Do your homework on repayment plans
College and graduate degrees can provide you with career options and even higher income in many cases, but these degrees can be costly. If you need to borrow money for school, carefully research and study your options; keep the loan amount as low as you can; and have a clear repayment plan. Here is some guidance and a few strategies to consider.
Obtaining a Student Loan
Look into your eligibility for grants and scholarships
Many students qualify for federal aid, so start by filling out the Free Application for Federal Student Aid (FAFSA) on the U.S. Department of Education’s website to see what is available to you. You can learn more about the FAFSA and grant opportunities at that same site. The Federal Student Aid Estimator provides an estimate of how much federal student aid you may be eligible to receive.
Determine how much you need to borrow and the affordability of payments
Your anticipated costs (tuition, textbooks, housing, food, transportation) minus your education savings, family contributions, income from work-study or a job, scholarships and/or grants will help determine how much you may need to borrow. Your goal should be to limit the amount you borrow, even if you are approved for a larger loan, because the more you borrow, the more money you will owe. Also, consider the minimum you will owe each month to pay off your loans (including interest) after you graduate. Your monthly repayment amount generally depends on the interest rate and the term of your loan, which can vary from 10 years to more than 20 years. Next, compare it to your projected earnings. To help you project your future salary in the lines of work you are considering, look at the U.S. Department of Labor Statistics on Wages in more than 800 occupations.
Even though most student loans will not require you to begin monthly payments until after you graduate, a student loan is a serious commitment. Borrowing more than you can afford to repay may result in you facing serious debt problems following graduation. Unlike some other loans, federal and private student loans generally cannot be discharged through bankruptcy. Borrowers who fail to pay their student loans could be referred to debt collection agencies, experience a drop in their credit score (which can make credit more expensive and perhaps make it harder to find a job), and have a portion of their wages withheld. To understand more about achieving and maintaining good credit, read FDIC Consumer News Credit Reports and Credit Scores.
If you need help deciding how much to borrow, consider speaking with a specialist at your school (perhaps a school counselor at your high school or an admissions or financial aid officer at your college). Also, visit FDIC Consumer News Money Management for Youth for budgeting ideas.
Consider federal loans first, if you plan to borrow
In general, federal student loans can be more favorable than private loans. Why? The interest rates on federal loans are fixed, meaning they will not change over time. Federal student loans also offer more flexible repayment plans and options to postpone your loan payments, if you are having financial problems. If you are a service member, read FDIC Consumer News Financial Success While in the Military for additional consumer loan protections. You should only consider private loans if you have reached your borrowing limit with federal loans. The interest rates on private loans, which are often significantly higher, could be either fixed or variable (meaning that interest rates can fluctuate).
When You Are in School
Set up direct deposit for your student aid money
Although some schools or financial institutions may encourage you to select a certain debit card or prepaid card for receiving part of your student loan or other aid (the part left after your school has subtracted tuition and fees), carefully weigh all of your options. School-preferred products may come with high fees and inconvenient ATM locations. Remember that you can always deposit loan proceeds anywhere you choose. Looking for an FDIC-insured bank account? Visit FDIC #GetBanked.
Keep track of the total amount you have borrowed and consider reducing it, if possible
If your loan accrues interest while you are in school, you may be able to make interest payments while still in school, and this can reduce the amount owed later on. You could also repay some of the principal (the amount borrowed) before the repayment period officially begins.
Paying Off Your Loan
Select your repayment plan
Federal loans and private loans offer different types of repayment options, and it is important that you fully understand your options before taking out a loan. Federal loans offer a variety of repayment options and you can generally change to a different repayment plan at any time. For example, one type of loan starts with low payment amounts that increase over time. Another is the “Pay as You Earn” program from the Department of Education. Also, Loan Simulator shows payment amounts in various repayment plans. In addition, it may be possible to have any remaining balance forgiven after a certain number of years or based on your chosen career. Private loans generally require fixed monthly payments over a period of time with limited repayment options, and rarely offer loan forgiveness.
Make your loan payments on time
Student loans are typically reported to credit bureaus, so paying on time can help build a good credit history. Paying late can harm your credit history. To help you stay on schedule, consider having your payments automatically deducted from your bank account or arranging for e-mail or text-message reminders. Automatic payment deductions can reduce your rate by .25%. Also, make sure your loan servicer (the company that collects your payments and administers your loan) has your current contact information so you do not miss important correspondence, such as a change in a due date.
Consider making extra payments to pay down your loan faster
Check with your servicer to see if applying extra payments is an option. If you are able to pay more than the minimum required, pay extra to the student loans with the highest interest rates first. If you have more than one student loan with a particular servicer, make it clear that you want to apply any extra payments to reduce the balance of the higher-rate loans.
Look into refinancing opportunities
You may be able to obtain a lower interest rate and even consolidate multiple loans of the same type into one loan. Be aware, however, that if you consolidate or refinance a federal loan into a private loan, you may lose important benefits associated with the federal loan (such as flexible repayment plans or loan forgiveness for a public service career). In some cases, even consolidating one type of federal loan into a different kind of federal loan can result in lost benefits, so take the time to learn the differences.
Contact your loan servicer immediately if you are having difficulty repaying
Repaying student loans can be challenging, especially during tough economic times. Remember that if you have a federal student loan that you are having trouble paying, you have options that could help. Private loan borrowers may be able to get some assistance, as well. Visit FDIC Consumer News Getting Beyond the Tough Times for ideas about establishing a budget in good times and being prepared for tough times. If you are experiencing financial hardship, it is important to contact your loan servicer to ask about your options, especially before you miss any payments.
Beware of debt relief scams
Scams try to sell you services or products that sound good, but only take your money, so be on the lookout. You should never have to pay for assistance on your federal student loans. Do not provide bank account or credit card numbers or other personal information over the phone or in an email, unless you can verify that the entity is reputable and trustworthy. The Federal Trade Commission (FTC) has additional information on student loan related scams. Carefully research and study the ways to pay for your education. Building a strategy to keep the loan amount as low as you can, and having a clear repayment plan, will help you create a better financial future.
Additional resources:
FDIC, How Money Smart Are You?
US Department of Education, Ways to Qualify for Loan Forgiveness, Cancellation, or Discharge
Consumer Financial Protection Bureau, Student Loans
For more consumer resources, visit FDIC.gov, or go to the FDIC Knowledge Center. You can also call the FDIC toll-free at 1-877-ASK-FDIC (1-877-275-3342). Please send your story ideas or comments to ConsumerNews@fdic.gov. You can subscribe to this and other free FDIC publications to keep informed!