If the pros outweigh the cons in your case, file your FedLoan consolidation application at StudentLoans.gov. According to the website, most applicants are able to complete the necessary forms in less than 30 minutes.

If you elect to keep FedLoan as your servicer, you can track your application progress via your MyFedLoan account. A resolution should arrive within four to six weeks.

FedLoan Servicing

What to know about student loan refinancing

When you consolidate your federal debt, your new loan’s rate will be a weighted average of your previous federal loans’ rates, rounded up to the nearest one-eighth of 1%.

Via student loan refinancing, however, you could reduce the collective interest rate of your federal debt — and (unlike with consolidation) your private student loans, too — potentially cutting it by whole percentage points.

That’s the greatest difference between FedLoan consolidation and private refinancing — and it explains why many creditworthy borrowers save hundreds even thousands of dollars on interest when working with a private lender.

Say you have four federal loans with FedLoan Servicing worth $35,000 accruing interest at an average rate of 7.00%. Now say you have sterling credit and stable income (or a cosigner who does). By refinancing to a rate of 5.00%, you’d save $4,218 on interest over the next decade.

To be eligible for such savings, however, you — and your cosigner, if you have one — must submit to a credit check. Only applicants with strong credit gain access to the lowest rates advertised by competing lenders. This stands in contrast to consolidation, which has no such credit requirements, making it a more accessible option.

If you have the finances to qualify for refinancing, you could enjoy other benefits besides a lower interest rate, including:

  • Leaving the federal student loan system behind and starting fresh with a top-rated private lender of your choice
  • Selecting fixed, variable or hybrid interest rates
  • Lowering your monthly payment in exchange for lengthening your repayment term and paying more interest overall
  • Releasing the cosigner on your undergraduate private student loans

The cons, however, are just as consequential. In exchange for the perks of private refinancing, you’ll lose access to all federal loan protections. This includes mandatory forbearance (should you need to pause your payments), IDR programs and forgiveness programs like PSLF.

Because refinancing is irreversible once you sign your loan agreement, it’s wise to weigh these plusses and minuses in advance.

How to refinance your FedLoan debt

If you elect to refinance, you can initiate the process by shopping around for the  best possible loan terms. You might also delay your search to improve your credit or find a cosigner who can help you qualify for the very lowest rates.

Once you’ve selected a refinancing lender — whether it be a bank, credit union or online-only lender — it would pay off your FedLoan (and any other eligible education debt). Then your lender would issue you the newly refinanced loan as a fresh start on your repayment.

Try crunching some numbers on our student loan refinancing calculator to estimate your savings (or cost), plus your new monthly payment, when comparing lenders’ quotes.

Should you pick FedLoan consolidation or FedLoan refinancing?

If you have poor credit and no cosigner in sight, you might already have your answer. Consolidation won’t save you money, but it will simplify your repayment, and it’s accessible to all federal loan borrowers.

With strong credit, you might also have the option of refinancing on the table. Whether it’s right for you, however, is another story.

As you’ll see, picking between consolidation and refinancing for your FedLoan debt (or any other loans, for that matter) isn’t just about what you’ll get. It’s about what you’re willing to give up.

This chart might help you as you consider which strategy is best for your situation:

What’s your repayment goal?Do you need federal protections?Your better option is probably ...
Switch to a single monthly payment (for your federal loans only)YesConsolidation
Switch to a single monthly payment (for both federal and private loans)NoRefinancing
Reduce your interest rateNoRefinancing
Work with a new loan servicerYesConsolidation
Work with a new lenderNoRefinancing
Choose a variable interest rateNoRefinancing
Lower your monthly paymentYesConsolidation
Lower your monthly paymentNoRefinancing
Make income-based payments and work toward loan forgivenessYesConsolidation

If you’d like to switch loan servicers, have a single monthly payment and reduce your interest rate, refinancing could deliver all three benefits.

But if you’re not willing to yield your government-exclusive loan options (such as IDR and PSLF), then you could settle for two out of three: Consolidation would allow you to work with a new servicer and achieve a simpler repayment, but not lower the rate.

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

Andrew Pentis
Andrew Pentis |

Andrew Pentis is a writer at MagnifyMoney. You can email Andrew here

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