Paying for your studies can be a big responsibility. Understanding the difference between a federal and private loan and your debt consolidation and rescheduling options can save you thousands of dollars.
Some companies promise to help you reduce your student loan debt, but anything they can do, you can do for yourself for free. And some of the companies that promise to relieve your student loan debt are scams. It is illegal for a company to charge you before helping you.
How to finance your education
There are several types of help available to pay for your education after high school, including grants and scholarships, federal work-study jobs, and student loans. The first step is to complete the Free Application for Federal Student Aid (FAFSA) form at fafsa.gov.
Grants and scholarships
Grants and scholarships are free money. They should be your first choice for financing your education. Why? Because you shouldn’t pay them. A good way to apply for a grant is through the FAFSA form. You can also explore these other resources to find out about scholarship and grant opportunities:
the financial aid office at a college or vocational school
a high school or TRIO counselor
the free scholarship search tool from the United States Department of Labor
federal agencies
your state
your library
foundations, religious or community organizations, local businesses, or civic groups
organizations related to your field of interest, such as professional associations
ethnicity-based organizations
your employer or your parents’ employers
Federal Work-Study Jobs
Federal work-study jobs are another way to help pay for college. This type of employment is a needs-based subsidy, which requires you to work part-time while you are in school. To qualify for work-study employment, you must complete the FAFSA form and meet the program’s “needs-based” criteria. You will only be paid for the hours you work.
Student loans
Student loans fall into two categories: federal loans and private loans.
Federal loans include:
Direct loans, where the US Department of Education is the lender;
Federal Family Education Loans (FFEL), where private lenders make loans backed by the federal government;
Federal Perkins Loans, low-interest federal student loans for undergraduate and graduate students with exceptional financial need; Y
PLUS Loans are federal loans that can be used by graduate or professional students and parents of dependent undergraduate students to help pay for college or vocational school.
Private loans sometimes called “alternative loans,” are offered by private lenders, such as banks and credit unions, and don’t include the benefits and protections offered by federal loans.
loan application
In most cases, you won’t need a co-signer to get a federal student loan (except for PLUS loans).
You don’t need a credit check for most federal student loans (except PLUS loans).
You may need a co-signer and your credit review. The cost of paying off private student loan debt will depend on your credit score and other factors.
Interest rates
(the cost of borrowing the money)
Rates are fixed and generally lower than private loans. Private student loans have variable interest rates.
Debt payment terms
You don’t have to start paying off the debt until you graduate, drop out of school, or change your enrollment status to less than half full-time.
Many private student loans require you to pay off the debt while you are still in school.
College students with financial needs typically qualify for a subsidized loan. The government pays the interest while you are studying at least half of the full time.
Private student loans are not subsidized. No one pays the interest on your loan, only you.
Loans can be consolidated into a Direct Consolidation Loan for free. Learn about your consolidation options.
There may be consolidation options, depending on your lender. But usually, there will be a charge for it.
There is no charge for paying off the loan faster, which is called a “prepayment penalty.”
A prepayment penalty may apply.
If you’re having trouble paying your loan, you may be able to temporarily postpone or lower your payments.
Private student loans do not offer grace or deferred payment options.
There are several payment options, including the option to link your monthly payment to your income.
You should check with your lender to find out about debt repayment options.
You may be eligible to have a portion of your debt forgiven if you work in public service.
It is unlikely that a private lender will offer a loan forgiveness program.
FAFSA
FAFSA stands for Free Application for Federal Student Aid. It is the only way to apply for federal student aid. The application is free. You must complete the FAFSA form at fafsa.gov each year you are in college or vocational school.
Also, many states use the data from your FAFSA form to determine your eligibility for state or college aid. Some private financial aid providers use information from the FAFSA to determine if you are eligible for their aid options.
Complete the FAFSA form for free at fafsa.gov.
FSA Identification
When you complete your FAFSA, you will also create an FSA ID. FSA ID stands for Federal Student Aid Identification. It is a username and password that you create. You use your FSA ID to:
enter the Federal Student Aid system.
complete the FAFSA form.
legally sign your student aid documents.
Only you can create and use your FSA ID. Do not share your FSA ID with anyone else. Dishonest people can use your FSA ID to get into your account and take control of your personal information.
Payment and forgiveness of loan debt
Student loans are a debt you must pay back, even if you don’t finish your degree. However, depending on your situation and the type of loan you have, you may be eligible for a different repayment plan or to receive debt forgiveness on your loan. And, when it comes to qualifying for these programs, there’s nothing a private company can do for you that you can’t do for yourself for free.
Federal loans
If you have federal loans, the Department of Education has free programs that may help you, including:
pay-as-you-earn plans – your monthly payment is based on the amount of money you earn
deferred payment or grace: you can postpone payments if you have a justified reason not to do it right now, although this would imply that the interest on what you owe will increase
Debt Forgiveness: In some situations, you don’t have to pay back some or all of your loan debt. You may qualify if, for example, you work for a government or nonprofit organization, if you have a disability, or if your college or school closed or committed fraud. Also, under certain pay-as-you-earn plans, any remaining balance after 20 or 25 years of payment is forgiven. In some cases, you may owe income taxes on the amount forgiven or exempted.
These options are free. You can learn more at the Department of Education’s StudentAid.gov/repay site or by contacting your federal student loan servicer. You can also find out how to get out of your delinquent status.
Private loans
With private loans, you often have few repayment options, especially when it comes to loan forgiveness or cancellation. To explore your options, contact your loan servicer directly. If you don’t know who your servicer is, look at your last loan statement.
Loan consolidation
Consolidating your student loans means combining several loans into one. Typically, people consolidate their loans to simplify monthly payments or to receive new payment terms. When you consolidate your loans, you receive a new loan with new terms and conditions.
If all of your education loans have fixed interest rates, it doesn’t matter when you consolidate the loans. If some or all of your loans have variable interest rates, when you consolidate your loans into one fixed-rate loan, that could affect the interest rate on your loan.
federal loans
Consolidating federal loans with the federal government is free. There are companies that offer help to help you consolidate your federal loans with the federal government for a fee, but you do not have to pay for this service. Consolidating loans with the federal government is a process you can do on your own, at no cost.
When you consolidate your federal student loans, you receive a Direct Consolidation Loan, with a fixed interest rate for the life of the loan. The fixed-rate is the weighted average of the interest rates on the loans you are consolidating.
You need to make sure it makes sense to consolidate your loans. Consolidating a low-interest Perkins loan may not be in your best interest. Perkins loans have deferment and cancellation rights that you could lose if you include them in the consolidation.
Consolidation has pros and cons, especially since if you combine your loans into a Direct Consolidation Loan, you won’t be able to separate them any further.
Reasons to consolidate loans
If you currently have federal student loans that are placed with different loan servicers, consolidation can greatly simplify debt repayment, since you will have a single loan with a single monthly bill.
Consolidation can lower your monthly payment by giving you a longer-term (up to 30 years) to repay your loans.
If you consolidate your federal student loans, you may have access to additional income-based repayment options and Public Service Loan Debt Forgiveness. (However, this is not the case for Direct Loans, which are from the William D. Ford Federal Direct Loan Program.)
You will be able to change any variable rate loan you have to a fixed-rate loan.
Reasons not to consolidate loans
Because consolidation often increases the time it takes to pay off your loans, you’ll have to make more payments and pay more in interest than you would have paid without consolidating.
Consolidation also causes you to lose some of the borrower benefits associated with your current loans.
If you are paying your current loans under an income-based plan, or if you have made eligible payments toward Public Service Loan Forgiveness, consolidating your current loans will cause you to lose credit for payments made toward a Public Service Loan Forgiveness plan. income-based payment or Public Service Loan Debt Forgiveness.
If you’re having trouble making your monthly payment but are concerned about the impact of loan consolidation, you may want to consider deferment or forbearance as short-term payment relief options or consider switching to a pay-as-you-earn plan.
private loans
Private loans must be consolidated with a private lender. There may be a cost when you consolidate, but avoid companies that tell you to pay that cost upfront. Make sure you understand all the terms of your consolidated loan before agreeing to the consolidation.
Some debt relief companies and lenders offer to consolidate federal and private loans into one new loan to lower your monthly payments or lower your interest rate. Do not do it. Consolidation of federal and private loans becomes a private loan, which means you will lose the federal repayment benefits and protections of your federal loans, such as deferment and forbearance, income-based repayment plans, and loan debt forgiveness.
Before you consolidate your loans, find out what this would mean in your specific case. If you have private loans, talk to your loan servicer. For federal loans, call the Department of Education’s Loan Consolidation Information Call Center at 1-800-557-7392.
Take your time to determine if consolidating your loans is right for you.
Signs of Fraud in Student Loan Debt Relief Offers
You’ve probably seen ads for companies that promise to help you with your student loan debt. Here’s what you need to know: There’s nothing such a company can do for you that you can’t do for yourself at no cost. And some of the companies that promise to relieve your debt are scams.
Never pay anything in advance. It is illegal for a company to charge you before helping you. If you pay upfront to reduce or end your student loan debt, you likely won’t get any help or a refund.
Only imposters promise quick forgiveness of a debt. Before learning the details of your situation, imposters may tell you that they can quickly relieve you of debt through a debt forgiveness program—programs that most people don’t qualify for. Or they might tell you that they can eliminate your debt by disputing those debts. However, they cannot do either.
A Department of Education seal does not mean that what you see is legitimate. The imposters use official-looking names, seals, and logos, and tell you they have access to certain debt payment plans, consolidations under a new federal loan, or loan forgiveness programs. They are not. If you have federal loans, go directly to the Department of Education’s StudentAid.gov site.
Don’t rush to make a decision. To get you to act fast, the imposters tell you that you could miss out on this opportunity to qualify for a payment plan, loan consolidation, or loan forgiveness programs if you don’t sign right away. Take all the time in the world and find out.
