Recently in Private loans Category

Barbara

Send a comment to Barbara

We already talked about ways you could possibly lower your monthly student loan obligations. But if you're looking for a way to postpone your student loan payments, there may be an option for you as well.

Under certain circumstances, borrowers may be eligible for a deferment or be granted a forbearance. Now, in both cases, you aren't required to make payments to your student loan for a short period of time. However, there are some differences that are important to understand. I'll give you the scoop on each:

• Deferments: These are for federal student loans. There are several types of deferments for folks in different situations.  You need to meet the criteria of these situations in order to be eligible for the deferment. If you are granted a deferment, know that in most cases, you’ll still be accruing interest. (The exception is for subsidized Federal Stafford Loans, which are based on financial need — the interest accrued during deferment for those loans is paid by the government.) If you don’t qualify for a deferment, you may be able to postpone payments with a forbearance.
• Forbearances: Forbearances are available for both federal and private student loans. These are granted at the discretion of your lender. Interest will continue to accrue on your loan during forbearance (even for the subsidized Federal Stafford Loan). Federal forbearances are available for borrowers experiencing financial hardship and other situations. Private student loan forbearances vary by lender, so ask your lender what options are available for you.

If you're having difficulties repaying your loan, it's very important to talk with your lender about options and the paperwork you'll need to apply for them. You don't want to fall behind on payments, and a deferment or forbearance could help.

Barbara

Folks, we've made it through another graduation season. The gowns and mortar boards are packed away, and now many graduates are focused on their finances during the first months out of college. Student loan repayment is just down the road.

As you look ahead to that first student loan payment, you may be realizing that it's going to be a little tough to swing. You may have borrowed more than you can afford to repay or may not have secured employment quite yet. (Side note for those of you just starting to take out student loans: Make sure you budget properly so you don't borrow more than you can repay.)

Whatever your situation, there are options available to help make it easier to pay your student loan. Here are some ways you may be able to lower your interest rate or monthly payments:

• Choose a different repayment plan. For federal loans, there are a number of repayment plans other than the standard repayment plan. You may be able to have your payment based on your income, extend your repayment if you have over $25,000 in federal loans, or start out with smaller payments that gradually get larger over the repayment term. And check with your lender to see what repayment options are available for your private student loans.
• Take advantage of discounts from you lender. Ask your lender if there are any interest rate discounts available for your loan. For example, you may be able to save money if you have your monthly student loan payment automatically deducted from your checking or savings account.
• Consolidate your loans. By combining your federal student loans  together into a new loan with a longer repayment period, you'll usually lower your monthly payment. For private student loans you may even find that your interest rate is lower if your credit situation has improved or if you bring on a cosigner with excellent credit.

Remember that if you're lowering your monthly payment by extending your repayment period or paying just the interest, you may end up paying more interest over the life of your loan. However, in the grand scheme of things, if it prevents you from missing payments and defaulting on your student loan, it might be worth it.

Looking for a way to postpone your student loan payment? We'll talk about deferments and forbearances later this week, so stay tuned!

Meanwhile, hit me up with any questions you have about different repayment options.

Staci

Here at the Student LoanDown, we like to think that every month is financial literacy month. But this April, it actually is National Financial Literacy Month!  Time to brush up on your financial fundamentals!

One of the personal finance bloggers we follow regularly, J.D. from Get Rich Slowly, asked his readers what they want to learn during Financial Literacy Month.  They've been more than forthcoming with interesting suggestions — some even want to know more about student loans.

You've been asking some interesting questions lately, too. In case you've missed them, I thought I'd highlight some of our recent exchanges:

• Do you have questions about student loan default or federal student loan rehabilitation? Check out the comment string on my post about student loan repayment.
• Are you thinking about cosigning a private student loan for a student and wondering how long you'll be on the hook?
• Want to know more about how Wells Fargo's private student loan interest rates are calculated? Barbara answers Tyler's questions here.
• If you're curious about student loan consolidation, our most popular post probably addresses the topic somewhere in the comments section!

What haven't we discussed that you'd like to know? You don't have to wait for Financial Literacy Month to roll around — you can ask us anytime.

Barbara

One of the questions we Student LoanDown bloggers get asked frequently (through comments and our Ask the Expert tool) is, "Can I lower my student loan interest rate?"

Some folks are looking to lower their monthly payment because they're not able to afford it — others are just looking to decrease the total interest paid to their lender. Here's the information I usually pass on to those readers.

When student loan borrowers sign their promissory note  agreeing to pay back the loan, they also agree to the interest rate detailed in the contract. For some loans this will be fixed and for others it will be variable (a margin that is added to a base rate). For federal student loans made after July 1, 2006, the interest rate is fixed. Most private student loans have variable interest rates.

Your promissory note locks in the terms on your loan (including the interest rate or rate margin). You can't "refinance" a student loan the way you can with other consumer credit products, but there are options to possibly lower your current monthly payment, reduce your interest rate, or reduce the amount you pay over the life of the loan.

Quick tangent: For those of you still in school or just beginning to take out student loans, be proactive. Understand what you're borrowing at what rate, so you don't find yourself unable to make payments later. End tangent.

Now, let's talk about the options.

Consolidate: By consolidating your student loans, you may end up reducing your current monthly payment because you are likely extending your repayment period. However, that means you would end up paying more over the life of the loan if you continue paying just the required amount each month. But if you're looking for a little payment relief now and are willing to pay more (or make higher payments later to avoid accruing additional interest), consolidation could be the answer. Your best bet for federal student loan consolidation is through the Department of Education's Direct Loan Program. 

An added benefit of private student loan consolidation is a possible interest rate change. If your credit situation has improved since you took out your loan (or if you bring on a cosigner), you may qualify for a better interest rate than you previously had.

Pay off the debt: Some borrowers could consider using a different consumer loan (personal, home equity, etc., depending on assets) to pay off their student loan. This option has a couple big things to consider, though. You would lose several benefits of student loans like deferment and forbearance options, as well as the potential tax deduction.

Pay more: If what you're looking to do is accrue less interest, then the best solution is to pay more money each month toward your principal balance. Even just a little bit each month could add up to big savings over the life of your loan.

Get the debt forgiven: There are some programs that will forgive a certain amount of a student's debt. For example, there is a federal loan forgiveness option available to students working in public service. 

Use borrower benefits: Ask you lender if they offer any benefits that could reduce your interest rate. For example, some lenders offer a discount if you make your payment automatically.

What other questions do you have about your student loans?

Staci

Happy 2009! Have you made any New Year's resolutions? 

I'm not a particularly successful resolution-keeper. Last year, I vowed to eat healthier, and for six weeks it was nothing but oatmeal for breakfast, salads for lunch, and Lean Cuisine®  for dinner. By the time Valentine's Day rolled around, I felt so deprived that I consumed a two-pound box of See's Candies®  in one sitting.

All bets — and subsequently, all resolutions — were off.

Looking back on it, I know my resolution was too general — not to mention highly unrealistic! I'm guessing that many resolution-makers find themselves in similar situations.

Depending on what stage you are in your student life — soon-to-be-student, current student, recent graduate — here are a couple of specific, achievable New Year's resolutions you could adopt in 2009:

1. Apply for at least one scholarship. Remember, free money for college means less money you'll have to borrow, and plenty of scholarships are out there for those willing to do a little work. Find one that's right for you by checking with your high school guidance counselor, your college financial aid office, your employer (or your parents' employer), or a scholarship search.

2. Before you apply, read the fine print. Know exactly what you're getting into before you sign a credit card application or a student loan promissory note, because your signature indicates that you agree to the terms and conditions. Pay attention to interest rates, fees, grace periods, and repayment periods. If you don't understand anything, ask — before you sign.

3. Make an extra student loan payment. Student loans don't have prepayment penalties. At least once this year, scrounge up enough cash to throw an extra $50 at one of your student loans, preferably the one with the highest interest rate. Just be sure to communicate with your lender and let them know exactly which loan you want the extra payment applied to.

My one resolution for 2009? Not to eat an entire box of See's Candies in one sitting. Sounds pretty doable, right?

Barbara

Recent grads, have you made your first student loan payment?

If not, it's coming. The six-month grace period of Federal Stafford Loans is ending for May graduates, which means it's time to repay.

Here are a few ideas to start your repayment off the right way:

1. Pay on time. One of the best things you can do to build your credit history and stay on good terms with your lender is to make on-time payments. Stay on top of due dates by managing your loan online. You can even make it simpler by signing up for automatic payments.

2. Pay more. A little extra can go a long way when it comes to saving money over time. Each dollar you pay in addition to your minimum payment means one less dollar to pay interest on. The savings can really add up.

3. Consolidate. If you want to make one student loan payment to one lender instead of several, you can consolidate your federal student loans through the government  and private student loans through lenders like Wells Fargo. Plus, there's an added bonus to private student loan consolidation: You may qualify for a better rate than you had on previous loans if your situation has changed.

4. Talk with your lender. We know some borrowers may have trouble repaying. The important thing is that you talk to your lender about your options. You may qualify for a deferment or forbearance. Or you may be able to pay on an income-sensitive, graduated, or extended schedule.

For those of you already repaying your student loans, what tips do you have on starting repayment on the right foot?

Barbara

If you're in the market for a private student loan (the kind you turn to once you've exhausted all your scholarships, grants, and federal funding), you've likely heard or will hear about cosigners. Having a cosigner can make a difference on your student loan eligibility and interest rate, so I wanted to take some time to talk about cosigners and answer your questions.

Here are a few of the basics to spark some conversation:

What exactly is a cosigner?
For private student loans a cosigner is someone who signs a loan with the student. The cosigner agrees to be responsible for the loan, along with the student. A cosigner is a person who takes on equal liability of a student loan. That means the cosigner is on the hook for any payment that the primary borrower doesn't make.

Why do I need a cosigner?
Many college students don't have an established credit history, so a cosigner is required to secure the funds. This makes the loan less of a risk for the lender. Even if a student has an established credit history, it may still be a good idea to apply with a cosigner. Why? Most private loans have tiered pricing. That means the interest rate is figured at a base rate (like Prime Rate  or LIBOR ) plus a margin. For private student loans, that margin is based on credit. So bringing on a cosigner with excellent credit can improve the terms of a borrower's loan.

Who should I get to cosign for me?
There isn't a standard person that must cosign a borrower's loan. In fact, by law lenders can't tell you who should cosign your loan. Some common choices are family members like parents or grandparents. However, you can choose a non-relative, too. As long as the person has established credit and is willing, he or she can cosign. One thing is for sure though: No matter who you choose to cosign your loan, it's important that you have a cosigner in mind at the beginning of the process, as it will help the lender in providing you with a more timely credit decision.

Will my cosigner be liable for my loan for the whole repayment period?
Not necessarily. Some lenders offer an incentive that gives borrowers the option to release their cosigner from the liability. This cosigner release is usually an option if the borrower proves that he or she is able to repay the loan. Many lenders ask borrowers to make a certain number of on-time payments before they can take on sole responsibility of the loan. Lenders may also require the borrower to meet certain credit guidelines at the time their cosigner is released.

Now, what else are you curious about when it comes to cosigning a loan or finding someone to cosign your loan? Here's the place to ask.

Staci

Not long ago I read an article that made me cringe: A graduate student at California State University, Northridge  decided to put her tuition on a credit card.

On her credit card? With all the other options out there? [Gasp.]

Although Jennifer didn't put her tuition on her credit card, she did charge some of her living expenses, which left her in a bit of a bind. Here's the final part of her story.

Mistake #3. Living on Credit — Not Taking out Enough Money in Loans to Cover Living Expenses

When I went away to college, my mother made a deal with me. She would give me an allowance of $200 every two weeks for living expenses (basically all she could afford). She also got me a credit card. Six years later, we still have the same deal and the same credit card.

When I took out loans, I only borrowed enough money to cover tuition costs and my rent. As it turns out, that $200 every two weeks hasn't been enough to live on, and I now have a standing balance on my credit card that I can't pay off.. Very recently a wise financial advisor pointed out to me that the nearly 18% interest rate that I pay on my credit card balance exceeds the interest rate of my student loans. Neither my mother nor I thought that it might be a good idea to budget living expenses into my student loans even though she's encouraged me to keep putting the larger, unusual purchases on my credit card.

Now that we've learned out lesson, my credit card will be paid off this fall before I start my new grad program. I've taken out extra money for my living expenses and I'm going to try something new once I'm established at school: My credit card is going in the pencil box that I bury in the bottom of my desk drawer, and I plan to withdraw a budgeted amount of cash every week.  The objective will be to live “cash to mouth,” or to make the cash last the whole week, without running out — groceries, coffee, everything. Any extra cash will go into a reward fund that I will utilize at graduation, one year from this September.

While the economy is increasingly digital, and more merchants can handle small $2.00 coffee transactions digitally, stick to cash because it's tangible. It's easier to see how the coffee adds up when you're making change and not just handing over a thin slab of plastic.

How many times have I heard that little gem of wisdom before? Lots. But there's no teacher like experience.

Jennifer's right — there's no teacher like experience. But perhaps the mistakes she made (or almost made) can help you avoid some financial pitfalls of your own.

Want to tell your student loan story? Have any wisdom to share about your own financial experiences? Send us an email — we'd love to hear from you!

Staci

Generally, Wells Fargo recommends that students exhaust all of their "free money" (such as grants and scholarships) first, then borrow federal student loans, and if they need additional funds, consider private student loans .

Graduate student Jennifer weighs the pros and cons of that borrowing strategy in her next segment.

Mistake #2: Not Considering a Private Loan over a Federal PLUS Loan for Graduate Students

When taking out my loan for grad school, I decided that I had better do my research this time. As a grad student, I now qualify for federally subsidized loans. Stafford loans only go so far, and to finance the shortfall, my options are either a Federal PLUS Loan for graduate students or a private loan. A Federal PLUS Loan for graduate students has a fixed interest rate, so of course, this is the best option. But is it really?

The terms for the two loans differ: PLUS loans have a ten-year repayment term, which can be extended with broad deferment options (including one that covers insufficient salary), and a fixed government rate of 8.5%. Private loans have a longer repayment term — up to 25 years depending upon the lender — and relatively narrower deferment options. The interest rate on private loans is based on the Prime Rate  (which is the federal funds rate plus 300 basis points, or 3%), plus a margin (one or more percentage points) based on your credit history.

Now, here's the kicker: for a private loan, the Prime Rate, plus a percentage point or two, may yield an interest rate lower than the Federal PLUS Loan if you have a good credit history. However, choosing a private loan is a gamble. The economy is currently in pretty bad shape, and the Fed has been keeping interest rates low, but inflation is also a risk — it may lead to the Fed raising interest rates in the future. The Prime Rate has ranged from 4 to 9.5% since 2000 and currently sits at 5%. Banks calculate the applicable Prime Rate differently. For example, banks can use the monthly average, yearly average, or the rate on the final day of each month. If you're going to go with the private loan, make certain that you know how your lender will calculate the interest rate.

A private loan may be the way to go if your career path is more certain and you have a good idea of what your salary will be upon graduation — i.e., you don't actually need the longer repayment term, and you can repay the loan sooner before economic conditions change too drastically and take advantage of a relatively certain lower rate of interest. But again, this is a gamble. It might be smarter to go with a Federal PLUS loan if you tend to procrastinate or think that you'll need to utilize the relatively broader repayment deferment options.

Ultimately, it comes down to this: You have to do what's best for your own financial situation, and what might work for one student might be completely wrong for another. So do as Jennifer did — if you need to take out a student loan, weigh your options, weigh your individual tolerance for risk, and after educating yourself, borrow accordingly.

We'll have Jennifer's last piece of advice on Thursday.

Staci

As we commemorate the second anniversary of the Student LoanDown — how can it be two years already? — I'm reminded of why we started blogging in the first place: To have a conversation about education financing.

Although we bloggers tell you about our experiences, it's really your experiences that resonate loudly and clearly with this community. And recently we were fortunate enough to get some great real-life experience from Jennifer, an American student about to begin graduate work at the the School of Oriental and African Studies  in London.

So for the next couple of days, I thought I'd share Jennifer's advice with all of you. It's a slightly different perspective from ours, which is what blogging's all about.

My parents were fantastic financial planners. They saved enough money to almost entirely pay for my entire undergraduate education, which was fortunate because they also made too much money for me to qualify for federal loans.

I did have to take out a couple of private education loans as an undergraduate for the summer course I took in Geneva and the month I spent doing volunteer work in Brazil. When I began to apply for loans, having already taken Intro to Microeconomics , I figured that the student loan market was probably homogenous because every bank offers student loans. How different can they be?

Plenty different, let me tell you. Thus, I would like to offer "The Three Mistakes I Made (or Almost Made) Financing My Education."

Mistake #1: Not Reading the Fine Print

Know the details of your loan. Before you sign the loan, read the fine print. I'll bet you're thinking, "Oh brilliant advice, everyone knows that you're supposed to read over the details of a loan before you sign it!" But seriously, how many people actually read the fine print, those tiny little details in seven-point font that appear in a new PDF window and go on for about six pages?

I didn't. Brilliant financial planner that I am, I was usually applying for loans after classes started, in an hour between classes, after I'd received the notice from Student Financial Services telling me that I owed the school money. I chose my lender based upon the lender my roommate at the time was using. I hate filling out loan applications because it feels as though the amount is always large and relatively abstract — while I theoretically know the value of $49,000 (the cost of 1 Masters of Science degree , also a year's salary, the cost of a luxury car, etc.), the reality of that large an amount of money remains relatively unfathomable. The possibility that I will ever earn a salary high enough to pay it back seems unreal. Even the meager $10,000s I needed sporadically as an undergrad felt relatively daunting and thus, I avoided loan applications until they became absolutely pressing.

The reality of the situation is that taking out loans requires comparative research. The first undergraduate loan I took out required repayment upon completion of my BA, regardless of whether or not I was continuing my education at the graduate level — something that I was in no position to do.

Select your private loan company carefully. Some loans allow repayment to begin before graduation, some charge an "origination fee," others do neither. It is a good idea to check the student loan options at the bank you keep a checking account with, as some banks offer post-graduation interest rate reductions for current customers. Consider opening a checking account with a bank just for the interest rate reduction; a lot of students relocate to a new city and have to open a checking account anyway, so check out which banks operate where you go to school. Many banks offer checking account applications over the internet, so you can apply before you leave home with plenty of time to apply for an education loan.

For a helpful guide to the different types of loans and their terms, check out Mapping Your Future , and for extra financial planning fun, click on the "play Show Me the Future" link on the left side of the screen.

Next week we'll be back with Parts 2 and 3 of Jennifer's financial aid life lessons. Stay tuned!