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10 Facts About Student Loans That Will Save You Money

August 23, 2018

Many millennials are first-generation college students, which is awesome! Going to college is a huge achievement, and you should be proud of your hard work. Navigating the financial side of college, however, can be a little tricky. There are definitely some basic facts you should know—all of them will save you money. We’ve compiled 10 facts about student loans that will save you money. Make sure you’re reaching out to your school to see what resources are available to you and read up on how you can make good borrowing choices.

  1. Not all student loan servicers are created equal.
  2. Small differences in interest rates and origination fees can mean BIG dollars down the road.
  3. Keeping an eye on your principal can help you understand the repayment process.
  4. It could behoove you to pay interest while in school
  5. Deferment is a short-term solution that you should avoid if possible.
  6. There are different reasons to consider fixed or variable interest rates.
  7. You pay taxes on forgiven loan amounts.
  8. You might qualify for loan forgiveness.
  9. There are options if you can’t pay. Don’t try to hide.
  10. Some borrowers save tons of money with refinancing.

 

Click Here to See What You Could Be Saving 

 

Not all student loan servicers are created equal

Some people think that getting a student loan from any company or bank is roughly equal. Maybe the interest rate will be a little different, but they all offer mostly the same thing. Sadly, too many millennials have found out the hard way that some student loan companies are not as reputable as others. Whether it’s a lack of payment options, little to no deferment even, or just plain difficult customer service, there are a lot of reasons why shopping around for the best service and best options can save you time and money in the end.

 

Small differences in interest rates and origination fees can mean BIG dollars down the road

The interest rate you pay for borrowing money is a percentage that’s calculated based on the principal or the amount borrowed. Interest rates might be fixed or variable, depending on your loan, and knowing the difference will save you big money. For instance, if you get a loan with a variable rate because it’s low now, you need to know how high the rate could go, which might affect your decision. When comparing loans, check the interest rate, but also look at the life of the loan and other associated fees. For example, some lenders or products charge an origination fee as well. Here’s a scenario to show how some of these variables play out:

  • A student takes out a $20,000 loan with a 7% interest rate & 0% origination fee. This loan accrues interest monthly and when it capitalizes at repayment 48 months from now, this student will have an outstanding balance of $25,600.
  • A student takes out a $20,000 loan with an 8% interest rate & 4% origination fee. This loan accrues interest monthly and when it capitalizes at repayment 48 months from now, this student will have an outstanding balance of $27,456.

It might look like a minor change, but these small differences matter a lot!

 

Keeping an eye on your principal can help you understand repayment progress

Your principal and payoff balance will appear on your loan statements and you should note those amounts each month. Obviously, you want to see them trending down, but sometimes watching your principal balance each month will help you realize how much more impact you could have on your loans if you increased or restructured your payments.

 

It could behoove you to pay interest while in school

There’s one reason why paying even just your interest payments on student loans while in school is a good idea: compound interest. Compound interest is when your interest gets added to the principal. When this happens, your principal is higher, and you end up paying more interest. To combat it, pay interest payments! If you make these small payments while in school, you won’t graduate with even more debt than you actually took out. If you continuously defer your loans, the debt grows and grows until you start paying. This is how some people get into a lot of trouble!

 

Deferment is a short-term solution that you should avoid if possible

Student loan deferral can sound like a great deal if you’re in dire straits, but there are a lot of reasons why you should avoid student loan deferral or forbearance if at all possible. These options increase your debt and add fees to your loan. If you’re in an extreme situation and have to defer payment or two that you can catch up on in a few months, you do what you have to do. But don’t opt to defer just because you want more money for something like a wedding when you could find other ways to save.

 

There are different reasons to consider fixed or variable interest rates

Government loans are always fixed-rate, but private loans can be fixed or variable. Knowing the benefits and possible downside of both options can help save you money when it’s time to decide which loan to get. With a fixed rate, you know what you’re going to pay for the life of the loan. Variable rates are not so certain. You might start with a low rate that goes up over time or vice versa, but they also generally start lower than the fixed rate. Consider how the variable rate is set and whether you’re okay with a variable rate or would prefer the fixed amount.

 

You pay taxes on forgiven loan amounts

Student loan forgiveness can be a great thing since your remaining balance after 10, 20, or maybe 25 years is forgiven. Many people don’t know, however, that current IRS rules require the forgiven loan amounts to be treated as taxable income. That means you could be on the hook for a hefty tax bill when you least expect it. Knowing this information could change the way you pay your loans, or at least prepare you for what’s at the end of the rainbow.

 

You might qualify for loan forgiveness

Speaking of loan forgiveness! Only you can figure out if you qualify, grasshopper. The government doesn’t keep track of this, and the rules for qualification are rigid. Be sure that you know your qualification status before you start planning your “student loan forgiveness day” party. Check out our blog on student loan forgiveness.

 

There are options if you can’t pay. Don’t try to hide (other word choices for ‘hide’ – run, ignore it, lie, pretend it’s not there).

The worst thing you can do is ignore student loan payments. Student loan companies have ways of getting money from you even if you’re hiding under a blanket in mom and dad’s basement. If you ever can’t pay your student loans, call them immediately and talk about options. You might be able to set up a new payment option or refinance to save some cash and keep making payments.

 

Some borrowers save tons of money with refinancing

There are many ways to save money with refinancing. For instance, if you consolidate private and federal student loans into one monthly payment, you might be able to score a lower payment. If you have several loans with high-interest rates or if rates have gone down since you borrowed, refinancing your student loans can save you bundles.

 

Common Misconceptions About Student Loan Forgiveness 

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Millennial reading news about student loans in coffee shop.
2020-07-10
This Week in Student Loans: July 10, 2020

Please note: Education Loan Finance does not endorse or take positions on any political matters that are mentioned. Our weekly summary is for informational purposes only and is solely intended to bring relevant news to our readers.

  This week in student loans:
US Capitol

GOP Concerns Over Costs Could Limit Student Loan Relief In Next Stimulus

GOP Senate leaders are showing increasing concern about the costs of additional economic relief, particularly when it comes to student loan relief, as they weigh a second stimulus bill.

Source: Forbes

 

State Senate Chambers

Democrats Fail to Override Trump Veto on Student Loan Policy

This Friday, House Democrats were unable to override the Trump Administration's veto on a proposal to reverse the Education Department's strict policy on loan forgiveness for students misled by for-profit colleges. The House voted 238-173 in support of the override measure, coming up short of the two-thirds majority needed to send it to the Senate.

Source: ABC News

 

question mark

Study Finds Gen Z Borrowers Are Unaware of COVID-19 Student Loan Relief Programs

While the CARES Act allowed those with federal student loans to pause payments until September, a recent survey from Student Debt Crisis shows that Gen Z borrowers, in particular, were the least aware of the relief program.  

Source: CNBC

 

note saying pay off debt

Author Shares Her Big 'Wake Up Call' That Led Her to Pay Off $81,00 in Student Debt

35-year-old Melanie Lockert, the author of "Dear Debt," shared with CNBS the story of how she was able to pay off $81,000 in student loan debt over 9 years, with her big wake up call coming five years into repayment.  

Source: CNBC

    That wraps things up for this week! Follow us on FacebookInstagramTwitter, or LinkedIn for more news about student loans, refinancing, and achieving financial freedom.  
 

Notice About Third Party Websites: Education Loan Finance by SouthEast Bank is not responsible for and has no control over the subject matter, content, information, or graphics of the websites that have links here. The portal and news features are being provided by an outside source – the bank is not responsible for the content. Please contact us with any concerns or comments.

picture of different loan term lengths
2020-07-08
Dash Through the Debt: How a Shorter Student Loan Term Adds Up

If you’re like most college graduates, you’re sick of your student loans. If you want to get rid of your debt once and for all, refinancing your loans and opting for a shorter student loan term is a smart strategy. You can secure a lower rate and pay off your loans years ahead of schedule while saving thousands.    Here’s what you need to know about shortening your loan term, as well as how much shortening your student loan term could save you.   

How long does the average graduate take to repay their student loans? 

When you graduate from college, you likely expect to pay off your student loans quickly. However, life often gets in the way of your plans, even if you make a good salary.    While the
Standard Repayment Plan for federal student loans is ten years, many students extend their repayment terms with income-driven repayment plans, forbearance or deferment periods, or by missing payments altogether. According to the One Wisconsin Institute, the average length of repayment for graduates with bachelor’s degrees is 19.7 years. If you have graduate student loans, the average repayment period is even longer.    With such a longer repayment term, you’ll pay thousands of dollars in interest charges on top of what you initially borrowed, adding to your loan's total cost. And, carrying such a heavy financial burden for decades can force you to put off other goals, like buying a house, starting a business, or even getting married.   

How to get a shorter student loan term

When you take out a student loan, you sign a loan agreement or promissory note where you promise to pay the loan back according to set repayment terms. The agreement will outline the loan’s interest rate, payments, and loan term.    Many borrowers don’t realize that you’re not stuck with those terms forever. If you’re unhappy with your current loan’s repayment terms or your finances improve, there is a way to change them: student loan refinancing.*    When you refinance your debt, you apply for a loan from a lender like Education Loan Finance for the amount of your total existing student loan debt. If you have both federal and private student loans, you can combine them so you’ll have just one loan to manage and one monthly payment to remember.*    The new loan will have different terms than your old ones, including the interest rate and monthly payment. When you apply for the loan, you can choose your own loan term that works for your goals and budget. For example, if you currently have a ten-year loan term, you can select a five or seven-year loan if you'd prefer a shorter term.   

Benefits of a shorter student loan term

Instead of making payments for 20 years or more, it’s a good idea to select a shorter loan term, if you can afford it. Opting for a shorter student loan term has many advantages:   

1. You can get a lower interest rate

When you have a long loan term, lenders consider you to be a riskier borrower and they charge you a higher interest rate. You’ll have a lower monthly payment, but the longer loan term will cost you more money in interest charges over time.    By contrast, lenders reserve their lowest interest rates for credit-worthy borrowers who choose the shortest loan terms. If you want the best possible rate, opting for a shorter loan term will allow you to save money.    You’re probably wondering, “How much can I save by shortening my loan term?” Let’s look at an example.    Pretend you had $30,000 in student loans with a ten-year loan term at 5% interest. By the end of your repayment term, you would repay a total of $38,184; interest charges would cost you $8,184.    If you refinanced your loans and chose a five-year loan and qualified for a 3.19% interest rate, you’d repay just $32,496 over the life of your loan. By refinancing your debt and selecting a shorter loan term, you’d save $5,688.   

Original Loan

Balance: $30,000 Interest Rate: 5% Loan Term: 10 Years Minimum Payment: $318 Total Interest: $8,184 Total Repaid: $38,184  

Refinanced Loan

Balance: $30,000 Interest Rate: 3.19% Minimum Payment: $542 Total Interest: $2,496 Total Repaid: $32,496

2. You’ll pay off your debt earlier 

When you choose a shorter loan term, you’ll be able to pay off your debt years ahead of schedule. Not only will you save a significant amount of money in interest charges, but you’ll also have the psychological benefit of not having to worry about debt any longer. If your student loan balance was causing you stress, that’s a significant advantage, and a huge weight off your shoulders.   

3. You’ll free up cash flow

Once you’ve paid off your student loans, you’ll free up extra cash flow. You’ll no longer have to make your monthly loan payment, so you can instead direct that money toward other goals, such as saving for retirement, boosting your emergency fund, or buying a home. If you use the above example, you’d have $542 per month you could use to fund your financial goals.    To put that in perspective, let’s say you paid off your loans by the time you turned 27. After that, you invested the $542 you were paying toward your student loans into your retirement nest egg. If you contributed $542 every month into your retirement fund and earned an 8% annual return, on average, your account would be worth over $1.8 million by the time you reached the age of 67.   

The bottom line

While extending your loan term may seem like a good idea to get a lower monthly payment, that can be a costly mistake. You’ll have to pay a higher interest rate and, over time, the longer loan term will cause you to pay back far more in interest charges.    Instead, consider refinancing your loans and selecting a shorter student loan term. You’ll be debt-free sooner, and you may save a substantial amount of money.    To find out how much you can save, use the student loan refinance calculator.*  
  *Subject to credit approval. Terms and conditions apply.   Notice About Third Party Websites: Education Loan Finance by SouthEast Bank is not responsible for and has no control over the subject matter, content, information, or graphics of the websites that have links here. The portal and news features are being provided by an outside source – the bank is not responsible for the content. Please contact us with any concerns or comments.
tax documents
2020-07-06
How Can I Get the Most Out of My Tax Return?

If you haven’t already filed your 2019 taxes, you don’t have much more time. The deadline to file your federal taxes this year has been extended to July 15, 2020, due to the COVID-19 pandemic. So if you still need to file this year, or if you’re looking for ways to maximize your tax return for the future, here are some important things to keep in mind.   By Kat Tretina  

Tax Implications of Student Loans 

If you have student loans that you have been making payments on, there is a major benefit you may be able to take advantage of.  

Student Loan Interest Deduction

Each year you pay back your student loans, you may be eligible to deduct up to $2,500 in interest costs off your taxable income. Here are the important things to know about the deduction:
  • The deduction is only for the interest portion of your loan payment. Your monthly loan payment consists of paying back the principal of the loan and interest, so you will not be able to deduct your entire loan payment. 
  • You can take advantage of the deduction whether you have private student loans or federal student loans. 
  • You do not need to itemize your tax return to take advantage of this deduction. This can be taken in conjunction with the standard deduction on your return. This deduction will lower your income, thereby lowering your tax liability. 
  • You have to meet income requirements. You are eligible for the deduction if your Modified Adjusted Gross Income (MAGI) was below $70,000 ($140,000 for married couples filing jointly) the previous tax year. You may be eligible to deduct a reduced amount if your income is higher, however, the deduction does not apply once your MAGI is over $85,000 or $170,000 for joint filers. 
  • You cannot claim this deduction if someone else claims you as a dependent on their tax return. 
  • The loan must have been taken out for a qualified education expense for you, your spouse, or a person who was a dependent when you borrowed the loan. 
 

How The Tax Deduction Works

A deduction is taken to reduce your income that taxes are assessed on, unlike a credit that reduces your taxes owed. For a simple example of how this works, if your income is $50,000 and you paid $1,000 in student loan interest, you can deduct the full $1,000 and your income would be reduced to $49,000 and taxes would be assessed on that amount. Whereas if you claimed any credits, discussed below, the amount of the credit would be taken off of your taxes owed. If you owe $1,500 in taxes and the credit is $500 you now owe $1,000 in taxes.     It’s important to obtain the tax information from your loan servicer when you are ready to file your return. If you have paid more than $600 in interest, your servicer will most likely automatically provide you the 1098-E form. The form will show the total amount of interest you have paid for the year.     If seeing the amount of interest you have paid gives you a shock, you may want to look into refinancing your student loans. Refinancing is when you obtain a new loan to pay off current student loans and can be a simple process that results in savings. Refinancing may help you obtain a lower interest rate, thereby saving you in interest costs. It can also help you lower your monthly payment. Use our Student Loan Refinance Calculator to see how much you may be able to save.*      

Other Ways to Maximize Your Return

If you are looking for other ways to get the most out of your return, check to see if any of these could apply to you:  

Education Tax Credits 

If you are still in school paying for tuition, you may be eligible to take a tax credit, even if you used student loans to pay the expenses. Here are the two available for 2019 taxes.  

American Opportunity Tax Credit

This allows you to take a credit of up to $2,500 per year for four tax years. You must be enrolled in school at least half time and be working towards a degree. Parents who are paying for the college tuition of their dependents can take this credit or the student themselves can take the credit. Make sure to obtain Form 1098-T from the school to show how much tuition has been paid. This credit is not available for graduate students. In addition, there are income requirements to meet.    

Lifetime Learning Credit

If you are working towards a college degree or enrolled in courses to help with your career, you may be eligible to take a credit of up to $2,000 per tax year for tuition, fees, books, and supplies. There is no limit on how many years this credit can be taken. There are income requirements to meet for this credit as well.    

Save More and Reduce Taxes

If you have an IRA or a Health Savings Account and you did not contribute the maximum amount allowed for the year, the deadline is extended to allow contributions until July 15. The money saved in an IRA and HSA is not subject to federal income taxes. So you are able to save more in these accounts and avoid federal income taxes on your savings.      Hopefully, you can take advantage of some of these savings to get the most out of your tax return. As with any tax advice, make sure to use a reputable program or speak with an experienced tax preparer for your specific situation. The most important thing to remember is to file and pay your federal income taxes by the deadline, July 15, 2020.   
  *Subject to credit approval. Terms and conditions apply.   Notice About Third Party Websites: Education Loan Finance by SouthEast Bank is not responsible for and has no control over the subject matter, content, information, or graphics of the websites that have links here. The portal and news features are being provided by an outside source – the bank is not responsible for the content. Please contact us with any concerns or comments.