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Paying for school can be a big undertaking. Understanding the difference between federal and private loans and your consolidation and repayment options can save you thousands of dollars.
Some companies promise to help reduce student loan debt, but there’s nothing they can do for you that you can’t do yourself for free. And some of the companies that promise student loan debt relief are scams. It’s illegal for companies to charge you before they help you.
Financing Your Education
There are several types of aid available to help you pay for your education beyond high school, including grants and scholarships, federal work-study jobs and student loans. The first step is to complete the Free Application for Federal Student Aid (FAFSA) form at fafsa.gov.
Grants and scholarships
Grants and scholarships are free money. They should be your first choice to finance your education. Why? Because you don’t have to pay them back. A good way to apply for a grant is through your FAFSA form. You also can check out these other sources to find grant and scholarship opportunities:
- the financial aid office at a college or career school
- a high school or TRIO counselor
- the U.S. Department of Labor’s free scholarship search tool
- federal agencies
- your state
- your library
- foundations, religious or community organizations, local businesses, or civic groups
- organizations related to your field of interest, like professional associations
- ethnicity-based organizations
- your employer or your parents’ employers
Federal work-study jobs
Federal work-study jobs are another way to help pay for college. Work-study is a need-based grant that requires you to work part-time while you’re in school. To qualify for work-study, you’ll need to fill out the FASFA form and meet the needs-based criteria of the program. You are only paid for the hours that you work.
Student loans fall into two categories: federal loans and private loans.
- Federal loans include:
- Direct Loans, where the U.S. Department of Education is the lender;
- Federal Family Education Loans (FFEL), where private lenders make loans backed by the federal government;
- Federal Perkins Loans, low-interest federal student loans for undergraduate and graduate students with exceptional financial need; and
- PLUS loans, federal loans that graduate or professional students and parents of dependent undergraduate students can use to help pay for college or career school.
Private loans, sometimes called “alternative loans,” are offered by private lenders, like banks and credit unions, and do not include the benefits and protections that come with federal loans.
Snapshot: Federal Loans vs. Private Loans
for the loan
You won’t need a co-signer to get a federal student loan in most cases (except for PLUS loans).
You may need a co-signer and a credit check. The cost to repay a private student loan will depend on your credit score and other factors.
(the cost of borrowing money)
Private student loans can have variable interest rates.
You will not have to start repaying your federal student loans until you graduate, leave school, or change your enrollment status to less than half-time.
Many private student loans require payment while you are still in school.
Undergraduate students with financial need usually qualify for a subsidized loan. The government pays the interest while you are in school on at least a half-time basis.
Private student loans are not subsidized. No one pays the interest on your loan but you.
Loans can be consolidated into a Direct Consolidation Loan for free. Learn about your consolidation options.
There may be options for consolidation, depending on your lender. But there usually is a fee.
There is no fee to repay your loan more quickly – called a prepayment penalty fee.
There may be prepayment penalty fees.
If you are having trouble repaying your loan, you may be able to temporarily postpone or lower your payments.
Private student loans may not offer forbearance or deferment options.
There are several repayment options, including an option to tie your monthly payment to your income.
You should check with your lender to find out about your repayment options.
You may be eligible to have some portion of your loans forgiven if you work in public service.
It is unlikely that a private lender will offer a loan forgiveness program.
FAFSA stands for Free Application for Federal Student Aid. It is the only way to apply for federal student aid. It is free to apply. You must fill out your FAFSA form at fafsa.gov every year that you are in college, university or career school.
In addition, many states and colleges use your FAFSA data to determine your eligibility for state and school aid. Some private financial aid providers may use your FAFSA information to determine whether you qualify for their aid.
Fill out your FAFSA form for free at fafsa.gov.
When you fill out your FASFA, you will also create an FSA ID. FSA ID stands for your Federal Student Aid Identification. It is a username and password that you create. You use your FSA ID to:
- get into the Federal Student Aid system.
- fill out your FAFSA form.
- legally sign your student aid documents.
Only you can create and use your FSA ID. Don’t share your FSA ID with anyone else. Dishonest people could use your FSA ID to get into your account and take control of your personal information.
Loan Repayment and Forgiveness
Student loans are debt you have to pay back, even if you don’t finish your degree. But depending on your situation and what kind of loans you have, you might be eligible for a different repayment plan or to get your loans forgiven. And ,when it comes to qualifying for these programs, there’s nothing a private company can do for you that you can’t do yourself for free.
If you have federal loans, the Department of Education has free programs that could help, including:
- income-driven repayment plans — your monthly payment is based on how much money you make
- deferment and forbearance — you can postpone making payments, if there’s a good reason you can’t repay right away, though interest might cause what you owe to increase
- loan forgiveness or loan discharge — in some circumstances, you don’t have to repay some or all of your loans. You might qualify if, for instance, you work for a government or not-for-profit organization, if you become disabled, or if your school closed or committed fraud. Also, under certain income-driven repayment plans, any balance that remains after 20 or 25 years of payments is forgiven. In some cases, you may owe income taxes on the forgiven or discharged amount.
These options are free. You can learn more at the Department of Education’s StudentAid.gov/repay or by contacting your federal student loan servicer. You also can find out how to get out of default.
With private student loans, you typically have fewer repayment options, especially when it comes to loan forgiveness or cancellation. To explore your options, contact your loan servicer directly. If you don’t know who your private student loan servicer is, look at a recent billing statement.
Consolidating your student loans means combining multiple loans into one loan. Typically, people consolidate their loans to simplify monthly payments or get new repayment terms. When you consolidate your loans, you get a brand new loan with new terms.
If all of your education loans have fixed interest rates, it may not matter when you consolidate. If some or all of your loans have variable interest rates, when you consolidate into a fixed loan may affect the interest rate of your loan.
Consolidating federal loans with the federal government is free. There are companies that may offer to help you consolidate your federal loans with the federal government, for a fee, but you don’t have to pay for this service. Consolidating with the federal government is a process you can do on your own, at no cost.
When you consolidate your federal student loans, you get a Direct Consolidation Loan, which has a fixed interest rate for the life of the loan. The fixed rate is the weighted average of the interest rates on the loans being consolidated.
You should make sure that it makes sense to consolidate your loans. Consolidating a low-interest Perkins loan may not be in your favor. Perkins loan borrowers have unique deferment and cancellation rights that may be lost when consolidating.
Consolidation has important pros and cons to consider, especially since once your loans are combined into a Direct Consolidation Loan, they cannot be separated.
Reasons to consolidate loans
- If you currently have federal student loans that are with different loan servicers, consolidation can greatly simplify loan repayment by giving you a single loan with just one monthly bill.
- Consolidation can lower your monthly payment by giving you a longer period of time (up to 30 years) to repay your loans.
- If you consolidate your federal student loans, you might get access to additional income-driven repayment plan options and Public Service Loan Forgiveness. (However, this is not true of Direct Loans, which are from the William D. Ford Federal Direct Loan Program.)
- You’ll be able to switch any variable-rate loans you have to a fixed interest rate.
Reasons not to consolidate loans
- Because consolidation usually increases the period of time you to have to repay your loans, you might make more payments and pay more in interest than you would if you don’t consolidate.
- Consolidation also may cause you to lose borrower benefits associated with your current loans.
- If you’re paying your current loans under an income-driven repayment plan, or if you’ve made qualifying payments toward Public Service Loan Forgiveness, consolidating your current loans will cause you to lose credit for any payments made toward income-driven repayment plan forgiveness or Public Service Loan Forgiveness.
If you are having problems making your monthly payment but are concerned about the impact of loan consolidation, you might want to consider deferment or forbearance as options for short-term payment relief, or consider switching to an income-driven repayment plan.
Private loans have to be consolidated with a private lender. There might be a cost when you consolidate but avoid companies that tell you to pay upfront. Make sure you understand all the conditions of your consolidated loan before you agree to consolidate.
Some debt relief companies and lenders offer to consolidate federal and private loans together into one new loan to lower your monthly payments or interest rate. Don’t do it. Consolidating private and federal loans turns it into a private loan, which means you will lose the federal repayment benefits and protections of your federal loans, such as deferment and forbearance, income-based repayment plans, and loan forgiveness.
Before you consolidate your loans, find out what it could mean for your specific situation. If you have private loans, talk to your loan servicer. For federal loans, call the Department of Education’s Loan Consolidation Information Call Center at 1-800-557-7392.
Take your time to determine whether consolidating is right for you.
Signs of a Student Loan Debt Relief Scam
You’ve probably seen ads from companies promising to help with your student loan debt. Here’s what you should know: there’s nothing a student loan debt relief company can do for you that you can’t do yourself for free. And some of the companies that promise relief are scams.
Never pay an up-front fee. It’s illegal for companies to charge you before they help you. If you pay up front to reduce or get rid of your student loan debt, you might not get any help — or your money back.
Only scammers promise fast loan forgiveness. Before they know the details of your situation, scammers might say they can quickly get rid of your loans through a loan forgiveness program — programs most people won’t qualify for. Or they might say they will wipe out your loans by disputing them. But they can’t do either.
A Department of Education seal doesn’t mean it’s legit. Scammers use official-looking names, seals and logos, and tell you they have special access to certain repayment plans, new federal loan consolidations, or loan forgiveness programs. They don’t. If you have federal loans, go to the Department of Education directly at StudentAid.gov.
Don’t be rushed into a bad decision.To get you to act fast, scammers tell you that you could miss qualifying for repayment plans, loan consolidation, or loan forgiveness programs if you don’t sign up right away. Take your time and check it out.
Don’t give away your FSA ID. Some scammers claim they need your FSA ID to help you, but don’t share your FSA ID with anyone. Dishonest people could use that information to get into your account and take control of your personal information.
If you think you’ve responded to a scam, tell the FTC and your State Attorney General.