Student Loan Frequently Asked Questions
When you borrow money, it's important to understand your repayment responsibilities
and options. Each loan comes with its own repayment terms, so check your Master
Promissory Note (MPN) for specific details. Here are answers to some frequently
asked questions:
Who is responsible for repaying my loans?
Some loans are designed for students, meaning that the student is responsible for
repaying the loan. Federal student loans include the Direct Subsidized Loan, Direct
Unsubsidized Loan, Perkins Loan, and Grad PLUS Loan (available for graduate students
only). The Federal PLUS Loan is the only type of loan where your parents are responsible
for repayment.
If you borrow with private loans, the borrower (this could be the student or the
parent) is responsible for repaying the loan. The borrower will need to pass a credit
check or have a creditworthy cosigner. Keep in mind that a cosigner will share the
responsibility of repaying the loan if the borrower fails to do so.
When do I have to start repaying my student loans?
A Direct Loan allows for a six-month grace period after you have left college
before you must begin repayment. A Perkins Loan will allow for a nine-month grace
period. Borrowers can choose from two repayment options for the PLUS Loan: either
60 days after the loan is fully disbursed or six months after you drop below half-time
enrollment status. Private and alternative student loans will have different repayment
terms. Check your MPN for the specific loan repayment conditions.
Should I consolidate my federal loans?
You can consolidate your federal loans into a single, larger loan and decrease your
monthly payment if you extend your repayment term. Keep in mind, extending your
repayment terms will increase the lifetime cost of the loan. However, there are
no prepayment penalties with federal student loans, and any money you pay in addition
to the monthly payment will be applied directly towards the principal. By paying
off the principal sooner, you will reduce the total amount of interest you pay.
Here are some additional consolidation tips:
- The interest rate for a consolidated loan is the weighted average of the loans
that you consolidated, rounded up to the nearest one-eighth of a percent. Since
it is a weighted average, the change to the interest rate is marginal at best.
- Some lenders offer borrower benefits. A borrower benefit is a way to lower your
interest paid by meeting a specific condition set by the lender. For example, if
you make a certain number of payments via direct deposit or you make a certain number
of on-time payments, your lender may lower your interest rate. Check with your lender
to see if any borrower benefits are offered.
- In some situations, consolidating could also cause you to lose some of the benefits
associated with Perkins Loans. Consolidating federal loans does not impact your
ability to put your loans in deferment. However, if you consolidate a Perkins Loan,
it will be treated as an unsubsidized loan. This means that you will have to pay
the accruing interest while it is in deferment.
- If you have a combination of federal and private loans, you should not consolidate
them together. This will cause you to lose many of the federal loan benefits.
- Once your loans are consolidated, they cannot be separated.
Should I consolidate my private loans?
Like with federal loans, you can consolidate private loans into a single, larger
loan and decrease your monthly payment if you extend your repayment term. Keep in
mind, extending your repayment terms will increase the lifetime cost of the loan.
Check to see if your lender has any penalties for early prepayment. If you consolidate
your private loans, your lender may reevaluate your interest rate. Your rate could
go up or down, since it is based on your credit history. It is also important to
see if there are any origination fees, and if so, you will need to evaluate whether
this is the right decision for you.
Consolidating loans locks in your interest rate. Let's say that you had a variable-rate
loan that you consolidated with your other loans. If the interest rate on the variable-rate
loan increases in the future, you will still benefit from the low interest rate
that you locked in. On the other hand, if you think interest rates are going to
decrease, hold off on consolidating so you aren't locked in at the higher interest
rate. Even if you have one loan, you can consolidate it in order to lock in the
interest rate.
If you have a combination of federal and private loans, you should not consolidate
them together. This will cause you to lose many of the benefits of federal loans.
What can I do if I cannot afford my student loan payments?
- Consider consolidating your loans into one larger loan, as this lowers monthly
payments if you extend your repayment terms. Keep in mind, extending your repayment
terms will increase the lifetime cost of the loan.
- If you are eligible, apply for deferment. Deferment allows you to postpone your
payments for an agreed amount of time. If your loan is subsidized, the federal government
will pay the interest that accrues during the deferment! If your loan is unsubsidized,
you will be responsible for all the interest that accrues during deferment.
- If you are not eligible for a deferment, you can always consider forbearance.
Forbearance is similar to deferment in that it also allows you to postpone your
student loan payments. However, you will be responsible for paying any accrued interest,
regardless of whether the loan is subsidized or unsubsidized.