How Do Student Loans Work? Guide to Student Loans

If you are thinking about going to college, it can be important to understand how student loans work. With the cost of higher education rising quickly, you may need financial assistance to pay for tuition, fees, room and board, and more. The likelihood of college seniors now graduating with student loan debt is pretty high, with over $1.5 trillion in student debt from 42.9 million borrowers.

Taking out student loans may be one of the first major financial commitments you’ll make. And it’s a decision that has the potential to affect your financial situation for years to come. Understanding the terms you’re signing up for and which options are right for you is crucial.

To help you get started, here’s a quick guide to student loans detailing some need-to-know basics on how student loans work.

What Is a Student Loan?

Student loans are loans that are intended to help a student pay for their education. Like most other types of loans, this money is usually borrowed with the requirement that it will be repaid in the future, with interest.

Student loans can be borrowed by the student pursuing education or in some cases, by their parents. When a student loan is borrowed by a parent to pay for their child’s education, it may be called a parent loan.

The way student loans work is similar to other loans but the application process may be a little different, especially when it comes to borrowing a federal student loan (more on that below). Federal student loans are funded by the federal government and for the most part, do not require a credit check.

When borrowing a private student loan the application process is similar to the process for other types of loans in that potential borrowers will file an application directly with the lender of their choice.

What Can Student Loans Be Used For?

Student loans can be used to pay for a student’s qualified educational expenses. These include things like tuition, room and board, books and supplies for classes, and other fees charged by the school.

They can also be used to pay for expenses related to transportation or the cost of a laptop or computer used for school.

Recommended: Using Student Loans for Living Expenses and Housing

The Two Main Student Loan Categories

The first student loan basic to understand: Student loans fall broadly into two main categories, federal and private. Federal loans, which as mentioned, are funded by the federal government, offer some advantages and borrower protections.

These include interest rates that are fixed and generally lower than private student loans, income-driven repayment plans, and temporary relief to those who are facing unemployment or other challenges.

Federal Student Loans

While federal student loans are backed by the government, the way college loans work is that your payments and loan management are usually handled through a student loan servicer.

To see if you qualify for a federal loan, and other federal student aid, you need to fill out the Free Application for Federal Student Aid – commonly referred to as FAFSA®. The application needs to be filled out every year you want to apply for federal student aid.

There are a few different types of federal student loans. The main federal student loans are:

• Direct Subsidized Loans, available to eligible undergraduates with financial need. The interest that accrues while students are enrolled in school and during the grace period and other times of deferment are covered by the U.S. Department of Education.

• Direct Unsubsidized Loans, available to eligible undergraduates and graduate students regardless of financial need.

• Direct PLUS Loans, available to parents of undergraduate students and to graduate or professional students for expenses not covered by financial aid.

Check out our breakdown on the different types of federal student loans for further details on how these student loans work and the distinctions between them.

Private Student Loans

Private student loans are issued by non-government lenders, such as banks, credit unions, or other financial service companies. A potential borrower’s eligibility and terms will depend on their credit history and other factors.

Parents or even family friends can co-sign with a student who may not be able to qualify for a private student loan on their own. Unlike federal loans, repayment on private student loans may start while the borrower is still enrolled in school.

Recommended: Can You Get a Student Loan With No Credit History?

It should be pointed out, though, that, unlike their federal counterpart, private student loan lenders may not offer the same safety net protections in cases of financial hardship or unemployment. So be sure to understand the terms before taking a private student loan. Private student loans tend to be the last option for paying for college after all other methods of financial aid have been exhausted.

Recommended: Guide to Private Student Loans

Understanding How Student Loans Work

Understanding the difference between federal and private student loans is the first step in navigating how college loans work. Here are other essentials:

Student Loan Application Process

Applying for federal student loans requires students to complete the Free Application for Federal Student Aid (FAFSA®) every year they are attending college. Some people assume they won’t qualify for federal aid because of how much their parents make or a low GPA, but that’s not always the case.

Everyone who may need help paying for college should fill out the FAFSA — aside from federal student loans, there are state or school-related scholarships, grants, and work-study programs that you may qualify for. The FAFSA form is generally available on October 1 for the following school year and can be completed online.

If you’re opting for private student loans, find a reputable lender and make sure your school and program are eligible for their offerings. The application process may or may not have a fee, depending on the lender.

Most private lenders typically want applicants to provide basic personal and financial details, and may also consider credit history. As we mentioned above, lenders may allow potential borrowers to apply for a private student loan with a co-signer, such as a parent. Adding a co-signer can potentially improve an applicant’s chance of getting approved with a competitive interest rate.

Recommended: Do I Need a Student Loan Cosigner? – A Guide

Understanding Student Loan Interest Rates

Interest is a percentage of the unpaid principal loan amount that is paid to the lender in exchange for borrowing money. Federal student loans have fixed interest rates and interest is accrued on a daily basis. Interest rates on federal direct subsidized and unsubsidized loans for undergraduates for the 2021-2022 school year is 3.73%. Interest rates on federal student loans are set annually by Congress.

Fixed-rate student loans have an interest rate that stays the same over the life of the loan. Although the rate might start off higher than on variable-rate loans, it won’t change as general interest rates fluctuate.

The way interest on private student loans works is different from federal student loans. Private student loans may have either fixed or variable interest rates. Variable-rate loans, also called floating-rate loans, have an interest rate that can vary every month, quarter, or year. Rates usually start off lower than a fixed-rate loan, but can fluctuate dramatically over the life of the loan.

If you expect to pay off your student loans quickly, a variable-rate loan may be an option to consider. But if you’re not sure how much you’ll be making after you graduate, you don’t think you’ll be able to pay your student loans off ASAP, or are risk-averse, a fixed-rate loan might be a better choice.

Private student loans will have different interest rates depending on the lender and the borrower’s credit history (and other financial factors).

Repaying Your Loan

As long as you’re still in school at least part-time, borrowers aren’t required to make payments on federal student loans. The exception for federal student loans is PLUS Loans, which require borrowers to start making payments as soon as they receive the entire loan amount. But it is important to note that if on an unsubsidized loan, interest starts accruing while the borrower is enrolled in school.

Recommended: What Is a Federal Direct Subsidized Loan?

Your federal loan servicer should give you a student loan repayment schedule that will tell you when your first payment is due and how much you owe. There are a few different repayment plans available for federal student loans. Borrowers can change their repayment plan at any time without incurring additional fees.

Most federal student loans have a six-month grace period, which gives you a break after you leave school before you have to start paying your loans back. (PLUS Loans don’t offer this perk.) Some private lenders also offer grace periods, but it’s not a guarantee. Unless the loan is a federal unsubsidized loan, it will likely accrue interest during the grace period.

Private lenders determine when repayment begins on a private student loan, so review your student loan agreement closely before signing.

Many lenders offer interest rate reductions if you have your student loan payments automatically deducted from your checking account. Be sure to look into that — who doesn’t like a discount?

The Takeaway

Student loans can make it possible for students to attend college, but just like other types of loans, student-borrowers are charged interest. Federal loans have fixed interest rates and generally have a six-month grace period following a student’s departure from school. They also come with borrower protections and benefits like income-driven repayment plans and deferment or forbearance.

Private student loans can be helpful if a student did not receive enough federal aid in the form of federal student loans, scholarships, grants, and work-study, to pay for college. Lenders determine the rate and terms usually based on factors including the borrower’s credit history. Interest rates may be either fixed or variable, depending on the lender. Private student loans do not carry the same federal borrower benefits.

Students interested in borrowing private student loans may want to shop around to find the best rates and terms for them. SoFi’s private student loans have absolutely no fees and the application process is entirely online.

Check out your interest rate in just a few minutes—with no strings attached.


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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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When Do Student Loans Start Accruing Interest?

Student loans — federal or private — begin accruing interest when they’re disbursed, and the borrower is responsible for paying the interest on all but subsidized federal student loans during grace periods or deferment.

The grace periods for each kind of student loan repayment are good to know. So are the various loan interest rates and what happens during any period of deferment or forbearance.

The Basics of Student Loan Interest

A student who takes out a student loan (or a parent who takes out a parent-student loan in their own name) signs a promissory note outlining all the terms of the loan, which include the loan amount, interest rate, disbursement date, and payment schedule.

Federal student loans issued after July 1, 2006, have a fixed rate. The repayment default is the standard 10-year plan, but there are options, such as income-based repayment or a Direct Consolidation Loan, that can draw out repayment to double that or more.

Private student loan interest rates may be fixed or variable, and are based on your — or your cosigner’s — financial history. The repayment term can be anywhere from five to 20 years.

With federal student loans and most private student loans, payments are deferred until after you graduate. Interest will have accrued, and in almost all cases you’re responsible for paying it.

Interest and Grace Periods by Loan

With the exception of subsidized federal student loans, any unpaid loan interest during grace periods will be capitalized, or added to the loan balance, when repayment begins. Capitalized interest on student loans can significantly increase how much a borrower owes.

Here are details about different kinds of student loans. Congress approves interest rates for Department of Education loans that span July 1 to June 30 the following year. These are the rates and loan fees (deducted from each disbursement) as of this writing.

Recommended: Types of Federal Student Loans

Unsubsidized Student Loans

Federal Direct Unsubsidized Loans are available to undergraduate and graduate students with no regard to financial need.

Rate and loan fee: 3.73% for undergraduates and 5.28% for graduate students, with a loan fee of 1.057%.

Grace period: While you’re in school at least half-time and for six months after graduation.

Subsidized Student Loans

Federal Direct Subsidized Loans are available to undergraduates with financial needs.

Rate and fee: 3.73%, with a loan fee of 1.057%.

Grace period: While you’re in school at least half-time and for six months after you leave school. The government pays the interest during those grace periods and during any deferment.

Direct PLUS Loans

Taken Out by a Parent

A Parent PLUS Loan acquired to help a dependent undergraduate is unsubsidized.

Rate and fee: 6.28%, with a loan fee of 4.228%. In the past decade, the rate for Direct PLUS Loans has been as high as 7.90%.

Some private lenders refinance Parent PLUS loans at what could be a lower rate.

Grace period: First payment is due within 60 days of final disbursement, but a parent can apply to defer payments while their child is in school at least half-time and for six months after.

Taken Out by a Graduate Student or Professional Student

Grad PLUS Loans are available to students through schools participating in the Direct Loan Program.

Rate and fee: 6.28%, with a loan fee of 4.228%.

Grace period: Automatic deferment while in school and for six months after graduating or dropping below half-time enrollment.

Student loan refinancing could potentially
lower the interest your loans accrue.


Private Student Loans

Some banks, credit unions, state agencies, and online lenders offer private student loans.

Rate and fee: Rates can be fixed or variable, and rates and fees vary by lender

Grace period: Interest begins when a private student loan is disbursed, but payments may be deferred while a borrower is in school.

How Is Interest on Student Loans Calculated?

Student loans generate interest every day. Your annual percentage rate is divided by 365 days to determine a daily interest rate, and you are then charged interest each day on the total amount you owe.

That interest is added to your total balance, and you’re then charged interest on the new balance — paying interest on interest until the loans are paid off.

If you don’t know what your monthly payments will be, a student loan payment calculator can help. This one estimates how much you’ll be paying each month so you can better prepare for your upcoming bills.

The amount you pay each month will be the same, but the money first goes toward paying off interest and any fees you’ve been charged (like late fees); the remainder goes to pay down the principal of the loan.

As you pay down your loan, because the principal is decreasing, the amount of interest you’re accruing decreases. And so, over the life of your loan, less of your monthly payment will go toward interest and more will go toward the principal. This is known as amortization.

Interest Accrual During Deferment or Forbearance

If you can’t afford payments on federal student loans once they begin, deferment and forbearance may allow you to hit pause.

The big difference is that interest always accrues during forbearance (except in the case of Perkins Loans), while during deferment, interest on some types of loans usually does not accrue.

They are:

•   Direct Subsidized Loans

•   Perkins Loans

•   The subsidized portion of Direct Consolidation Loans

•   The subsidized portion of Federal Family Education Loan Consolidation Loans

Some private student loan issuers offer deferment or forbearance for specific reasons. Any unpaid interest will likely accrue and be added to the principal after the payment pause.

How You Could Save on Interest

Because interest can add up so quickly, it’s important to pay attention to the interest rates you’re paying on your student loans.

Refinancing — taking out a brand-new loan that pays off your current loans — can lower the amount of interest your loans accrue if you qualify for a lower interest rate or a shorter term. To see how refinancing might save you money, take a look at this student loan refinance calculator.

Even a small difference in interest rates could help you save a substantial amount of money paid in total interest over the life of the loan, depending on the term you select.

It’s important to know, though, that refinancing federal student loans will make them ineligible for federal benefits like income-driven repayment plans and Public Service Loan Forgiveness.

The Takeaway

When does student loan interest start accruing? The minute the loan is disbursed, and you’re usually responsible for paying it. It’s important for borrowers to understand and pay attention to capitalized interest.

Interested in seeing if you could get a lower rate or different term by refinancing? If so, look into SoFi refinancing.

There are no fees.

Check your rate and check out the perks of refinancing 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 THE END OF JANUARY 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.
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Can You Get Your Sallie Mae Loans Forgiven?

The reality is that — much like that red wine stain on the rug — Sallie Mae student loans aren’t likely to evaporate into thin air. That’s because Sallie Mae is a private lender now.

And despite what you may have heard — or hoped for based on some 2020 presidential campaign promises — currently there is no such thing as private student loan forgiveness.

Forgiveness is limited to federal education loans, and even then, the options are few. There are federal student loan forgiveness programs for those who go into public service or teaching. But other than that, it’s extremely difficult to cancel student loans.

Can Older Sallie Mae Loans Be Forgiven?

If you’re confused about whether your Sallie Mae loans are private or federal, it may be because the company has evolved over the years.

Though Sallie Mae, aka the SLM Corp., no longer services federal loans, that wasn’t always the case.

Sallie Mae was created in 1972 as the Student Loan Marketing Association, a government-sponsored enterprise that serviced federal education loans. Even though it became fully privatized in 2005, the company continued to service federal loans made under the Federal Family Education Loan (FFEL) Program until that program ended in 2010. Then, in 2014, Sallie Mae split into two companies: SLM Corp. and Navient Corp and shifted all its federal student loans to Navient.

So, if you have an older loan — one that originated before 2014 — it may have been a federal loan that started out with Sallie Mae and then moved on to Navient. And if that’s the case, you may be able to apply for Sallie Mae loan forgiveness.

Applying can be complicated, and you may have to consolidate your loans into a Federal Direct Consolidation Loan as part of the process.

You can see if your old debt is a federal education loan by visiting the Federal Student Aid website. If it is, and you want to seek loan forgiveness, you’ll eventually make your application to the government.

Keep in mind that Navient federal student loan accounts were to shift to Maximus after Navient cut ties with the Department of Education in late 2021.

You can contact your current loan servicer for information on how to get started.

What If You Don’t Qualify for Loan Forgiveness?

If federal student loan forgiveness seems a long shot for you, don’t despair — you also may want to look into deferment or forbearance. These strategies allow qualifying borrowers to temporarily reduce or stop their federal student loan payments. However, depending on the type of federal loan you have, interest may continue to accrue while payments are paused, which could increase the overall cost of the loan.

Looking for a more long-term solution? An income-based repayment plan can offer qualified applicants another way to lower federal student loan payments. The four options limit monthly payments based on family size and discretionary income (the difference between your annual income and 150% of the poverty guideline for your family size and state of residence).

You can contact your loan servicer for assistance with federal loan repayment. If you don’t know who your servicer is, you can find out by visiting your Federal Student Aid dashboard or calling 800-433-3243.

Are There Alternatives to Private Student Loan Forgiveness?

Although there currently is no such thing as Sallie Mae private student loan forgiveness, there are alternatives available to borrowers struggling to manage their private loans.

Private lenders don’t offer income-driven repayment plans. But if you feel comfortable calling Sallie Mae (or any lender) directly, you could ask about other repayment plans they might offer or what ideas they might have for your situation. At the very least, it doesn’t hurt to learn more about your loans.

And some lenders, including Sallie Mae, offer deferment and forbearance for those who qualify.

The timeline and cost for each of these programs may vary by lender. Sallie Mae, for example, may require a “good faith payment” to go into forbearance, and you can press pause on payments for only three months at a time, for a maximum of a year.

Something else to consider if you’re thinking about deferment or forbearance is that — just as with federal loans — even though the payments are paused, interest may continue to accrue. And this can increase the total cost of the loan.

Recommended: What Happens If You Just Stop Paying Your Student Loans

What About Refinancing?

If you can’t make any headway with your current repayment plan, you can always look into refinancing.

While Sallie Mae doesn’t offer loan consolidation and refinancing anymore, you could potentially reduce your interest rate by refinancing your student loans with a different private lender, especially if you have a good credit history and strong potential earnings.

If you’re approved, the new lender will pay off your old loans and issue you one new student loan — hopefully with a lower interest rate. A lower rate can save money on interest payments over the life of the loan, provided that the loan term isn’t extended.

Though you can’t combine federal and private student loans through a federal loan consolidation program, some private lenders will refinance both.

You could extend your loan term if you’re hoping to make your monthly payments more manageable, or you could opt for a shorter loan term to try to get out of debt sooner.

You’ve probably been warned that you could give up some important benefits if you refinance your federal student loans through a private lender, and it’s true. You’ll lose access to federal repayment programs.

But refinancing with a private lender makes sense for some borrowers.

Recommended: Student Loan Consolidation vs Refinancing

The Takeaway

Lender Sallie Mae used to offer federal student loans, and if you received one, you may be able to qualify for loan forgiveness. But federal student loan forgiveness can be hard to get — and if you have a private student loan through Sallie Mae, forgiveness is not available.

There are, however, repayment options, including refinancing. SoFi offers flexible terms and competitive rates for student loan refinancing, with no origination fee.

View your rate in two minutes.


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 THE END OF JANUARY 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.
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What Happens When Your Student Loans Go to Collections?

When a borrower stops making payments on student loans for a period of time, they could end up in default. And in some cases, lenders may send loans that are in default onto collections.

In general, it’s ideal to avoid defaulting on student loans and having them sent to collections in the first place. But if your student loans have already gone to collections, fear not — there are steps you can take.

Before we dive in, it’s important for you to know that this is an incredibly complex topic. We’re going to try to break it down the best we can, but full disclosure: this info is general in nature and does not take into account your specific objectives, financial situation, and needs; it should not be considered advice. SoFi’s just trying to be real with you and recommend that you speak to a professional about your unique situation.

How Student Loans End up in Collections

Student loans don’t go away until you’ve paid them off. If you haven’t been paying off your student loans, your debt can go into default, because you are failing to fulfill your contractual obligation to repay your loan.

Americans owe more than $1.7 trillion in student loan debt as of the second quarter of 2021. When you consider that the average student loan debt for the class of 2020 was over $29,900, it’s no surprise that some have trouble keeping up with it. In fact, an average of 15% of student loans are in default at any given time.

Delinquent Federal Student Loans

The first day after missing a payment on a federal student loan, the loan becomes delinquent. The loan will remain delinquent until the overdue balance is paid, or the borrower makes alternate arrangements such as applying for deferment or forbearance or switching their payment plan.

After 90 days of missing payments for federal student loans, the loan servicer will report the late payments to credit bureaus, which could negatively impact the borrower’s credit score.

Recommended: Defaulting on Student Loans: What You Should Know

Federal Student Loans in Default

For federal loans, you typically go into default after you haven’t paid your loan bill for nine months or 270 days.

When in default, the entire balance of the loan comes due. But just because a loan is in default, doesn’t mean it automatically goes to a collections agency.

At this point, you may have the opportunity to make arrangements with your loan servicer. For example, your lender may help you tailor solutions that lower your monthly bill to make payments more manageable for you.

However, if you don’t come to an agreement, your lender can send your debt to a collections agency that will collect it for them.

Private Student Loans in Default

The timeframe may vary for private loans depending on the terms and conditions of the loan. Generally speaking, private student loans may go into default after 90 days ​of missed payments.

What Does It Mean to Have a Loan Sent to Collection?

Once your debt is sent to a collections agency, that agency will do everything they can to get you to pay. Unfortunately, on top of collecting the debt, collections agencies typically charge fees, for which you’ll also be responsible.

Once your debt is in collections, the collections agency might try to work out a repayment plan with you as a first step. If you continue to not pay, the agency can then take actions to recoup the money, such as trying to garnish your wages.

Garnishment means the agency can take a certain amount from each paycheck and apply it toward your debt. For federal student loans, lenders are not required to take the borrower to court before garnishing wages.

Once this happens, you no longer have control over that money. Whereas, if you’d come to an agreement earlier, you may have been able to make smaller payments each month.

Private student loans function differently. They are not subject to the same special regulation as federal student loans. Private lenders interested in garnishing wages must follow garnishment rules laid out for private debt. In this case, the lender is required to take the borrower to court and obtain a judgment in their favor before any wages can be garnished.

Recommended: What Happens If You Just Stop Paying Your Student Loans

What Happens When Your Loans Go into Default and Collections?

Some other not-so-great things can happen when your loans go into default and collections.

First, if you have defaulted on federal student loans, you may lose access to various federal loan repayment plans and forbearance or deferment on federal loans. These programs are important tools designed to make it easier for you to pay off your loans. Loan forgiveness is offered to those who follow career paths in certain government, healthcare, and nonprofit sectors. Forbearance allows you to temporarily stop making student loan payments or reduce the amount you pay each month.

Your credit score may take a hit as well. For both private and federal student loans in default, the lender or the collections agency will report the late payments to the three major credit bureaus, who might then lower your credit score.

A low credit score might cost you down the line, making it difficult to secure future loans at reasonable interest rates, should you want to buy a house or a car, for example. It may even mean you won’t qualify for a loan at all. Avoiding default might help you maintain these important financial tools.

Recommended: Student Loan Deferment vs Forbearance: What’s The Difference?

How to Get Your Loans Out of Default

Of course, the best thing you can do to avoid default and collections is to pay your bills on time. But if you’ve defaulted, there may still be options for you to recover.

Options for Federal Student Loans

If you have federal student loans, you could try to rehabilitate your student loan in collections. Here’s how the program works — after you have made three consecutive on-time, voluntary, full payments on a defaulted loan, you can consolidate your federal loans.

The new direct loan pays off the old loans in full and consolidates them. Once you have made nine out of 10 consecutive, voluntary, on-time payments to this new loan, the loan may be rehabilitated and the default may be removed from your record. With a Direct Consolidation Loan, your eligible federal loans will be combined into one loan with a fixed interest rate — and the new rate will be the weighted average of the rates on the loans being consolidated (rounded up to the nearest one-eighth of 1%).

Options for Private Student Loans

When it comes to private student loans, private lenders may or may not offer borrowers the opportunity to rehabilitate their loans. And, when it comes to private student loan rehabilitation there is not much federal legislation. Borrowers who have rehabilitated a private student loan may ask to have the default removed from their credit report, but there is no guarantee that it will be removed.

In some circumstances, the statute of limitations on debt may be a consideration for private student loan debt. This is a legal time frame in which a creditor is allowed to collect on the debt and it is determined by state law. In the case that the statute of limitations on private student loan debt has been met, entering into a rehabilitation plan may restart the limitations period.

Additionally, it’s important to note that some lenders may charge off private student loans that are delinquent for 120 days, or a set period of time, which may vary from lender to lender. If a debt is charged off, the lender may not be willing to work with the borrower.

What to Do If Your Student Loan Goes to Collections

If you do find yourself in the unfortunate situation of having debt in collections, there might be steps you can take.

First, you could talk to your collections agency. It might seem scary, and it may be tempting to ignore their calls and letters, but doing so isn’t going to make them stop. Remember: collections agencies want you to pay. It’s in their best interest for you to ultimately pay back your loan. In many ways, this is a situation in which the ball is in your court.

When you talk to them, the collections agency might offer options tailored to your individual circumstances, such as whether you have a job and what your income is.

They might offer solutions such as allowing you to pay a discounted lump sum, or they might set up a low monthly payment plan if you don’t have a lot of income.

Having your loans in default or collections might have serious effects on your credit and your financial stability. If you’re afraid of defaulting on your loans, or if you already have, consider taking action as fast as you can. Taking control of the situation could help keep it from getting worse.

The Takeaway

In an ideal world, the best way to avoid going into student loan default in the first place is to make payments on time and in full — or, better yet not to take out student loans in the first place.

However, that’s not the world we live in. The cost of education is so high that many students who pursue a college degree will need a little bit of financial help along the way. Unfortunately, it’s easy to get in over your head with student loans.

If you’re reading this article about loans going into default or collections, you’re probably struggling to make your monthly payments. And that’s pretty scary. There are ways to make your monthly payments lower, such that you’re more confidently able to make them. If you have federal loans, looking into federal income-driven repayment plans may be a good idea.

If you have private and federal loans, you could also potentially consider refinancing your loans with a longer-term. When you refinance your loans with a longer loan term, it will potentially cost you more in interest over the life of the loan. However, the (hopefully) lower monthly payments could help make ends easier to meet in the short term and keep you from worrying about imminent default.

Note that refinancing federal student loans eliminates them from federal borrower protections such as income-driven repayment plans or student loan deferment.

SoFi also offers a line of student loan and student loan refinancing programs, which could be an option. For those struggling with their income, it may be worth considering adding a cosigner with solid credit history and income, to possibly give you a better chance at approval. (Just keep in mind that a cosigner would be just as responsible for your monthly payments as you are.)

Learn more about whether SoFi student loan refinancing could be right for you.


SoFi Loan Products
SoFi loans are originated by SoFi Lending Corp. or an affiliate (dba SoFi), a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license # 6054612; NMLS # 1121636 . For additional product-specific legal and licensing information, see SoFi.com/legal.

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 THE END OF JANUARY 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 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.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s
website
.

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.
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Should I Refinance My Federal Student Loans?

If you’re thinking about refinancing your student loans, you probably heard that interest rates are low — or at least lower than what you’re paying. Maybe you’re looking to pay down your loans faster – or maybe you’d just like to lower your monthly student loan payments.

Of course, if your student loans are federally held, you haven’t had to make payments since the passage of the CARES Act last year. And thanks to President Joe Biden’s executive order, the payment holiday, which includes 0% interest, has been extended through January 31, 2022.

Yet the pause is finite (despite multiple extensions) while interest rates could rise before the holiday ends. There’s also the option of consolidation to take into account.

Clearly, knowing if — and when — to refinance is not a simple decision. These answers to some frequently asked questions about federal student loan refinancing may help you decide what’s right for you.

If you find a lower rate for student loan refinancing –
SoFi will match it AND give you $100.*


What Is Federal Student Loan Refinancing?

If you graduated with student loans, you may have a combination of private and federal student loans, the latter of which are loans funded by the federal government. Direct Subsidized Loans or Direct PLUS Loans are both examples of federal student loans.

Interest rates on federal student loans are fixed and set by the government annually, whereas private student loan rates are set by individual lenders. If you’re unhappy with your current interest rates, you may be able to refinance your student loans with a private lender and a new — ideally, lower — interest rate.

Can I Refinance My Federal Student Loans?

It is possible to refinance federal student loans with a private lender. However, when you refinance a federal student loan into a private loan, you lose the benefits and protections that come with a federal loan, like deferment and public service-based loan forgiveness, which are worth keeping in mind. However, the new loan could mean paying less interest over the life of the loan and paying off loans sooner.

How Are Refinancing and Consolidation Different?

Student loan consolidation and student loan refinancing are not the same thing, but it’s easy to confuse the two. In both cases, you’re essentially signing new loan terms on a new loan to replace your old student loans.

Consolidation takes your student loans and bundles them together. Different servicers manage direct consolidation loans, allowing federal borrowers to repay with one monthly bill. Consolidation, however, does not typically get you a lower interest rate (you’ll see why in the next paragraph). Refinancing, on the other hand, takes your old loans and finances them at new interest rates with a private lender.

When you consolidate federal student loans through the Direct Consolidation Loan program, the resulting interest rate is the weighted average of the original loans’ rates, rounded up to the nearest eighth of a percent, which means you don’t usually save any money there. If your monthly payment goes down, it’s usually the result of lengthening the loan term, which means you’ll spend more on total interest in the long run.

When you refinance federal and/or private student loans, you’re given a new — ideally, better, if you qualify — interest rate based on your financial profile. That lower rate can translate into total interest savings, or you may be able to lower your monthly payments, or you may choose to shorten your payment term.

Recommended: Student Loan Consolidation vs Refinancing

What Are Potential Benefits to Refinancing Federal Student Loans?

Potential Savings in Interest

The main benefit is potential savings. If you refinance federal loans at a lower interest rate, you could save thousands over the life of the new loan.

Plus, you may be able to switch out your fixed-rate loan for a variable rate loan if that makes more financial sense for you (more on variable rates below).

Lower Monthly Payments

You can also lower your monthly payments (which typically means lengthening your term and accepting a higher interest rate) or shorten your term (this typically means higher monthly payments but more total interest savings).

Streamlining Repayments

Refinancing multiple loans into a single loan can help streamline the repayment process. Instead of multiple loan payments with different lenders, refinancing allows you to streamline to a single monthly payment with one lender.

Not sure which route to take with your student debt? Use our Student Loan Help Center to explore your options.

What Are Potential Disadvantages to Refinancing Federal Loans?

When you refinance federal loans with a private lender, you lose the benefits and protections that come with government-held student loans. Those benefits fall into three main categories:

Deferment/Forbearance

Most federal loans will allow borrowers to put payments on hold through deferment or forbearance when they are experiencing financial hardship. Student loan deferment allows you to pause subsidized loan payments without accruing interest, while unsubsidized loans will still accrue interest.

Student loan forbearance allows you to reduce or pause payments, but interest usually accrues during the forbearance period. Some private lenders do offer forbearance; so check lender policies before refinancing.

Special Repayment Plans

Federal loans offer extended, graduated, and income-driven repayment plans (such as Pay As You Earn, or PAYE), which allow you to make payments based on your discretionary income. It’s important to note that these plans typically cost more in total interest over the life of the loan and that private lenders do not offer these programs.

Potential Student Loan Forgiveness

Some federal student loans are eligible for forgiveness under certain circumstances. Common forgiveness programs are for public service workers or teachers, or those who’ve participated in an income-driven repayment plan for 20 or 25 years, depending on the plan. There is also talk on Capitol Hill of canceling some amount of student loans ($10,000 and $50,000 are figures that have been proposed). Private loans generally do not offer forgiveness.

Potential Advantages of Refinancing Federal Student Loans

Potential Disadvantages Refinancing Federal Student Loans

Interest Rate. Opportunity to qualify for a lower interest rate, which may result in cost-savings over the long-term. Option to select variable rate, if preferable for individual financial circumstances. Loss of deferment or forbearance options. These programs allow borrowers to temporarily pause their payments during periods of financial difficulty.
Adjust Loan Term. Get a lower monthly payment, usually by extending the loan term, which could make loan payments easier to budget for, but may make the loan more expensive in the long term. Federal Repayment Plans. No longer eligible for special repayment plans, such as income-driven repayment plans.
Get a single monthly payment. Combining existing loans into a new refinanced loan can help streamline monthly repayment. Loan Forgiveness. Elimination from federal forgiveness programs, including Public Service Loan forgiveness.

FAQs Around Refinancing Your Federal Loans

Who Typically Chooses Federal Student Loan Refinancing?

Many borrowers who refinance are refinancing graduate student loans since federal unsubsidized and Grad PLUS loans have historically offered less competitive rates than federal student loans for undergraduates.

In order to qualify for a lower interest rate, it’s helpful to show strong income and a history of managing credit responsibly, among other factors. The one thing many refinance borrowers have in common is a desire to save money.

Do I Need a High Credit Score to Refinance Federal Loans?

Generally speaking, the better your history of dealing with debt (illustrated by your credit score), the lower your new interest rate may be, regardless of the lender you choose. While many lenders look at credit score as part of their analysis, however, it’s not the single defining factor. Underwriting criteria will vary and is different from lender to lender, which means it can pay to shop around.

For example, SoFi evaluates a number of factors, including employment and/or income, credit score, and financial history. For full eligibility requirements for student loan refinancing, check here for current eligibility and licensing details.

Are There Any Fees Involved in Refinancing Federal Loans?

Fees vary and depend on the lender. That said, SoFi has no application or origination fees.

Should I Choose a Fixed or Variable Rate Loan?

Most federal loans are fixed-rate, meaning the interest rate stays the same over the life of the loan. When you apply to refinance, you may be given the option to choose a variable rate loan.

Here’s what you should know:

Fixed Rate Refinancing Loans Typically Have:

• A rate that stays the same throughout the life of the loan

• A higher rate than variable rate refinancing loans (at least at first)

• Payments that stay the same over the life of the loan

Variable Rate Refinancing Loans Typically Have:

• A rate that’s tied to an “index” rate, such as the prime rate or LIBOR

• A lower initial rate than fixed rate refinancing loans

• Payments and total interest cost that change based on interest rate changes

• A cap, or maximum interest rate

Generally speaking, a variable rate loan can be a cost-saving option if you’re reasonably certain you can pay off the loan somewhat quickly. The more time it takes to pay down that debt, the more opportunity there is for the index rate to rise — taking your loan’s rate with it.

What Happens If I Lose My Job or Can’t Make Loan Payments for Other Reasons?

Some private lenders offer forbearance — the ability to put loans on hold— in cases of financial hardship. Policies vary by lender, so it’s best to learn what they are before you refinance. SoFi, for example, offers Unemployment Protection to qualifying borrowers who lose their jobs through no fault of their own.

In those cases, SoFi suspends monthly loan payments and provides job placement assistance during the forbearance period. This benefit is offered in three-month periods and capped at 12 months.

For policies on disability forbearance, it’s best to check with the lender directly, as this is often considered on a case-by-case basis.

Do Refinance Lenders Allow Co-Signers/Co-Signer Release Options?

Many private lenders do allow co-signers and some allow co-signer release options. SoFi allows co-signers, but no option for co-signer release for refinanced student loans. However, if you have a co-signer and your financial situation improves, you can apply to refinance the co-signed loan under your name alone.

The Takeaway

Is refinancing the right option for you? It depends on how much you may save (to get an idea, use our student loan refinancing calculator) and whether you qualify for a lower interest rate from a student loan refinance. Another important factor to weigh is how likely you are to use the benefits and protections that come with having federal student loans.

In general, many borrowers refinance federal graduate student loans and PLUS loans, since those have historically offered less competitive rates.

If refinancing feels right for you, you can check your rates in two minutes with SoFi. SoFi’s student refinance loan is a private loan and does not have the same repayment options/benefits offered by federal programs.
You should explore and compare federal and private loan options, terms, and features to determine what is best for you and your situation.

Ready to refinance your student loans? Learn more about the options available with SoFi.


*Guaranteed Rate Match Offer: Your pre-qualified rate, and the rate match program itself, are conditional upon our verification of your application information, including verification of sufficient income to support an ability to repay. Eligible documentation of a competitor’s rate offer, issued within 30 days of your SoFi pre-qualified rate, will be determined at SoFi’s sole discretion and must be for the same loan amount and term. SoFi will only match rate offers for private student loan refinance products. The match will be on the rate, exclusive of all discounts. The $100 Rate Match Bonus is not available to residents of Ohio. To receive the $100 Rate Match Bonus, you must: (1) register and/or apply for a student loan refinance (2) provide documentation of an eligible competitive rate offer; (3) call at (855) 456-SOFI (7634) or chat on SoFi.com and follow the instructions to send in your proof of lower rate; (4) have and provide a valid US bank account to receive bonus; (5) complete Form W-9; (6) and meet SoFi’s underwriting criteria and book a student loan refinance with SoFi. Once conditions are met and the loan has been disbursed, you will receive your Rate Match bonus via automated clearing house (ACH) into your checking account within 30 calendar days. Bonuses that are not redeemed within 180 calendar days of the date they were made available to the recipient may be subject to forfeit. Bonus amounts of $600 or greater in a single calendar year may be reported to the Internal Revenue Service (IRS) as miscellaneous income to the recipient on Form 1099-MISC in the year received as required by applicable law. Recipient is responsible for any applicable federal, state or local taxes associated with receiving the bonus offer; consult your tax advisor to determine applicable tax consequences. Additional terms and conditions may apply. SoFi may discontinue this program at any time.
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 THE END OF JANUARY 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 Lending Corp. or an affiliate (dba SoFi), a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license # 6054612; NMLS # 1121636 . For additional product-specific legal and licensing information, see SoFi.com/legal.

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.
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. A hard credit pull, which may impact your credit score, is required if you apply for a SoFi product after being pre-qualified.
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