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.
- Not all student loan servicers are created equal.
- Small differences in interest rates and origination fees can mean BIG dollars down the road.
- Keeping an eye on your principal can help you understand the repayment process.
- It could behoove you to pay interest while in school
- Deferment is a short-term solution that you should avoid if possible.
- There are different reasons to consider fixed or variable interest rates.
- You pay taxes on forgiven loan amounts.
- You might qualify for loan forgiveness.
- There are options if you can’t pay. Don’t try to hide.
- Some borrowers save tons of money through student loan refinancing.
Learn How Much You Could Save By Refinancing Your Student Loans
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.
