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College Students and Recent Grads, Pay Down My Debt, Student Loan ReFi

Understanding the Pay As You Earn Plan (PAYE)

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If you have federal student loans, then you will have to choose a repayment plan when it is time for you to start making payments on your loans. There are many repayment plans to choose from, including a standard (10 year) repayment plan, an extended (25 year) repayment plan, and one of three repayment plans based on your income. One of these three income repayment plans is the Pay As You Earn plan (PAYE).

[Learn about Income-Based Repayment and Income Contingent Repayment Plans.]

What Is the Income Pay As You Earn Plan?

The PAYE plan was passed by President Obama on December 21, 2012, and is the newest income driven repayment plan. Under the PAYE plan, your student loan payments are capped at 10% of your discretionary income.

If you file taxes individually or you are married filing separate, only your income will count. If you file jointly, both incomes will count.

After 20 years, your remaining loan balance is forgiven. However, you will owe taxes on the forgiven amount.

Direct Loans and Direct PLUS loans qualify for PAYE, but private loans and Parent PLUS loans do not qualify.

What Makes You Eligible for the Pay As You Earn Plan?

In order to qualify for the PAYE plan, you must show a “partial financial hardship”. You must be a new borrower as of October 1, 2007 and you must have received a disbursement on or after October 1, 2011.

To show a partial financial hardship, you must show that the annual amount due on your loans exceeds 10% of the difference between your adjusted gross income (AGI) and 150% of the poverty line for your family size in the state you live.

Generally, people who qualify for PAYE will have borrowed for the first time in the 2008-2009 school year and will have borrowed after 2011 (basically, only new borrowers qualify for PAYE). This means that people who were freshmen in college in 2008 will qualify, as well as people who were sophomores, juniors, or seniors in 2008-2009 and then went to graduate school and took out federal loans.

Considering the limiting date restrictions, President Obama announced that the PAYE plan will be extended to borrowers who took out loans before October 1, 2007 in late 2015.

Pros and Cons of the Pay As You Earn Plan

PAYE is the most generous income driven plan. Like other income driven plans, on the PAYE plan, your payments are lower than if you were on a traditional plan. Lower payments mean that your loans will be more manageable, giving you more money to live on.

The downside of the PAYE plan is that it is only available to new borrowers (at least for right now). Additionally, you will pay taxes on any debt that is forgiven, and you will likely pay more in interest than if you were on a standard plan.

The fact that PAYE is a relatively new repayment plan that is set to change later this year shows how the government is still making strides to help student loan borrowers in ways that it hasn’t before. It remains to be seen how PAYE will benefit borrowers over time.

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Natalie Bacon is a writer at MagnifyMoney. You can email Natalie at [email protected]

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College Students and Recent Grads, Pay Down My Debt

How To Know If Your Student Loans Are Private or Federal

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.

How To Tell If Your Student Loans Are Private or Federal

When you borrowed money to pay for college, you may not have paid much attention to the difference between federal and private student loans. You might not know who your student loan servicer is, or if you do, you may wonder for example whether that loan listed under Nelnet is federal or private.

In fact, it’s completely reasonable to ask why the difference between private and federal student loans matters in the first place.

There are a few ways to see if your student loans are private or federal — here’s how, along with what makes each different, and why knowing which type of loan you have is important.

What makes federal and private student loans different?

Federal student loans are offered through the Department of Education. Typically, these loans are easy to qualify for. For many federal student loans, your credit isn’t even checked.

There are four different federal student loan programs currently available:

  • Direct subsidized loans: These loans are awarded based on your financial need. When you apply for federal financial aid, your eligibility for subsidized loans is also considered. “Subsidized” here means that interest isn’t charged until after you graduate or drop below half time.
  • Directed unsubsidized loans: Anyone can receive an unsubsidized loan — they aren’t based on need. However, unsubsidized loans will put you on the hook for interest charges that accrue while you’re in school.
  • Direct PLUS loans: These loans are specifically for graduate students or for parents of undergraduate students taking out loans on behalf of their child. These loans aren’t based on financial need, and a credit check is required.
  • Direct consolidation loans: This type of loan allows you to combine all your federal student loans into one, giving you one manageable payment each month rather than many. Your new interest rate is the weighted average of all your loans, rounded up to the nearest one-eighth of a percent.

Private student loans, on the other hand, are offered by private lenders and have different repayment requirements compared with federal student loans. For example, private student loans can offer fixed or variable interest rates, while federal student loans only offer fixed rates.

Because the features of private loans vary from lender to lender, eligibility will depend on the bank, credit union or online financial institution that you borrow from.

Most borrowers usually favor federal student loans, given the flexible repayment options and debt-forgiveness programs they come with. But since federal loans also have borrowing limits, students may need to turn to private loans to help fund any remaining costs, and in a few cases, a private loan might have a better interest rate than their federal equivalent.

How to determine if your loans are federal

The first thing you should do to see if you have federal loans is log on to the National Student Loan Data System. The only loans listed here are federal.

If you’ve never used the NSLDS before, you’ll want to click the “Financial Aid Review” button on the homepage, hit “Accept,” and then enter your credentials.

If you have a Federal Student Aid (FSA) ID, you can enter it here. If not, there’s an option to create one. In May 2015, the government redesigned its student loan system, and you can now use your FSA ID to log on to multiple government sites. But if you haven’t visited in a while, you might need to create one.

In the event you forgot your credentials, you can click the “Forgot my username/password” button and have the information emailed to you or answer a challenge question. You’ll just be required to enter your Social Security number, last name and date of birth.

Once you log on, you’ll see a list of all the student loans that were disbursed to you. This page will also show you what your original loan amount was, and how much you currently owe.

Click on the numbered box to the left of your loan to determine your loan servicer. This will display all the information about that particular loan. Your loan servicer will be listed under the “Servicer/Lender/Guaranty Agency/ED Servicer Information” section. The name, address, phone number and website should all be displayed.

Additionally, this page will also inform you of your loan terms. Along with your original loan balance and current outstanding balance, it will tell you what the interest rate is and the current status of the loan.

How to determine if your student loan is private

As discussed, private student loans are loans not made by the government — banking institutions, such as Sallie Mae, Wells Fargo, Citizens Bank and others offer them. As a result, there are more lenders to look out for when it comes to private loans.

Unfortunately, there’s no central reporting system for private loans like there is for federal loans, which makes them slightly more tricky to track down.

Your first stop should still be the NSLDS to at least see if you have any federal loans. In 2015, just 5% of undergraduate borrowers had private student loans, so your student loans are more likely to be federal than private.

But in order to make sure you have no outstanding private student debt, you’ll want to take a look at your credit report. You can view your reports from the three main credit bureaus for free by visiting AnnualCreditReport.com.

Some lenders may not look familiar to you. Searching the lender’s name online may help you find out who the parent company is. Don’t hesitate to call the numbers available on your credit report if you’re still unsure.

If you graduated a while ago, some older loans may look unfamiliar. You might see “federal direct loan,” “federal Perkins,” or “Stafford” on your report — these are federal loans, so ensure they match up with what’s in your NSLDS file.

You might also be able to call your school’s financial aid office to see if they have records of your loans.

What should you do once you find out?

Knowing whether your student loans are private or federal can be important as you repay you college debt.

For example, knowing the difference is crucial if you ever decide to refinance or consolidate your student loans. You can only combine your debt under a direct consolidation loan if you have federal loans. Likewise, refinancing through a private lender will cause you to lose access to federal repayment and forgiveness programs, while private loans would be unaffected.

So, by knowing which type of student loans you have, you’ll get a better idea of what options you have to knock them off.

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Dori Zinn contributed to this report.

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College Students and Recent Grads

5 Reasons You Might Be Denied for a Private Student Loan

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When you’re applying for money to pay for college, experts agree that federal loans are usually the best way to go. They’re less expensive (especially for undergraduates) and more flexible than private student loans.

But if you need more money than you’re being offered in federal aid, a private student loan from a bank or other lender may be your best option to fill the gap. In the most recent numbers on private student loan borrowers, 43% turned to private lenders because they could not borrow any more in federal Stafford loans, according to the Institute for College Access & Success (TICAS).

But if you’re thinking of applying for a private loan, you should know that getting approved isn’t a slam-dunk.

“Lenders are focusing their money on the borrower who is least likely to default and most likely to be profitable,” said Mark Kantrowitz, financial aid expert and publisher of Savingforcollege.com. As a result, applicants who seem even a little risky might find themselves rejected for a private student loan.

Here are five reasons you might be denied for a private student loan:

1. Your credit isn’t good enough

Many undergraduate students — and some graduate students — don’t have a robust enough credit history to qualify for a private student loan. Or, if they do, their score might be too low.

Can you get a private student loan with bad credit? Possibly, but you might need a cosigner on a private loan application to get it approved. “About 90% of our private education loans are co-signed,” said Rick Castellano, a spokesperson for Sallie Mae.

Note, however, that using a cosigner can also cause problems of its own.

2. You’ve borrowed a lot recently

The Department of Education, guaranty agencies and other federal student lenders report your loans to the credit bureaus, as do most private lenders. As a result, future lenders are able to easily see how much money you’re borrowing and what your total debt load looks like.

Your debt-to-income ratio ideally needs to be 40% or less, though standards range from lender to lender. If you have a lot of debt and not much income, you’re a riskier bet, leading private lenders to reject your loan request.

3. You’re going into the ‘wrong’ field

“If you’re applying for private aid for a degree in a field that pays well, like a medical degree or in the sciences, and you’ve got a reasonably good credit background, you’re getting approved,” Kantrowitz said. On the other hand, if you’re pursuing a degree in a field that traditionally pays poorly — thus making it harder for you to repay a loan later — it’s a tougher call.

Keep in mind that your future earnings will also play into your likelihood of getting approved for student loan refinancing after you graduate. We definitely aren’t telling you to avoid pursuing your dreams, just to be careful about your debt burden if you’re entering a historically low-paying field.

4. You’re asking for too much

It could be that the private lender thinks your loan request is too high. “To ensure applicants borrow only what they need to cover their school’s cost of attendance, we actively engage with schools and require school certification before we disburse a private education loan,” Castellano said.

In this case, you might not get rejected, but the school might certify a lesser amount.

Also be aware that you can sometimes get approved for more than you actually need. If that’s the case, you probably shouldn’t use those extra student loan funds to cover the cost of decorating your dorm, grabbing coffee after class or bar hopping. The cost of using student loans to cover living expenses can take a heavy toll down the road.

5. You’re a freshman

If you’re only a year or two away from graduating, you’re more likely to get approved than if you still have four years of undergraduate schooling ahead of you. This is because, as Kantrowitz explained, “there’s less risk of you dropping out.”

Graduate students may also have an easier time getting a private student loan because they’re more of a known quantity — they even started to pay down debt and established themselves as less of a risk.

Why you might be denied for a private student loan (and what to do instead)

In all circumstances, experts feel you should weigh the costs and benefits of private loans carefully — and whether you need them at all. For one thing, 45% of private loan borrowers borrowed less than they could have in federal loans, according to TICAS. So make sure you’ve exhausted your federal loan opportunities before heading this way.

Private student loans can be harder to get than federal ones because they’re credit-dependent. Everything from existing debt and credit scores to how far you are into your education will play a role in whether or not your application is accepted.

But getting denied for a private student loan doesn’t mean that you’re out of luck when it comes to funding college. There are many other options, from racking up scholarships to finding a tuition-free school. You could even start with a low-cost or no-cost community college and then try to build your credit to qualify for a private student loan later on when you transfer to a four-year university.

Devon Delfino contributed to this report.

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.

Kate Ashford
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Kate Ashford is a writer at MagnifyMoney. You can email Kate at [email protected]

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