What is Debt Consolidation and How Does it Work_780x440

How Does Debt Consolidation Work?

If you’re repaying a variety of different debts to different lenders, keeping track of them and making payments on time each month can be time consuming. It isn’t just tough to keep track of these various debts, it’s also difficult to know which debts to prioritize in order to fast track your debt repayment. After all, each of your cards or loans likely have different interest rates, minimum payments, payment due dates, and loan terms.

Consolidating — or combining — your debts into a new, single loan may give your brain and your budget some breathing room. We’ll take a look at what it means to consolidate debt and how it works.

What Is Debt Consolidation?

Debt consolidation taking out one loan or line of credit and using it to pay off other debts — whether that’s car loans, credit card debt, or another type of debt. After consolidating those existing loans into one loan, you have just one monthly payment and one interest rate.

Common Ways to Consolidate Debt

Your options to consolidate debt depend on your overall financial situation and what type of debt you wish to consolidate. Here are some common approaches.

Balance Transfer

If you are able to qualify for a credit card that has a lower annual percentage rate (APR) than your current cards, a balance transfer credit card may be one option to consider and can be a smart financial strategy to consolidate debt if you use it responsibly.

Some credit cards have zero- or low-interest promotional rates specifically for balance transfers. Promotional rates are typically for a limited time, so if you pay the transferred balance in full before it ends, you’ll reap the benefit of paying less — or possibly zero — interest.

Credit card issuers generally charge a balance transfer fee, sometimes 3% to 5% of the amount transferred. If you use the credit card for new purchases, the card’s purchase APR, not the promotional rate, will apply to those purchases.

At the end of the promotional period, the card’s APR will revert to its regular rate. If a balance remains at that time, it will be subject to the new, regular rate.

Making late payments or missing payments entirely will typically trigger a penalty rate, which will apply to both the balance transfer amount and regular purchases made with the credit card.

Home Equity Loan

If you own a home and have equity in it, you may be considering a home equity loan. Home equity is the home’s value minus the amount remaining on your mortgage. If your home is worth $300,000 and you owe $125,000 on the mortgage, you have $175,000 worth of equity in your home.

Another key term lenders use in home equity loan determinations is loan-to-value (LTV) ratio. Typically expressed as a percentage, the LTV is similar to equity, but on the other side of the scale: Instead of how much you own, it’s how much you owe. The percentage is calculated by dividing the home’s appraised value by the remaining mortgage balance.

Lenders typically like to see applicants whose LTV is no more than 80%. In the above example, the LTV would be 42%.

$125,000 / $300,000 = 0.42
(To express this as a percentage, multiply 0.42 x 100 to get 42%.)

If you qualify for a home equity loan, you’ll typically be able to tap into 75% to 80% of your equity.

After the home equity loan closes, you’ll receive the loan proceeds in one lump sum, which you can use to pay your other debts.

A home equity loan is essentially a second mortgage, a secured loan using your home as collateral. Since there is a risk of losing your home if you default on the loan, this option should be considered carefully.

Personal Loan

If you don’t have home equity to tap into or you prefer not to put your home up as collateral, a personal loan may be another option to consider.

There are many types of personal loans, but they are typically unsecured loans, which means no collateral is required to secure the loan. They can have fixed or variable interest rates, but it’s fairly easy to find a lender that offers fixed-rate personal loans.

Recommended: Secured vs. Unsecured Loans 101

Generally, personal loans offer lower interest rates than credit cards. So consolidating credit card debt with a fixed-rate personal loan may result in savings over the life of the loan. Also, since personal loans are installment loans, there is a payment end date, unlike the revolving nature of credit cards.

There are many online personal loan lenders and the application process tends to be fairly simple. You may be able to use a loan comparison site to see what types of interest rates and loan terms you may be able to qualify for.

When you apply for a personal loan, the lender will do a hard credit inquiry into your credit report, which may temporarily lower your credit score. The lower credit score may drop off your credit report in a few months.

If you’re approved, the lender will send you the loan proceeds in one lump sum, which you can use to pay off your other debts. You’ll then be responsible for paying the monthly personal loan payment.

A drawback to using a personal loan for debt consolidation is that some lenders may charge origination fees, which can add to the total balance you’ll have to repay. Other fees may also be charged, such as late fees or prepayment penalties. It’s important to make sure you’re aware of any fees or penalties before signing the loan agreement.

Recommended: Personal Loan Calculator

Is Debt Consolidation Right For You?

Your financial situation is unique to you, but there are some considerations to be sure if debt consolidation is right for you.

Debt Consolidation Might Be a Good Idea If …

•   You want to have only one monthly debt payment. It can be a challenge to manage multiple lenders, interest rates, and due dates.

•   You want to have a payment end date. Using a home equity loan or a personal loan for debt consolidation will be useful for this reason because they are forms of installment debt.

•   If your credit is good enough to qualify for a zero- or low-interest rate balance transfer credit card, you may be able to consolidate multiple debts on one new credit card and save interest by paying off the balance before the promotional rate ends.

Debt Consolidation Might Not Be For You If …

•   If you think you’ll be tempted to continue using the credit cards you paid off in the debt consolidation process, you may just end up further in debt.

•   You may have to incur fees (balance transfer fee or origination fee), and if they are high, it might not make sense financially to consolidate the debts.

•   Consolidating your debts may actually cost you more in the long run. If your goal is to have smaller monthly payments, that generally means you’ll be making payments for a longer period of time and incurring more interest over the life of the loan.

Credit Card Debt Relief: How to Get It

Some people seek assistance with getting relief from debt burdens. Reputable credit counselors do exist, but there are also many programs that scam on people who may already be overwhelmed and are vulnerable.

Disreputable debt settlement companies may charge fees before ever settling your debt, guarantee that they will be able to make your debt go away, or claim there is a government program to bail out those in credit card debt. Companies may make other bogus claims, but these are common.

Even if a debt settlement company can eventually settle your debt, there may be negative consequences to your credit along the way. A debt settlement program may require that you stop making payments to your creditors. But your debts may continue to accrue interest and fees, putting you further in debt. The lack of payments may also take a negative toll on your payment history, which is an important factor in the calculation of your credit score.

Debt Relief: Is it a Good Idea?

What’s a good idea for some people may be a bad idea for others. Whether debt relief is a good idea for you and your financial situation will depend on factors that are unique to you. Working with a reputable credit counselor may be a good way to get some assistance that will help you get out of debt for good and create a solid financial plan for the future.

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The Takeaway

Debt consolidation allows borrowers to combine a variety of debts, like credit cards, into a new loan. Ideally, this new loan has a lower interest rate or more favorable terms to help streamline the repayment process.

SoFi Personal Loans offer fixed, competitive interest rates with terms to work with a variety of budgets. With no origination fees or prepayment penalties, the balance you transfer is the balance you repay, whether you use the entire loan term or make extra payments to pay it off sooner.

Find your rate on a SoFi Personal Loan


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SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC), and by SoFi Lending Corp. NMLS #1121636 , a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law (License # 6054612) and by other states. For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.
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Strategies to Pay Back Federal Student Loans

If you borrowed money from the government to help cover the cost of tuition, you’ll someday get hit with the reality that you do have to pay back federal student loans. This could lead you to wonder how to pay back federal student loans. Luckily, there are a number of student loan repayment strategies to consider to pay back the money you borrowed and become debt-free.

Read on for a full explanation of the strategies that could help you when it comes time to start paying back federal student loans.

Paying Back Your Student Loans

The prospect of paying back your student loans may seem daunting, but there are strategies you can take to pay off your federal student loan debt. This includes choosing from the number of repayment plan options available or opting to refinance your student loans.

Of course, before you start making payments, you’ll want to know when you need to pay off your loans — and how — so you can determine an appropriate plan of action.

Types of Student Loans

To determine the right student loan repayment strategy, it’s important to know what type of student loans you have. Here are the types of federal student loans you may have taken out:

Direct Subsidized Loans

Direct Subsidized Loans are a type of federal student loan only for undergraduates who have demonstrated financial need. With these loans, borrowers generally do not have to pay interest while they are in school or during a grace period or deferment.

You may also hear this type of federal loan referred to as a Subsidized Federal Stafford Loan.

Direct Unsubsidized Loans

With Direct Unsubsidized Loans, borrowers are not required to demonstrate financial need. Also called Unsubsidized Federal Stafford Loans, these federal loans are offered to undergraduate, graduate, and professional students. Interest is charged during all periods.

When Do You Have To Pay Back Federal Student Loans?

Before you start worrying about how to pay off your federal student loans, you should know when you have to pay them back. If you just graduated or left school, you may have some time before you’re required to start paying back your student loans.

New grads generally have a grace period of six months before they are required to start throwing their hard-earned cash at their federal student loans. The exact length of the grace period depends on the type of loan and your specific circumstances.

Direct Subsidized Loans and Direct Unsubsidized Loans have a six-month grace period. This means that if you graduate in the spring, you may not need to make federal student loan payments until around October, depending on the date you graduate. If you’re a winter grad, you can expect to start repayment around June.

Unfortunately for graduate students, Direct PLUS Loans don’t have a grace period. This means you’re on the hook for making payments 60 days after your final loan disbursement (though you may be able to get a six-month deferment).

You may also lose your grace period if you consolidate your federal student loans with the government during your grace period. One caveat: If you’re a member of the armed forces on active duty, you may be eligible to extend your grace period during a deployment.

Private student loans are a different story, as these are loans from private lenders that set their own terms when it comes to loan grace periods. This means that private student loans may not offer a grace period at all, or that it may be shorter or longer than the federal student loan grace period.

How Do I Pay Back My Federal Student Loans?

Even though you may not be required to start paying off your student loans while they’re in a grace period, you might want to think about starting payments early.

Why start making payments before they’re due? During a grace period, some loans may still be accruing interest. That means that every month you wait to start making payments is another month that the total loan amount grows larger. Starting loan payback as soon as possible may help save on those capitalizing interest costs.

Figuring out how to pay federal student loans can be confusing. Paying back federal student loans starts with getting to know your loan servicer. There are several different loan servicers throughout the country who are responsible for managing federal student loans. Luckily, most loan servicers have robust websites where you can manage your student loan payments online.

Your loan servicer’s website should allow you to view your loans, choose a payment plan, and set up automatic payments. Generally, you can make payments directly through the website, which means that you can avoid having to write out a check and worrying that it will get lost in the mail on the way to your loan service provider.

Choosing a Loan Repayment Plan

One integral loan repayment strategy is choosing a student loan repayment plan. While you’ll automatically be put onto the Standard Repayment Plan if you do nothing else, you may want to consider choosing a different repayment plan depending on your financial situation.

If you’re paying off federal loans, you may be able to choose between a few different repayment plans depending on which best fits your financial situation, such as:

The Standard Repayment Plan

The Standard Repayment plan is the default loan repayment plan for federal student loans. Under the Standard plan, you pay a fixed amount every month for up to 10 years in order to pay off the full balance of your loan.

The Extended Repayment Plan

Extended Repayment plans work similarly to the Standard Repayment plan, but the term of the loan is longer. Extended Repayment plans generally have terms of up to 25 years. The longer term allows for lower monthly payments, but you may end up paying more over the life of your loan thanks to additional interest charges.

The Income-Driven Repayment Plan

For qualified applicants, there are also loan repayment options that are tied to the amount of your discretionary income. With income-driven repayment plans , the amount you owe on your student loans is tied to the amount of money you make. Income-based repayment plans are generally capped at 20 or 25 years, and any remaining balance on your loan may be forgiven after that term.

Refinancing Student Loans

Another strategy you may consider for paying back federal student loans is student loan refinancing. For some grads, loan refinancing may help save money over the term of your loan.

What are the benefits of refinancing with a private lender instead of just paying off the federal loans you currently owe? Student loan refinancing combines all of your current federal and private student loans into one new loan from a private lender, hopefully with better terms.

This means that you may be able to snag a lower monthly payment or even a shorter repayment term, both of which could save some serious cash over the life of your loan — depending on the term you choose, of course.

There are downsides to refinancing though. If you refinance your federal loans, they will no longer be eligible for any federal repayment assistance, like the Public Service Loan Forgiveness Program or any federal repayment plan. You also will no longer be eligible for federal repayment protections and will lose any remaining grace periods.

The Takeaway

As you can see, you have a number of options for paying back your federal student loans. You will want to consider your financial situation and which options you’re eligible for in order to choose the student loan repayment strategy that makes the most sense for you.

If loan repayment plans don’t seem like the right path for you, consider the option to refinance your student loans. While you’ll lose some federal loan protections, you may secure a lower interest rate.

Finding the right strategy to pay off your student loans can help you take control of your finances. See if refinancing with SoFi is right for you.

FAQ

Is there a way to get rid of federal student loans?

One way to get rid of them is by paying back federal student loans through one of the available student loan repayment strategies. However, you may also explore student loan forgiveness, though this is generally only an option in select circumstances. Bankruptcy could also allow you to get your loans discharged if you can prove “undue hardship,” but this should be viewed as an absolute last resort due to its financial implications.

What is the best option for repaying student loans?

The best student loan repayment strategy will vary depending on your personal situation. For instance, if you need lower payments, you might look into Income-Driven Repayment. Meanwhile, if you’re focused on paying as little interest as possible, the Standard Repayment plan may be a better option due to its shorter term. To decide what’s right for you, check which plans you’re eligible for and then calculate potential payments on those plans to determine what might fit into your financial circumstances.

What can the federal government do if you do not pay back your student loans?

If you’re wondering, ‘do you have to pay back federal student loans?,’ the answer is yes. The government can garnish your wages and withhold your tax refunds if your loan goes into default. Further, when a loan goes into default, it’s reported to the credit bureaus, which can damage your credit and make future borrowing more difficult.


SoFi Student Loan Refinance
IF YOU ARE LOOKING TO REFINANCE FEDERAL STUDENT LOANS PLEASE BE AWARE OF RECENT LEGISLATIVE CHANGES THAT HAVE SUSPENDED ALL FEDERAL STUDENT LOAN PAYMENTS AND WAIVED INTEREST CHARGES ON FEDERALLY HELD LOANS UNTIL SEPTEMBER 1, 2022 DUE TO COVID-19. PLEASE CAREFULLY CONSIDER THESE CHANGES BEFORE REFINANCING FEDERALLY HELD LOANS WITH SOFI, SINCE IN DOING SO YOU WILL NO LONGER QUALIFY FOR THE FEDERAL LOAN PAYMENT SUSPENSION, INTEREST WAIVER, OR ANY OTHER CURRENT OR FUTURE BENEFITS APPLICABLE TO FEDERAL LOANS. CLICK HERE FOR MORE INFORMATION.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
SoFi Private Student Loans
Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs. SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See SoFi.com/eligibility for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change.

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Important FAFSA Deadlines to Know

The Free Application for Federal Student Aid, or FAFSA®, is a form students can fill out each school year to apply for grants, work-study, or federal student loans from the government for higher education pursuits.

By not filling it out, or missing the FAFSA deadline, students may not receive financial aid that could help them pay for college. Many states and individual schools also use the FAFSA to help determine if a student qualifies for aid. Therefore, it’s helpful to fill out your FAFSA as early as possible and not miss the important application deadlines, as there is a limited amount of aid available.

What Is the FAFSA?

The FAFSA is the application for federal student aid from the US government. The type of federal student aid awarded is determined based on income, usually the income of the student’s parents, if they are considered a dependent student.

If a student is considered independent, then they are not required to submit their parent’s financial information. Federal financial aid includes student loans, grants, scholarships, and work-study jobs. It’s important when applying to schools to consider all of the costs involved.

Students can estimate their financial aid online ahead of time, which can help inform decisions about where to attend school. If you are already in school, remember that the FAFSA must be filled out every year, since income and tax information might have changed.

In general, the eligibility requirements for federal aid state that for most programs, students:

•   Must demonstrate financial need (though there is some non-need based aid, such as unsubsidized student loans) and,

•   Must be a US citizen or an eligible noncitizen, and

•   Be enrolled in an qualifying degree or certificate program at your college or career school

For further detail, take a look at the basic eligibility requirements on the Student Aid website.

The FAFSA form will need information about the student, their family, and their financial situation. This includes things like Social Security numbers, driver’s license numbers, and federal tax information or tax returns for either the student or their parents (depending on whether or not they are a dependent student). Plus, this includes information on bank account balances such as savings, investments, and other financial information.

FAFSA Open Date and Deadline

File Your FAFSA for Next Year Close to October 1

Generally, it makes sense to submit the FAFSA promptly after the October 1st application release. Some aid is awarded on a first-come, first-served basis, so submitting it early could potentially help students improve their chance of receiving some federal aid.

Recommended: Grants for College—Find Free Money for Students

In addition, since some schools determine funding on a first-come-first-serve basis, filling it out early will help ensure you get the funding you need.

It will also help you get what you need well in advance, so you’re not scrambling at the last minute.

File Your FAFSA for Last Year by June 30

Students must file the FAFSA no later than June 30th for the previous school year. So, for the academic year 2022-23, you must file by June 30th, 2023. While the federal deadline for submitting the FAFSA is after the end of the school year, it may be possible for some aid to be applied retroactively or be applied to summer courses.

While this is the federal government’s deadline, it’s essential to submit the application well before then since students generally need funding to pay for the school year.

Again, individual states and institutions have different deadlines for awarding financial aid to students. Waiting too long may put you in a sticky financial situation if you don’t receive the funding you need to start school.

State and institutional FAFSA deadlines

So, when is FAFSA due? Below you will find the federal, state, and institutional FAFSA deadlines.

Institutional FAFSA Deadlines

Students typically have around 21 months to file the FAFSA, but individual schools may have their own earlier deadlines. So if you are applying to many different colleges, check each school’s FAFSA deadline and apply by the earliest one.

Recommended: Types of Federal Student Loans

These priority deadlines mean you need to get your FAFSA application in by the school’s date to be considered for the possible aid. While filling out your FAFSA, you can include every school you consider, even if you haven’t been accepted to college yet.

State FAFSA Deadlines

Individual state deadlines can be found from the US Department of Education. Some states have strict cutoffs, while others are just best-practice suggestions—so check carefully. States may have limited funds to offer as well.

Federal FAFSA Deadline

So, when is FAFSA due?

Again, the FAFSA becomes available almost a full year in advance of the year that aid is awarded. When is the deadline for FAFSA? While the final deadline for FAFSA submission is June 30, the FAFSA becomes available on October 1. That’s earlier than most individual college deadlines for application.

Recommended: How to Pay for College

It’s generally recommended that students fill out the FAFSA as soon as possible after October 1 for next school year’s aid, to avoid missing out on available funds. For instance, for the 2021-2022 school year, the FAFSA became available October 1, 2020, though the final deadline to submit was June 30, 2022, at the end of the academic year it applies to.

But because some federal student aid programs have limited funds, the US Department of Education recommends applying as soon as you can. Plus, there are often earlier school and state deadlines to worry about first.

Taking the Next Steps After Submitting the FAFSA

So what happens after you hit “submit” on your FAFSA?

•   First, students receive a Student Aid Report (SAR) which summarizes the data and information submitted. This generally arrives anytime from three days to three weeks after the FAFSA is completed.

•   Check if the information is correct (and if not, make corrections online if needed). The SAR will not state how much financial aid students will receive, nor will it detail the income or tax information submitted. Instead, if a school was listed on the FAFSA form and the student has been accepted, or you are currently enrolled in school, the school will calculate your aid and send you an electronic or paper aid offer (sometimes called an award letter) telling you the amount of aid you’re eligible for at that school.

•   Wait for aid acceptance. Timing of the financial aid offer depends on the school and can be as soon as the winter before the next academic year, or as late as the summer before the fall semester starts. It all depends on when the application was submitted and how the school schedules it out.

Understanding Your Financial Aid Award

Receiving financial aid can be a great relief when it comes to paying for higher education. But keep in mind that federal aid can come in the form of grants, work-study, and student loans.

Direct Loans are the most common federal student loans available for students looking for financial aid. Students who don’t qualify for enough financial aid via FAFSA and are still looking for ways to finance their education could look into scholarships, grants, or even private student loans.

For example, SoFi makes the process simple—to help make paying for school stress-free. Plus, SoFi has flexible repayment options to help you find the loan that fits your budget.

Keep in mind private student loans lack the same borrower protections as federal loans, so this method of financial aid should be considered as an option only after other sources of funding have been evaluated.

The Takeaway

Completing the FAFSA application is the first step in a student’s journey to apply for federal aid (including federal student loans, scholarships, grants, and work-study). The FAFSA form is generally released on October 1st of the year before the aid year and closes on July 30th of the school year. For the 2022-2023 school year, the FAFSA application opened on October 1, 2021 and will close on June 30, 2023.

If students need additional sources of financing for student aid, they may consider private student loans to fill in the gaps. SoFi offers competitive rates to qualifying borrowers and there are absolutely no fees.

Learn more about SoFi private student loans today.


SoFi Private Student Loans
Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs. SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See SoFi.com/eligibility for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC), and by SoFi Lending Corp. NMLS #1121636 , a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law (License # 6054612) and by other states. For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Third-Party Brand Mentions: No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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Guide to Student Loan Servicers

Do you know who oversees your student loans? If you’ve taken out loans from a variety of lenders, it can be hard to keep track. But it’s important to know who your student loan servicers and/or lenders are so you can make payments on time and reach out with any questions.

You’ll also want to contact your loan servicer or lender if you’re having trouble paying back your loan to discuss your options. Falling behind on payments or defaulting on a loan can have serious financial consequences. Here’s what to know about the different types of student loan servicers and lenders—and how to identify your own.

What Is a Student Loan Lender?

A lender is any individual or institution that loans money to someone and expects it to be paid back, usually with interest. In the case of private student loans, your lender is typically a bank or other financial institution.

When it comes to federal student loan providers, your lender is the federal government. But while you’re borrowing funds from the government, several different companies—called loan servicers—handle the administration of the loan and collect payments.

What Are Student Loan Servicers?

The federal government contracts with student loan servicers to take care of billing borrowers, setting up repayment plans, handling loan consolidation, and administering other tasks related to federal student loans.

The government currently works with nine different loan servicers to handle Direct Loans and Federal Family Education Loans (FFEL). If you’ve ever wondered, “who is my student loan servicer?” it’s likely one of the following companies:

•  FedLoan Servicing (PHEAA)

•  Great Lakes Educational Loan Services, Inc.

•  Edfinancial (HESC)

•  MOHELA

•  Aidvantage

•  Nelnet

•  OSLA Servicing

•  ECSI

•  Default Resolution Group

What Do Student Loan Servicers Do?

Loan servicers are the main point of contact for the administration of your loan. Here are some of the main functions of federal student loan servicers:

Collect Payments

The U.S. Department of Education assigns your loan to a loan servicer after it’s disbursed. As mentioned, your student loan servicer handles the billing and customer service for your student loans.

For federal loans, you can reach out to your loan servicer to confirm your balance and interest rate, or check your monthly payment. It’s helpful to register on the loan servicer’s site so you can stay on top of payments and understand what you owe. If you have any questions, it’s worth reaching out to ask.

In some cases, the department may decide to transfer your loans from one loan servicer to another. If this happens, you’ll receive a letter from the new servicer that will include the company’s contact information.

Execute Deferment or Forbearance Requests

If you run into financial hardship, contact your loan servicer to discuss options, such as applying for deferment or forbearance. One of the worst things to do is avoid contacting your lender or loan servicer because you’re embarrassed, confused, or overwhelmed.

These institutions are designed to help you understand your loan and pay it off according to schedule, and that means explaining things you don’t understand or working with you to come up with a more affordable repayment plan.

Handle Repayment Plan Changes

Loan servicers can help you figure out the best repayment plan for you and whether to consolidate your student loans. Federal borrowers can change their repayment plan at any time without any fees.

For example, if you’re hoping to lower your monthly student loan payment, you can extend your loan term. You’ll pay more in interest over the life of the loan, but it’s one way to get relief if you’re struggling to make payments.

On the flip side, you can shorten your loan term if you’d like to pay off your loan sooner. There are also income-driven repayment plans that tie the amount of a borrower’s income to their monthly payments.

Help Process Loan Consolidation Requests

If you’re looking to simplify your payments, your loan servicer can help you consolidate your federal loans through the Direct Loan Program, combining different federal loans into a single new loan with an interest rate that’s a weighted average of all of your existing federal loan rates. Keep in mind you’ll pay more interest over the life of the loan due to the rate change.

Your loan servicer can also help you determine if you’re eligible for Public Service Loan Forgiveness or other types of federal loan forgiveness and help you find out if you’re on the right repayment plan to qualify.

Looking to simplify your student loans? Learn more
about refinancing your student loans with SoFi.


How To Find Your Student Loan Servicer or Lender

Finding your student loan servicer can vary depending on the types of student loans that you have. Here are some of the most common ones:

Private Student Loans

There generally aren’t private student loan servicers; your main point of contact is your lender. You can find contact information for your private student loan lender on the emails or billing statements you should be receiving each month once you enter repayment.

Some private lenders also send a welcome packet or call you once you begin repayment. You can also look for their contact details on the documents you received when you first took out the loan, such as a promissory note.

If you’ve completely lost sight of your private student loan lender, you can confirm who they are by checking your credit report. You can request one free credit report annually from each of the three major credit reporting agencies—Equifax, Experian, and TransUnion. The financial aid office at your school may also be able to help you track down your lender.

Federal Student Loan Lenders

For federal student loans, you can log in to the Federal Student Aid site in order to confirm the name of your loan servicers and retrieve their contact information.

Another option is to check the National Student Loan Data System (NSLDS). This Department of Education database is a centralized repository of information about your student loans, aggregating data from universities, federal loan programs, and more.

Federal Perkins Loans

For federal student loans outside of the Direct Loan and FFEL programs, you can find out information about your loan servicer in other ways.

For a Federal Perkins Loan, contact the school that issued it, which may also be your loan servicer. If your Federal Perkins Loan has been transferred to the Department of Education, contact the ECSI Federal Perkins Loan Servicer at 1-866-313-3797.

If you have a FFEL Program loan owned by a private lender and not the Department of Education, you can find the lender’s details on your credit report as well.

Contacting Your Lender or Loan Servicer

Most lenders and loan servicers make it easy for you to contact them. They want you to be able to get in touch easily to make sure repayment goes as smoothly as possible. You can find phone numbers and website URLs for the nine federal loan servicers on the Department of Education site.

Loan servicers are generally available by phone, mail, and email, and some are also accessible through live online chat. You can find contact information for a private lender by searching online or reviewing mail or email correspondence they have sent you.

Why Might You Need to Contact Your Student Loan Servicer?

As mentioned earlier, you can reach out to your federal loan servicer for payment questions or issues or to adjust your payment plan. You can also apply for deferment or forbearance or look into forgiveness options.

Ignoring payment problems, or neglecting your student loans, can backfire in the long term. If your student loans become delinquent or you default on your student loans, there can be serious financial repercussions, including the unpaid balance of the loan being due immediately.

If you’re having trouble making payments, contact your loan servicer to find out payment options that may be available to you.

Don’t try to reach out to a loan servicer for questions about the status of your loan application or disbursement amounts and timelines—those are queries best left to your financial aid office since they are the ones responsible for ultimately disbursing your loan.

The same goes for questions about the Free Application for Federal Student Aid (FAFSA®) should be directed to the Federal Student Aid Information Center (1-800-4-FED-AID).

Recommended: FAFSA Guide

The Takeaway

While you may borrow money from the federal government, student loan servicers—private companies that work with the Department of Education—oversee the administration of your loan. They collect payments, handle applications for deferment or forbearance, assist with repayment plan changes, and offer customer service and general assistance. When you have a private student loan, the lender generally oversees the administration of the loan.

If you have any questions about your loan or if you’re having trouble making payments on your loan, you should reach out as soon as possible to your student loan servicer or lender. They may be able to help you find solutions that will prevent you from defaulting on your loan.

Wondering if your student loans are with the lender or servicer that’s right for you? Learn more about refinancing your student loans with SoFi.


SoFi Student Loan Refinance
IF YOU ARE LOOKING TO REFINANCE FEDERAL STUDENT LOANS PLEASE BE AWARE OF RECENT LEGISLATIVE CHANGES THAT HAVE SUSPENDED ALL FEDERAL STUDENT LOAN PAYMENTS AND WAIVED INTEREST CHARGES ON FEDERALLY HELD LOANS UNTIL SEPTEMBER 1, 2022 DUE TO COVID-19. PLEASE CAREFULLY CONSIDER THESE CHANGES BEFORE REFINANCING FEDERALLY HELD LOANS WITH SOFI, SINCE IN DOING SO YOU WILL NO LONGER QUALIFY FOR THE FEDERAL LOAN PAYMENT SUSPENSION, INTEREST WAIVER, OR ANY OTHER CURRENT OR FUTURE BENEFITS APPLICABLE TO FEDERAL LOANS. CLICK HERE FOR MORE INFORMATION.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC), and by SoFi Lending Corp. NMLS #1121636 , a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law (License # 6054612) and by other states. For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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How Do Collection Agencies Work?

It could come as a dreaded envelope in your mailbox, or as a call from an unknown number you’re afraid to take. Whether you’re receiving calls or mail from a debt collector or are going out of your way to avoid either (or both!), you’ll probably want to know: How do debt collection agencies work?

How Do Collection Agencies Work?

At their most basic, debt collection agencies exist in order to try to get borrowers to pay their overdue debts. Debt collection companies make money by buying debt from lenders, often for pennies on the dollar, and then attempting to get the original amount owed from the borrower.

A bill that’s 30 days past due is otherwise known as a delinquent account. Lenders and creditors have some leeway when they report overdue debts to credit bureaus. For borrowers who continually miss payments, a lender may report a missed payment right at the 30-day mark. But for a borrower who has a positive repayment record, a lender might allow a few missed payments before reporting it to the credit bureaus.

A debt is typically not sent to a collection agency until several months have gone by and your lender no longer wants to put effort into collecting the debt from you. Instead, the lender might either enlist an agency that is hired to collect third-party debts or sell the debt to a collection agency. Once the debt has been sold to a debt collection agency, you may start to get calls and/or letters from that agency.

Recommended: 11 Types of Personal Loans & Their Differences

The debt collection industry is heavily regulated, and borrowers have many rights when it comes to dealing with bill collectors. Debt collectors are allowed to try to get you to pay, but they are restricted by the Fair Debt Collection Practices Act (FDCPA), which prohibits them from harassing you or lying to you in order to collect your debt. Despite this, debt collectors will try everything in their power to get you to pay your old debt.

What Is a Debt Collector?

A debt collector can be either an individual person or an agency. In either case, their task is to collect overdue debts from those who owe them. Sometimes referred to as collection specialists, an individual debt collector may be responsible for many accounts. They may be paid a base salary plus commission, so have a high incentive to convince the debtor to pay.

What Do Collection Agencies Do?

Debt collection agencies are hired by creditors and are generally paid a percentage of the amount of the debt they recover for the creditor. The percentage a collection agency charges is typically based on the age of the debt and the amount of the debt. Older debts or higher debts may take more time to collect, so a collection agency might charge a higher percentage for collecting those.

Some agencies may also charge a flat fee for collecting a debt. Others work on a contingency basis and only charge the creditor if they are successful in collecting on the debt.

The debt collection agency enters into an agreement with the creditor to collect a percentage of the debt — the percentage is stipulated by the creditor. One creditor might not be willing to settle for less than the full amount owed, while another might accept a settlement for 50% of the debt.

When the debt is collected, the agency takes its payment from the amount paid and sends the remainder to the creditor.

Recommended: What Are the Common Uses for Personal Loans?

How is this different from a debt buyer?

The main difference between a debt collector and a debt buyer is the stage the debt is with the creditor. If a creditor is still trying to collect a debt, either on its own or through a debt collection agency, the debt is considered to be a current debt. But if a creditor has given up trying to collect a debt, they may write off — or charge off — the debt, no longer expecting it to be paid.

A debt collector is hired by the creditor to attempt to collect what is owed on the current debt by the debtor.

A debt buyer, in comparison, doesn’t work for the creditor like a debt collector does. They buy debts that have been charged off by creditors, sometimes buying a collection of old debts from a single creditor. They may pay very little for the debt, sometimes just a few cents of what was originally owed. Debt buyers then attempt to collect the debt, sometimes using aggressive tactics.

The debt buyer buys only an electronic file of information, often without supporting evidence of the debt. The debt is also generally very old debt, sometimes referred to as “zombie debt” because the debt buyer tries to revive a debt that was beyond the statute of limitations for collections.

How To Deal With a Debt in Collections

Debt collection agencies may contact you either in writing or by phone.

If your first instinct is to hang up when you get a phone call from a debt collector, you’re not alone. But not talking to them won’t make the debt go away, and they may just try alternative methods to contact you, including suing you. When a debt collector calls you, it’s important to get some initial information from them, such as:

•  The debt collector’s name, address, and phone number.

•  The total amount of the debt they claim you owe, including any fees and interest charges that may have accrued.

•  The date the debt was incurred and who it was originally owed to.

•  Proof they have that the debt is actually yours.

The debt collector must let you know that you have the right to dispute the debt and how to do so. If they don’t say this in their first contact with you, they must notify you of your right to dispute within five days of their initial contact with you. Under the FDCPA, a debt collector must send a debt validation notice, which must include certain information.

•  The letter must state that it’s from a debt collector.

•  Name and address of both the debt collector and the debtor.

•  The creditor or creditors to whom the debt is owed.

•  An itemization of the debt, including fees and interest.

They must also inform you of your rights in the debt collection process, and how you can dispute the debt.

•  If you don’t dispute the debt within 30 days of their first contact with you, they’ll assume the debt is valid.

•  If you do dispute the debt within 30 days, they must cease collection efforts until they provide you with proof that the debt is yours.

•  They must provide you with the name and address of the original creditor if you request that information within 30 days.

The debt validation notice must include a form that can be used to contact them if you wish to dispute the debt.

The FDCPA ensures that consumers aren’t harassed during the collections process. Some things debt collectors cannot do are:

•  Make repeated calls to a debtor, intending to annoy the debtor.

•  Threaten physical violence.

•  Use obscenity.

•  Lie about how much you owe or pretend to call from an official government office.

How Does a Debt in Collections Affect Your Credit?

Generally, unpaid debt is reported to the credit bureaus when it’s 30 days past due. If payments continue to be missed, additional late payments will be reported, and with each missed payment, your credit is likely to be negatively affected.

If your debt is transferred to a debt collector or sold to a debt buyer, an entry will be made on your credit report. Each time your debt is sold, if it continues to go unpaid, another entry will be added to your credit report.

Each negative entry on your credit report can remain there for up to seven years, even after the debt has been paid. This, of course, will likely affect your credit score. Higher credit scores may take a greater hit than lower scores.

A late payment or collections entry on your credit report could lower your credit score by as much as 110 points, a debt settlement entry could lower it by as much as 125 points, and a bankruptcy could lower it up to 240 points.

The Takeaway

If you’ve received a phone call or letter from a debt collector, but don’t know how debt collection agencies work, the information here is helpful, basic information. Avoiding a collector won’t make your debt disappear — it’s better to get all the information you can from the debt collector to help you make informed choices as you go through the collections process or dispute the debt.

If you’re beginning to have trouble managing multiple high-interest debts, consolidating them into one personal loan might be a smart financial move. SoFi Personal Loans have competitive, fixed interest rates that can be lower than credit card interest rates for qualified borrowers. Having a fixed-rate vs. a variable-rate loan can help you get out of debt by having a payment end date.

Check your rate on a SoFi Personal Loan in just one minute without affecting your credit score.*


Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.
SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC), and by SoFi Lending Corp. NMLS #1121636 , a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law (License # 6054612) and by other states. For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
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