Student loans can be an integral part of college costs, yet they can still be managed responsibly. The key is knowing exactly what you’re getting yourself into before borrowing money.
Subsidized and unsubsidized loans offer different interest rates, and you should carefully consider when to make payments, be it during school sessions, deferment periods or grace periods.
Interest Rates
Costs associated with student loans can be considerable, and interest rates associated with them can have a tremendous effect on debtors’ accounts. Gaining insight into how interest works will enable you to reduce student loan expenses and make informed decisions when borrowing funds for school.
Most college students need student loans to cover tuition, books and other school-related expenses. Unfortunately, many people do not understand how student loan interest rates work and can be taken by surprise when making payments on their loans. Understanding how interest works will allow you to save money in the long run by lowering interest rates, paying off faster and avoiding any extra charges that might otherwise apply.
Interest rates on student loans depend on both their type and the borrower’s creditworthiness. Federal student loans tend to offer lower rates than private ones and tend to offer better value than credit card rates.
Federal student loans are offered to undergraduate and graduate students alike, including Direct Subsidized Loans and Unsubsidized Loans. Interest on Direct Subsidized Loans is currently 4.99% (subsidized by the government for those in financial need). Direct Unsubsidized Loans have fixed rates between 6.54% – 7.54% depending on which loan type a borrower chooses.
Private student loans are offered by private lenders, usually on the basis of creditworthiness and market conditions. Their rates can be fixed or variable and interest payments often fluctuate with market fluctuations; those with poor credit may require cosigners in order to secure such financing.
The Federal government annually sets interest rates for federal student loans based on 10-year Treasury notes with caps to prevent rates from skyrocketing too fast. Students also have various repayment options available to them including income-driven repayment plans.
Repayment Options
Loan repayment options are an integral component of a borrower’s overall student loan strategy, determining monthly payments, payment schedules and the accrual of interest during this time.
There are various federal loan repayment plans, and it’s key that you find one that suits your individual needs. Without doing sufficient research, you could end up choosing one which is either too expensive or extends repayment periods beyond necessary.
Most loan repayment options involve a mix of fixed and variable payments; interest-only and graduated repayment plans also exist. It can be beneficial to utilize a loan repayment calculator prior to graduation so you can see what each scenario will entail; additionally, regularly evaluate your choices to make sure you’re on the path toward getting out of debt faster.
One of the most popular repayment plans is a standard repayment plan that features fixed monthly payments over 10 years and typically saves on interest costs. Other repayment options available to you may include graduated plans that start out low but increase every two years and PAYE or REPAYE plans that cap monthly payments at 10% of discretionary income; however these types of plans may take more time for debtors looking for Public Service Loan Forgiveness eligibility to clear it all away.
Consolidation may also help simplify your monthly bill while stretching out repayment over up to 30 years, depending on the loan type and lender.
Income-driven repayment plans also exist, which adjust your monthly bill according to your income and family size. These have become increasingly popular for undergraduate and graduate borrowers alike; however, eligibility criteria must first be fulfilled before being applied for. It would be prudent for those considering these kinds of plans to begin applying during their final years of college so as to be qualified as soon as possible.
Credit Scores
Student loans, like other debt, can have various effects on your credit score depending on how they’re managed. Key elements that impact it include payment history, amount owed, length of credit history and mix; thus keeping student loan balances low while making timely payments can boost it significantly.
Private lenders generally rely on your FICO credit score (developed by Fair Isaac Corporation) when making decisions regarding whether and at what rate to extend credit. The higher your score is, the more likely it is that they consider you an ideal borrower.
Your credit score is determined using information in your credit report, such as all active accounts, account balances and payment history. A computer model uses this data to assign you a score between 300 and 850; with 850 being the highest possible number. Lenders use these scores to compare potential borrowers and assess risk.
As soon as you open new accounts or make late payments, your credit report is updated. This change can affect your score; should any delinquency remain on it for too long it could cause it to drop further.
Most student loans are installment debt, meaning the lender reports your payments to one or more of the three major credit bureaus. Thankfully, unlike car and mortgage loans, your federal student loan servicer typically waits 90 days before reporting a missed payment to them; however, missing any type of payment may still have a serious negative effect on your credit, especially if other debt has accrued and/or you have other forms of negative activity on your record.
Paying back student loans may be challenging, but keeping payments up-to-date is essential if you want to build strong credit. Refinancing or income-driven repayment plans may help boost your score as they adjust monthly payments based on income levels.
Those at risk of becoming delinquent should immediately reach out to their loan servicer to discuss options. Even if your account has fallen behind only temporarily, communicating with your servicer allows them to correct any discrepancies in reporting and avoid sending your report directly to credit bureaus.
Taxes
Your student loan interest could be tax-deductible depending on your income. Your loan servicer should send you a Form 1098-E that details how much interest was paid over the previous year; use this form to calculate your federal tax deduction; this could save hundreds each year!
As with the student loan repayment and forgiveness payments you make each year, any student loan-related tax breaks available could include tuition, books and room and board. Check your local or state tax department for more specifics as rules vary based on jurisdiction.
Additionally, you may be eligible to exclude your canceled debt from taxable income if it was discharged under certain conditions. For instance, if it was forgiven as part of a program that required you to work in public service for a specified number of years before being forgiven then any amount canceled would not require tax payments upon its cancellation.
Debates regarding whether cancelled student debt should be taxed are still underway in certain states, so for more information about how these changes could impact you and your taxes it would be wise to speak with a certified public accountant.
Although President Biden’s new student debt relief proposal remains vague with respect to tax implications, some states have already taken steps to establish their stance on it. Arkansas and Mississippi confirmed their pledge not to tax forgiven student loans using provisions in existing state laws that exempt certain forms of debt forgiveness from taxation in that state.
Other states, like California and Pennsylvania, appear likely to follow Biden’s executive order with similar policies that will exempt student loan forgiveness from state income taxes through provisions in their existing laws that specifically exclude these types of cancelled student debt.
Check out the Understanding your student loans video
