Your options for Student Loan Relief

Nadav ShemerByNadav ShemerAug. 25, 2019
Financial Freedom
If paying off your student loan seems out of sight, it’s important to know that there are plenty of options out there that can help you make the dream a reality.

For most of us, a college education is a crucial step towards financial success – and taking a student loan to pay for tuition fees is a no-brainer. But as many people find out after graduating, it can take years or even decades to pay off all that student loan debt.

Types of Loans

The Federal Government’s Department of Education offers 3 types of student loans to help cover the cost of higher education at a 4-year college or university, community college, or trade, career, or technical school.

  • Private Loans

These can be a good option if you’re a student who has borrowed the maximum permissible amounts on federal student loans and has good credit (or can bring a co-signer who has good credit), or if you already have federal loans you’d like to refinance.

  • Stafford loans: 

Direct subsidized and direct unsubsidized loans. Only undergraduates demonstrating a financial need (through a Free Application for Federal Student Aid form, or FAFSA) qualify for a subsidized loan. The DOE pays the interest on direct subsidized loans for students in school at least half-time, whereas interest on an unsubsidized loan is paid by the student.

  • Perkins loans: 

Low-interest loans for undergraduate and graduate students demonstrating exceptional financial need. The school is the lender and the federal government guarantees the loan.

  • PLUS loans: 

Direct loans designed to cover tuition fees not covered by other financial aid. The applicant can be a graduate or professional student or the parent of a dependent undergraduate. The applicant must fill out a FAFSA form and have good credit.

As with any loan, you should only borrow up to the amount you need.

Interest Rates on Federal Loans

All federal student loans carry fixed interest rates for the life of the loan. The Department of Education sets annual interest rates on July 1 each year. In addition to interest, PLUS loans carry a one-off loan fee (set at 4.264% in 2017-18).

Loan Type

Interest Rate (2017-18)

Stafford (Direct Subsidized Loans)

4.45% (paid by DOE)

Stafford (Direct Unsubsidized Loans)

4.45% for undergraduates; 6% for graduate or professional students

Perkins

5%

PLUS

7%


Loan Limits of Federal Loans

Each federal student loan has a maximum amount you or your parent(s) can borrow.

Loan Type

Maximum Loan Amount

Stafford (Dependent students)

$31,000. Up to $23,000 of this amount may be in subsidized loans.

Stafford (Independent students)

$57,500 for undergraduates. Up to $23,000 may be in subsidized loans. 

$138,500 for graduate or professional students. Up to $65,500 may be in subsidized loans. 

Perkins

Up to $27,500 for an undergraduate or $60,000 for a graduate student (including amounts borrowed as an undergraduate).

PLUS

Cost of attendance minus any other financial aid


FAFSA or Applying for a Private Loan or Refinance

If you’re applying for federal government loans, you need to fill out a FAFSA form or, in the case of PLUS loans, to have a parent fill out the form. Follow these 8 steps to submit your FAFSA form:

  1. Create an FSA ID here. Only the person submitting the FAFSA form may create the ID. Therefore, if you’re a student applying for federal aid, you must create the ID yourself. If a parent is submitting an application on your behalf, they must create the ID.
  2. Start the FAFSA form here. If you’re applying for a degree starting in 2018-19, select the 2018-19 FAFSA form. You may return to the form at any time and submit when you’re ready.
  3. Complete the Student Demographics section. This includes information such as your name and date of birth.
  4. Complete the School Selection section. Add every school you’re considering, even if you haven’t applied or been accepted to any of those schools.
  5. Complete the Dependency Status section. This includes questions to determine whether you’re also required to provide your parents’ financial information on the FAFSA form.
  6. Complete the Parent Demographics section. Whether you live with them or not, you are required to fill out basic information about your parent or guardian.
  7. Complete the Financial Information section. The student, and possibly your parents will need to provide financial information. You can upload the information automatically with the IRS Data Retrieval Tool, which imports your tax information into the FAFSA form.
  8. Sign the FAFSA form with your FSA ID and submit.

Applying for Private Student Loans and Refinancing

Applying for a private student loan or refinance is very similar to applying for any othe types of unsecured private loan or refinance, such as a personal loan. We recommend taking the following steps:

  • Check that your credit is good. Each of the 3 major credit agencies (Equifax, Experian, and TransUnion) is legally required to show you your credit history once every 12 months upon request, free of charge. As a general rule, a score of 700 or more is good enough to secure a student loan or refinance with a good rate.
  • Shop around for the right lender. You can use loans marketplaces like Credible to see loan options from multiple lenders or do your own research.
  • Apply to your chosen lender. You and your co-signer (if you have one) will need to provide some personal and financial information.

This should include:

  • A driver’s license or state ID
  • Social security number
  • Information about you and your co-signer’s finances (including pay slips
  • and employment information).

Comparing Student Loan Debt Relief Options

Since there are no prepayment penalties for student loans, the best way of wiping out student debt quickly is to make extra payments. It can also pay to consider refinancing your student loans, as a better interest rate can lower your monthly payments.

If you’re in the position where you’re not able to make extra payments or meet the minimum payments, there are ways to have all or a portion of your debt waived or canceled.

  • Public Service Loan Forgiveness. For employees of: government organizations at federal, state, local, or tribal level; non-profit organizations with 501(c)(3) status; other non-profits, if their primary purpose is to provide certain types of public services.
  • Teacher Loan Forgiveness. People who teach full-time for 5 consecutive academic years in a low-income school or educational service agency may be eligible for forgiveness of up to $17,500 of debt.
  • Perkins Loan Cancellation. Cancellation of up to 100% of a Perkins loan for: teachers in schools serving low-income students, teachers; teachers of infants, toddlers, or children with disabilities; teachers of mathematics, science, foreign languages, or other fields where there is a shortage of qualified teachers in the state.
  • Special Circumstances: Student debt may also be canceled in the event of the following: total or permanent disability; death; bankruptcy (in rare cases); school closure; school falsely certifying student’s eligibility for loan; withdrawal from school after receiving loan.

This table shows which programs apply to direct loans (Stafford, PLUS, and Parent Plus), Perkins loans, and also to the Federal Family Education Loan (FFEL) program, a government-backed loan that was available until 2010.

Type of Forgiveness, Cancelation, or Discharge

Direct Loans

Perkins Loans

FFEL Loans

Public Service Loan Forgiveness

✔ *

✔ *

Teacher Loan Forgiveness

X

Perkins Loan Cancelation

X

X

Total and Permanent Disability Discharge

Death Discharge

Bankruptcy Discharge


Closed School Discharge

False Certification of Student Eligibility or Unauthorized Signature / Unauthorized Payment Discharge

X

Unpaid Refund Discharge

X


*Only if these loans are consolidated into direct loan programs.

Refinancing or Consolidating Your Existing Loans

If you have multiple federal student loans, you can consolidate the loans with a Direct Consolidation Loan from the federal government. Consolidating your student loans means combining some or all of your loans into one loan, with one monthly payment. If you have one or more student loans from private lenders, you can refinance. This involves replacing your loan or loans with a completely new one.

Consolidation and refinancing can overlap and achieve the same thing: they can turn multiple loan payments into a single payment, making it easier for you to budget and (ideally) reducing your interest rate.

You can apply for a Direct Consolidation Loan through StudentLoans.gov. The application process is free of charge and processed directly by the Department of Education. You can apply for a refinance with lender that offers student loans. If your credit has improved significantly since your student days or if your student debts date back more than a decade to a time when interest rates were generally much higher, there’s a high likelihood you’ll be able to refinance your debts with a superior interest rate.

Moving Forward

A student loan is the simplest way of paying tuition fees. But before committing to loans worth 10s of thousands of dollars, know what your future options are if you can’t repay the lot. The good news is that the situation is never hopeless: between debt waivers, consolidations, and refinancing, there’s almost always a way to eliminate or at least reduce the costs of repaying those debts.

Nadav ShemerByNadav ShemerDec. 20, 2018
Nadav Shemer specializes in business, tech, and energy, with a background in financial journalism, hi-tech and startups. He enjoys writing about the latest innovations in financial services and products.