Forgo Deferment & Forbearance on Your Student Loans

June 11, 2018

It’s tough to cover a mortgage, wedding, new baby, or medical expense on top of your student loan payments. As such, it can be tempting to request deferment and forbearance on your student loans. Before you apply for these options, be sure to understand the hidden costs that can lead to a much higher, much longer repayment down the road.

Both federal and private student loan programs offer deferment and forbearance options. These options provide you with temporary relief from your burdensome monthly payments and may seem like a good option to avoid a delinquency or default. Think again. Not making payments during your deferment and forbearance periods results in the capitalization of the interest you owe, meaning your loan principal will subsequently increase. Voila! Not only have your monthly payments ballooned when you inevitably start making payments again, but you now owe way more than you did when you first took out the student loans!

Deferment

Deferment is pushing back payments due to a temporary situation and your loan provider has a list of qualifications. The most common types are In-School Deferment, Graduate Deferment, and Military Service Deferment. For Parent PLUS Borrower loans, it is only available to parents who received Direct PLUS Loans or FFEL PLUS Loans. The deferments listed below are available to Direct Loan, FFEL Program loan, and Perkins Loan recipients only as per the Federal Student Aid government website. Types of deferments available differ based on your education loan lender, but there are commonalities between all private student loan debts. According to US News, private lenders can offer deferment relief for up to 6 months, or in extreme cases 12 months.

Federal Student Loan Deferment Types

In-School Deferment Request
Parent PLUS Borrower Deferment Request
Graduate Fellowship Deferment Request
Rehabilitation Training Program Deferment Request
Unemployment Deferment Request
Economic Hardship Deferment Request
Military Service and Post-Active Duty Student Deferment Request

It sounds like a great deal, but remember – you’re increasing the principal balance of the loan and prolonging the inevitable. Let’s say that you chose to defer your loans. As per MarketWatch, the average undergraduate student comes out with $37,000 in student loan debt. Think the cost of an undergrad degree is a lot? The average cost for a law school student that graduated from a private college is $122,158 according to Forbes. Even more unbelievable is the average Medical School Debt at $189,165 as per Modern Healthcare. Check out our chart below to see the hidden costs associated with deferring your student loan payments. Calculations as per those listed in College Reviews.

Undergraduate Deferment Loan Costs

Total Loan Cost	Interest Rate	Deferment Period	Loan Length	Total Debt After Deferment	Total Increase in Debt
$37,172	8.25%	12 months	10 years	$40,238	$3,066
$37,172	8.25%	24 months	10 years	$43,305	$6,133

Graduate Deferment Loan Costs

Total Loan Cost	Interest Rate	Deferment Period	Loan Length	Total Debt After Deferment	Total Increase in Debt
$140,616	9.50%	12 months	10 years	$153,974	$13,358
$140,616	9.50%	24 months	10 years	$167,333	$26,717
$161,722	9.50%	12 months	10 years	$177,085	$15,363
$192,449	9.50%	24 months	10 years	$167,333	$30,727

Forbearance

Financial responsibility starts with taking charge of your financial obligations and developing a sound monthly budget. However, what happens if you unexpectedly lose your job or are unable to work due to medical reasons? You suddenly find yourself in financial hardship and may turn to your student loan provider to seek forbearance options.

Similar to deferment, each loan provider and loan type has a unique set of guidelines to qualify for forbearance. Unlike deferment, forbearance could potentially affect your credit. The guidelines for qualifying for forbearance are different for the federal and private student loan programs, so check with your loan servicers and lenders to determine what forbearance options are available. According to the Federal Student Aid site, there are two types of Forbearance for Federal Student Loans- General and Mandatory.

General Forbearance

According to the government Federal Student Aid site, General Forbearances are used when you cannot make a monthly payment. Direct Loans, FFEL Program loans, and Perkins Loan borrowers qualify for this type of forbearance. Types of General Forbearance as per the Federal Student Aid site.

Financial difficulties
Medical expenses
Change in employment
Other reasons acceptable to your loan servicer

Mandatory Forbearance

If you meet the requirements for this type of loan, your loan servicer is required to grant you forbearance. Mandatory forbearance is only provided for 12 months. If you still qualify at the end of the 12-month period, you must resubmit your information. As per the Federal Student Aid site, here are the types of Mandatory Forbearance:

Medical or Dental Internship/Residency, National Guard Duty, or Department of Defense Student Loan Repayment Program – (Direct Loans and FFEL Program loans only)
Student Loan Debt Burden (Direct Loans, FFEL Program loans, and Perkins Loans)
AmeriCorps Forbearance (Direct Loans and FFEL Program loans only)
Teacher Loan Forgiveness Forbearance Request) (Direct Loans and FFEL Program loans only)

Once you qualify for forbearance, there may be a time period in which you may need to reapply in order to continue receiving benefits, as well as a maximum time they’re available. Keep making your monthly payments until forbearance is granted by your lender, as a delinquency on your monthly payments can result in a negative hit to your credit score. Just like deferment, most student loans in forbearance will accrue interest which gets capitalized and added to the principal amount of your loan. Therefore, this seemingly attractive option to postpone your monthly payments during an unexpected financial hardship ultimately further enslaves you to your student loans.

Although deferment or forbearance may seem like a tempting option, it isn’t always the best path forward. Making even a partial monthly payment is better than making no payment at all. Watch your budget closely and get creative with the steps you can take to avoid deferment or forbearance.

Refinancing your student loans is another great option to consider, just be sure to find a reputable lender like Education Loan Finance. By consolidating private and federal student loans into one monthly payment, you may be able to reduce your student loan payments enough to help you afford that wedding or down payment on a home.

Our Simplest Guide to Student Loan Refinancing

Find a Credit Card

While in college, you may see a credit card offer dropped in your mailbox every week. Actually reading through the information and what the card offers is KEY. Look at interest rates and cash back rewards. Some cards have cash back rewards on points earned by using the card on things such as gas and groceries. By using a credit card for necessities and paying it off, you are earning easy credit while still in college. Some cards offer cash back opportunities on travel. If you’re going away to college, using a credit card could be a great way to earn points for a visit back home or a weekend getaway. Remember, use a credit card on things you will be able to pay back on time. This way you will be building credit while also gaining reward points to redeem on things you want to do. If you’re attending college you may want to check out student credit cards. Student credit cards can be a really great way to start building credit while you are in school. Be warned that you will still need to demonstrate a decent salary to qualify for a student credit card, simply being a student is not enough. Most student credit cards will not charge an annual fee and many offer additional perks.

Learn How Completing College Early Can Save You Money

Secure Credit Cards

If you don’t qualify for a student credit card or any traditional credit card because you don’t have a credit history look into secure credit cards. They work just like other credit cards but require a cash deposit, first. This deposit is usually in the hundreds or low thousands. If you make every payment in full and on time you’ll receive back your down payment. If you do not make payments on time or in full the lender keeps your down payment.

Rent

While being in college you will likely be moving into your FIRST apartment. An apartment can be a great way to start earning credit. Putting the rent in your name and paying it on time can assist in building credit. In order for rent to go towards your credit history, your landlord must be reporting the rent payments to one of the credit agencies. If your landlord isn’t reporting your rental payments it will not help you to build a credit history. In today’s society, it is also pretty uncommon for landlords to report rent payments to a credit agency. If your landlord isn’t reporting your rent payments to a credit agency it can’t hurt to ask if they could start! When sharing an apartment with roommates, it is vital for everyone living there to pay their share of rent on time. Finding roommates that share accountability is important when you are building a good credit score.

Get a Credit Builder Loan

A loan that is in place to IMPROVE CREDIT?! Sign me up! When you have a credit builder loan, you make payments into your savings account. After one year, you will get the amount you paid back and increase your credit score! A credit builder loan does not require good credit to begin, you just have to show proof of income. Start by applying for a credit builder loan, and begin to make payments on time. In order for you to be benefiting from a credit builder loan, you must be paying on time. The pros to a credit builder loan include getting the money you put in and having a better credit score at the end of the year!

Become an Authorized User

Becoming an authorized user is a smart and easy way to embark on creating credit while in college. Being an authorized user means that you can use another person’s credit card and your name will be included on the account. The process simply has the account user add your name to the credit card account. As an authorized user, you will not be responsible for paying back debts on the credit card. This responsibility will legally be in the original account holder’s name. The main goal for being an authorized user is to increase your credit score by having an account holder with an outstanding credit history. If you have an account holder who is known for paying their debt on time, this will increase your score, because you’re on the account. Keep in mind that you should ask someone who is trusted and reliable when becoming an authorized user.

Start on Student Loan Payments

As a former college student, I know that going to school full time while working enough to have money to start paying off student loans can seem impossible. Remember, you do not have to pay off large amounts right away. While in college, consider putting money aside to start paying off loans when you can. If you start loan payments early you will start to see positive growth on your credit score. The benefits of having student loans include helping build your credit score. If you decide to start paying off loans while in school, it will be before your loan deadline and will create less to pay off later. Even if you are not able to pay off large sums, these small amounts can make for fewer payments later on and a better credit score when you graduate from college.

Credit Utilization

A top way to build credit is not to utilize all the credit that is available to you. For example, if you have a credit card with a credit limit of $2,500 and the balance is $2,500 that would be 100% credit utilization. Credit utilization is important because it impacts your credit score. The maximum recommended credit utilization is about 30%. Therefore, if your credit card had a maximum limit of $2,500 then 30% of that would be $750. In this example, to avoid negatively impacting your credit score you should not spend over $750 on your credit card.

It can be difficult to be disciplined as a college student, but it’s important to remember that this money is not free. It’s also likely that this is probably your first credit card ever! Exciting, but this is a really important rule of thumb! This is a credit that you will eventually need to pay back. In an effort to build credit you want to be sure you’re creating good financial habits for yourself too. Be sure to stay disciplined and not utilize over 30% of your credit card.

BONUS: Credit Reports

While we are on the topic of creating good financial habits, the number one habit you can create is looking at your credit report. If you talk with any financial expert, this will be their number one piece of advice! Yearly, check your credit score and your credit report. Think about it like an annual physical at the doctor, but for your finances. Review your credit report to make sure that there are no errors or fraud to your credit history. If you visit AnnualCreditReport.com you can receive a free credit report from all three major credit agencies in the U.S. and a free credit report can be requested every 12 months. Having paid off debt or using credit in college will prepare you for future payments on cars, houses, and throughout your adult life. Knowing your responsibilities and taking care of payments on time is key to achieving a better credit score by the end of your college career. Consider these options when deciding how to build credit and choose one that will benefit you in the long run.

Are Student Loans Impacting Your Credit Score?

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2019-05-10

What You Need to Know About College Scholarships: Part 2

Part 1 of this series covered the basics of searching for scholarship money to lessen the cost of college and the average cost of college. Part 2 looks at scholarships available through the federal government and gives you additional information about qualifying and applying for these opportunities to help you achieve your educational goals.

Federal Scholarships for College

It’s a big part of the American Dream: graduating from college to pursue a productive and rewarding career. In fact, Americans value a college education so much that our federal government awards over 120 billion dollars in annual aid to help students achieve this goal. Much federal financial aid is in the form of student loans, work-study programs, and tax credits for education. However, the government also awards “free money,” which often doesn’t have to be repaid. Instead of calling this type of award a scholarship, the government calls it a federal grant. Grants are awarded based on need, plus special conditions and circumstances. A federal scholarship or grant could be your ticket to a great education at a lower cost.

Federal Grants & Private Scholarships: What’s the Difference?

You may be eligible for both federal grants and scholarships from your college, state, service club, foundation or business. One of the main differences between the two types of aid is the application process. Each private scholarship has its own process, and you must carefully adhere to the instructions and meet all deadlines if you hope to qualify. Eligibility for a federal grant is determined using the comprehensive FAFSA® form, which students submit to apply for all federal student aid (grants, loans, work-study and other types of federal assistance). An exception to this is military ROTC scholarships and VA programs, which have varying application processes. ROTC and VA applicants must go through the appropriate service branch or agency to apply. Private scholarships are frequently awarded on merit (scholastic or athletic achievement), specified condition (area of study, heritage, college or state) or financial need. Sometimes, more than one criterion is used to determine the award. Federal grants are based primarily on need, although some federal programs have been established for specific purposes like promoting teacher education or community service. Such grants may have additional requirements, like academic achievement and service commitment, in exchange for education benefits. Likewise, scholarships awarded through U.S. military ROTC programs come with a specific commitment to serve.

How Do You Apply for a Federal Grant or Scholarship?

Application for federal grants begins by filling out the Free Application for Federal Student Aid (FAFSA®) form. To apply for scholarships through military ROTC programs, you must apply with the associated military branch. Application for VA benefits can be accessed through the Dept. of Veterans Affairs website. The Dept. of Defense also offers scholarships and graduate fellowships with their own application process. Links to these federal sites are listed here:

Resources for Grants & Scholarships Through the Federal Government

Check out these federal grant programs that could help you lower the amount of money you have to borrow to attend college.

Pell Grants:

These grants gave eligible students a maximum amount of $6,195 toward their education in 2019 - 2020. Students may receive this assistance for up to 12 semesters of college. Available To: Undergraduate Students Qualifications:

Must show exceptional financial need.
Have not earned a bachelor’s, graduate, or professional degree. May be eligible if enrolled in a post-baccalaureate teacher certification program.
Must not have been incarcerated in a federal or state correctional institution.

Amount Received Dependent On:

Expected Family Contribution (EFC). Defined by the Department of Education as “an index number that college financial aid staff use to determine how much financial aid you would receive if you were to attend their school.” The FAFSA form information is used to calculate this. The formula takes into account your family’s taxed and untaxed income, assets, benefits, family size, and the number of family members who will attend college.

Cost of Attendance – Expected Family Contribution = Financial Need

Cost of Attendance. Determined by your school for your program.
Attendance Schedule. Will you be a full-time or part-time student?
Are you attending school for the entire year or just a semester?

Federal Supplemental Educational Opportunity Grants:

This is an additional grant program distributed by participating colleges and allocates anywhere from $100 to $4000 toward a recipient’s undergraduate education. Submitting your FAFSA early can have a direct impact on this type of grant. Each school sets its own deadline for campus-based funding. You should be able to see the deadline on the school’s website and if it’s not there be sure to speak with a member of your financial aid office. Available To: Undergraduate Students Qualifications:

Must show exceptional financial need.
Have not earned a bachelor’s, graduate, or professional degree.

Teacher Education Assistance for College & Higher Education (TEACH) Grants:

You must also be pursuing a career in teaching. In order to qualify you will need to teach at the elementary or secondary level school in a high-need field in a low-income area after graduation. Available To: Undergraduate Students, Post Baccalaureate Students, or Graduate Student (Attend a Participating School) Qualifications:

Enrolled in a TEACH-Grant-eligible program.
Meet academic achievement requirements (scoring above the 75th percentile on one or more parts of a college admissions test or maintaining a cumulative GPA of at least 3.25)
Receive TEACH counseling to explain the terms and conditions of the service obligation. Must complete counseling each year you receive a TEACH Grant.
Sign a TEACH Grant Agreement to Serve.

Iraq & Afghanistan Service Grants:

Eligible students who lost a parent in military service and do not meet the need-based threshold for a Pell Grant can apply for additional college funds through this program. Available To Qualifications:

Not eligible for the Federal Pell Grant due to Expected Family Contribution.
Meet Federal Pell Grant requirements for eligibility.
Parent or guardian was a member of the U.S armed forces, who died as a result of military service performed in Iraq or Afghanistan after the events of 9/11.
Under 24 years old or enrolled in college at least part-time at the time of the parent or guardian’s death.

SMART Scholarship Program:

The Dept. of Defense offers undergraduate scholarships and graduate fellowships to encourage participation in the STEM sciences and recruit future civilian employees for the DoD. Available To Qualifications:

Must be a U.S., Australia, Canada, New Zealand, or United Kingdom Citizen at the time of application
As of August 1, 2019, must be 18 years of age or older.
Ability to participate in summer internships at a DoD facility.
Willingness to accept employment post graduate for DoD
Minimum of 3.0 on a scale of 4.0 and in good standing.
Pursuing one of these disciplines for undergraduate or graduate degrees.

Jobs to Reduce Student Loans

2019-05-07

What is a Prepayment Penalty? What’s the Catch?

Imagine finally paying off your loan just to find out you owe the lender more money! All because you’ve paid your debt off early. Instead of your lender rewarding you for paying the loan off earlier than your contract states, they charge you extra. Here’s what that is, how to avoid it, and what you can do.

What is a prepayment penalty?

A prepayment penalty is a fee charged to a borrower. If you pay off your loan earlier before the date planned in the contract the lender could charge you a prepayment penalty. A prepayment penalty is charged once you’ve completed paying your debt, if it was paid it off early, or it could be a fee for overpaying the scheduled amount set per year. A prepayment penalty can be a fixed amount or based on what the remaining balance of your loan was set to be. For example, certain loans may allow you to pay off 20% extra each year before facing a fee.

What are prepayment penalties for?

When you borrow from an institution, they assume that it will take you a certain amount of time to repay the debt back, with interest. If you pay back your debt sooner, that institution may lose out on the interest that they collect. For this reason, loans like a mortgage might have a prepayment penalty to discourage people from refinancing or selling within the first few years. You can think of a prepayment penalty as a way for the institution to ensure that it makes an adequate return amount for the credit they lent. Additionally, lenders charge prepayment penalties because if they place the loan in security and sell it, they need verification that the loan will be outstanding for a particular period of time. Having the security outstanding for a period of time will provide the buyer of the security a yield.

Student Loans

There are so many benefits to paying extra on your student loans each month. One of the main benefits - you’ll pay less interest over the life of the student loan. When it comes to student loans, you may be surprised to find out that there are no prepayment penalties. That’s right no prepayment penalties for both federal and private student loans. According to the Higher Education Opportunity Act of August 2008: “It shall be unlawful for any private educational lender to impose a fee or penalty on a borrower for early repayment or prepayment of any private education loan.” Before you begin making extra payments towards your student loans, you should contact your servicer. Verify that the additional payment is being applied to the principal balance of the loan and not to the interest. If the overpayment is directed to the principal you’ll be able to pay down the debt faster.

Mortgage Loans

Mortgages don’t always have prepayment penalties, but some do. If there is a prepayment fee on your mortgage you should be able to review the details in the mortgage contract. It’s vital when signing a contract that you pay attention to the fine print. If you don’t understand something or need further clarity, be sure to ask questions. When dealing with Mortgages, if you chose to refinance your loan there could be a prepayment penalty. Typically if you choose to refinance within the first three or five years of having the loan there may be a prepayment penalty fee that applies. If you ever have any questions about prepayment fees you should contact your mortgage lender for clarity.

Auto Loans

When taking out an auto loan there are two types of interest that may be used in your contract, simple interest or pre-computed interest. Simple interest works similarly to a student loan, it is calculated based on the balance of the loan. Therefore, if you have an auto loan with simple interest, the sooner you can pay your loan off, the less interest you’ll pay. The other type of interest is pre-computed interest. This interest is included in your agreement. It is a fixed amount calculated and added on at the beginning of the contract. Using a pre-computed interest rate is typically when you encounter prepayment penalties. Similar to mortgage loans it isn’t guaranteed that these loans have a prepayment penalty, but if so, it should be in the contract. Be sure to contact your lender or institution that services the loan to find out if there are any prepayment penalties before paying extra towards your debt.

Personal Loans

Personal loans can be used for a number of different reasons, from medical expenses to travel or even wedding expenses. When it comes to the prepayment penalty for personal loans, most companies will charge a percentage of the remaining balance. Though it’s likely your personal loan won’t have a prepayment penalty, you could still have one. Check with your lending institution or be sure to closely review your contract to see if there are any penalty fees for paying your debt down earlier.

Soft Penalty vs. Hard Penalty

You may have heard of two different types of prepayment penalties: soft and hard. A soft prepayment penalty would charge you a fee for refinancing, but not for other situations. A hard prepayment penalty would charge you for refinancing, prepayment, or selling (in the case of a mortgage - selling your house).

How can prepayment penalties affect you?

First, assuming you have multiple bills and debts that you pay each month, knowing whether any of them have a prepayment penalty can change how you pay. Imagine you have a student loan and a mortgage loan, you know the student loan doesn’t have any prepayment penalties, but the mortgage loan does. Let’s say that you’ve received some additional income and you want to put it towards one of the loans, but you aren’t sure which one. You’ll want to pay additional money toward the student loan debt because you won’t get penalized for paying it off early. Knowing a loan you’ve applied for has a prepayment penalty might motivate you to find a different borrower and give you the freedom to pay off that debt sooner without a fee. Does this mean you should never pay off debts early? No way! There are plenty of loans and other types of debts that won’t have a prepayment penalty. The important thing is to know what you’re getting into. Read the fine print and ask questions during the application process. Also, for loans like a mortgage, there is typically a page you sign toward the end of the process that includes disclosures on things like whether there is a prepayment penalty, balloon payment, and so on. Always be aware of those disclosures before you take on new debt.