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What Is the Student Loan Forgiveness Act?

With Americans facing over $1.6 trillion in combined student loan balances, many borrowers are on the hunt for ways to ease their debt burden. One option you may have seen was called the Obama Student Loan Forgiveness Plan, which according to some websites, was a way for some borrowers to escape their debt for a small fee.

This offer might sound appealing, but there’s one problem: It’s fake. It’s just one example of real ads that scammers have used to target and bilk borrowers.

Fraudsters have used lines like this to lure in their marks, then charged them hefty fees to fill out forms they could’ve filled out themselves for free. In the worst cases, people end up paying for nonexistent services.

Here are some answers to your burning questions on student loan forgiveness, so you can get a better idea of how the program works:

Does Any Student Loan Forgiveness Act Exist?

Yes. The Student Loan Forgiveness Act (SLFA) was a congressional bill introduced in 2012 intended to help borrowers with paying down their student debt.

In addition to capping interest rates for all federal loans, the proposed law would have introduced a repayment plan that allows borrowers to have their loans forgiven after 10 years if they made monthly payments equivalent to 10% of their adjusted gross income. The bill also would have made borrowers in public service jobs eligible for loan forgiveness after five years, instead of 10.

Sound too good to be true? It was. The bill never made it out of committee.

So, What is Obama’s New Student Loan Forgiveness Program?

Even though you may have heard about it, “Obama’s new student loan forgiveness program” doesn’t exist. During his tenure, President Obama did expand the reach of federal loan forgiveness programs. A bill he signed in 2010 allowed students who took out certain federal loans to have their balances forgiven in 20 years, rather than 25.

The same bill capped annual payments at 10% of adjusted gross income, rather than 15%. It also ushered in loan forgiveness after 10 years for borrowers working in qualified public service jobs.

Those changes preceded the introduction of the Student Loan Forgiveness Act (SLFA), and was never officially called “Obama’s Student Loan Forgiveness Program.” Likewise, there is no “new” student loan forgiveness program in Obama’s name, either, obviously.

Then Why Have I Read about Obama’s New Student Loan Forgiveness Program?

Because it’s a term that debt relief companies use to confuse student loan borrowers. The name seems convincing since President Obama did take action on federal student loans and legitimate federal loan forgiveness programs exist. That’s why some borrowers have been duped into paying high fees for pointless—or nonexistent—services. Don’t be fooled: The program isn’t real!

Debt relief companies advertising the “Student Loan Forgiveness Act” or “Obama’s New Student Loan Forgiveness Program” are bad news. Understanding which programs are real and which are fake can help you avoid being scammed—and find legitimate ways to actually have some of your student loans forgiven.

What Are Some Legitimate Options for Student Loan Forgiveness?

No, Obama’s Student Loan Forgiveness Act never passed. However, there are several real options for having federal student loans forgiven.

In fact, in response to the coronavirus epidemic, the CARES Act suspended federal student loan interest and payment suspension through September 2020.

The pending HEROES Act (narrowly passed by the House in mid-May, 2020) proposed $10,000 each of federal student loan AND private student loan forgiveness initially but may have more stringent eligibility requirements if passed by the Senate. While it’s definitely something to keep an eye on, here are some existing programs that may be helpful.

Income-Driven Repayment Plans

The government currently offers four income-driven repayment plans for federal student loans that can forgive borrowers’ balances after 20 or 25 years.

There are eligibility requirements, like making required monthly payments for a designated period of time, which are tied to a person’s income. The plans a borrower qualifies for will depend on the types of loans they have and when they took them out.

These student loan repayment plans are based on borrowers’ discretionary income, or the amount they earn after subtracting necessary expenses like taxes, shelter, and food. Here is a brief overview of each one:

•   Revised Pay As You Earn Repayment Plan (REPAYE): Borrowers’ monthly payment is typically 10% of their income. If all loans were taken out for undergraduate studies, they’ll make payments for 20 years; if they also took out loans for graduate or professional studies, they’ll make payments for 25 years. At the end of 20 or 25 years, the remaining amount will be forgiven.
•   Pay As You Earn Repayment Plan (PAYE): People pay up to 10% of their discretionary income each month, but they never pay more than they would under the 10-year Standard Repayment Plan. After 20 years, the remaining debt will be forgiven.
•   Income-Based Repayment Plan (IBR): People will pay 10% of their discretionary income for 20 years if they became a new borrower on or after July 1, 2014, and 15% for 25 years if they were a borrower before July 1, 2014. They will never pay more than they would under the 10-year Standard Repayment Plan. Borrowers’ debt will be forgiven after either 20 or 25 years.
•   Income-Contingent Repayment Plan (ICR): Borrowers choose whichever repayment plan is cheaper—20% of their discretionary income or what they would pay if they spread their payments out equally over 12 years. Any remaining balance will be forgiven after 25 years.

These four plans are designed to help borrowers make monthly payments they can actually afford. Some people may assume that an income-driven repayment plan that results in forgiveness is best for them, when in reality, this might not be the case.

Note that if the remaining balance of your loan is forgiven, you may be responsible for paying income taxes on that amount.

A repayment calculator can be a useful tool to help determine enrolling in an income-based forgiveness program that would be beneficial. After a borrower plugs in their information, they could discover that they would pay less, in the long run, should they enroll in, say, the government’s Standard Repayment Plan.

Public Service Loan Forgiveness

Borrowers can have their loans forgiven in 10 years under the Public Service Loan Forgiveness (PSLF) program. To potentially qualify, they must work full-time for a qualified government organization, nonprofit, or certain public-interest employers, such as a public interest law firm, public library, or public health provider.

Over those 10 years, borrowers must make 120 qualifying monthly payments, and the payment amount is based on their income. Those 120 payments don’t necessarily have to be consecutive. For example, let’s say a borrower works for the local government for three years, then switches to the private sector for a year.

If they decide to go back into public service after that year, they can pick up where they left off with payments rather than start all over.

The PSLF program can be difficult to qualify for, but some people have successfully enrolled. As of March 2020, 145,758 borrowers had applied for the program. Only 3,174 applications were accepted. 171,321 applications had been rejected, and the remaining applications were still processing.

Teacher Loan Forgiveness Program

Qualifying teachers can also get up to $17,500 of their federal loans forgiven after five years teaching full-time under the Teacher Loan Forgiveness Program. The American Federation of Teachers has a searchable database of state and local loan forgiveness programs.

To qualify for the full amount, teachers must either teach math or science at the secondary level, or teach special education at the elementary or secondary level. Otherwise, borrowers can have up to $5,000 forgiven if they are a full-time teacher at the elementary or secondary level.

NURSE Corps Loan Repayment Program

Health professionals have access to other loan assistance programs. The federal government’s NURSE Corps Loan Repayment Program pays up to 85% of eligible nurses’ unpaid debt for nursing school.

To receive loan forgiveness, borrowers must serve for two years in a Critical Shortage Facility or work as nurse faculty in an accredited school of nursing.

After two years, 60% of their nursing loans will be forgiven. If a borrower applies and is accepted for a third year, an additional 25% of their original loan amount will be forgiven, coming to a total of 85%.

Borrowers interested in the NURSE Corps Loan Repayment Program can read about what qualifies as a Critical Shortage Facility or an eligible school of nursing before applying.

Indian Health Services’ Loan Repayment Program

The Indian Health Services’ Loan Repayment Program will repay up to $40,000 in qualifying loans for doctors, nurses, psychologists, dentists, and other professionals who spend two years working in health facilities serving American Indian or Alaska Native communities.

Once a borrower completes their initial two years, they may choose to extend their contract each year until their student loans are completely forgiven.

In 2019, the Indian Health Service’s budget allows for up to 384 new awards for two-year contracts, and around 392 awards for one-year contract extensions. The average award for a one-year extension is $24,840 in 2019.

Even those who aren’t typical medical professionals, like doctors or nurses, may still qualify. The IHS has also provided awards to people in other fields, such as social work, dietetics, and environmental engineering.

The National Health Service Corps

The National Health Service Corps offers up to $50,000 for loan repayment to medical, dental, and mental health practitioners who spend two years working in underserved areas.

Loan forgiveness programs are generally available for federal loans, as opposed to private ones. In rare cases, such as school closure while a student is enrolled or soon after, they could qualify to have their loan discharged or cancelled.

Health Professional Shortage Areas (HPSAs) include facilities such as correctional facilities, state mental hospitals, federally qualified health centers, and Indian health facilities, just to name a few. Each HPSA receives a score depending on how great the site’s need is.

Scores range from 0 to25 for primary care and mental health, and 0 to 26 for dental care. The higher the score, the greater the need.

Borrowers have the option to enroll in either a full-time or part-time position, but people working in a private practice must work full-time. Full-time health professionals may receive awards up to $50,000 if they work at a site with a score of at least 14, and up to $30,000 if the site’s score is 13 or below. Half-time employees will receive up to $25,000 if their site’s score is at least 14, and up to $15,000 if the score is 13 or lower.

Interested in learning more about your options for student loan repayment? Check out SoFi’s student loan help center to get the answers you need about your student debt. The help center explains student loan jargon in terms people can understand, provides loan calculators, and even offers student loan refinancing to hopefully land borrowers lower rates.

Refinancing student loans through a private lender can disqualify people from enrolling in federal loan forgiveness programs and loan forgiveness programs, and disqualifies them from CARES Act forbearance and interest rate benefits. However, certain borrowers who have taken out private student loans or.

Check out SoFi to see how refinancing your student loans can help you.


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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 DECEMBER 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.
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SoFi loans are originated by SoFi Lending Corp (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.

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How to Pay for Grad School

Signing on for grad school is a big decision, but one more and more students are making it each year. In 2019, more than 820,000 students graduated with a masters degree in the United States.

The price of grad school, however, remains high. Students who graduate with a master’s degree carry an average debt of $84,300. Once you’ve decided on a master’s degree, you have to spend months meticulously assembling your applications and crossing your fingers for good news. But perhaps the biggest challenge in planning for grad school is figuring out how exactly you’re supposed to pay for it.

Luckily, there are numerous ways to finance your advanced degree (even ways without taking out loans), and investing in graduate education is frequently worth it; the right degree has the potential for a massive return on investment.

The complicated part is determining what options are available to you and figuring out how to hack your way through grad school with the smallest bill. If you’re considering going to grad school, we’ve laid out some key financing options.

Take a deep breath, remember that education is a reward unto itself, and read on to learn how to formulate a plan to pay for your graduate education.

Fill Out Your FAFSA

If you received financial aid or federal student loans during undergrad, you’re probably familiar with the Free Application for Federal Student Aid, usually called by its friendlier name: the FAFSA®. The FAFSA is an application to determine what types of federal financial assistance you might qualify for.

Many students who are applying for grad school are considered “independent,” for FAFSA purposes. This means that even if your mom is supplementing your monthly groceries with weekly homemade lasagnas and you’re still using your parents’ password to binge watch Netflix, you may not need to include their financial information on your FAFSA application.

Assess Your Federal Options

Your FAFSA will determine your eligibility for federal student loans, federal work-study, and federal grants. In addition, your college may use your FAFSA to determine your eligibility for aid from the school itself. Here’s a closer look at the three federal options.

Federal Student Loans

Federal student loans are one popular way that students pay for grad school. Federal student loans allow you to borrow money from the federal government in order to finance your education.

Depending on the loan type, payments on these student loans can be deferred until after graduation and sometimes qualify you for certain tax deductions (like taking a tax deduction for interest paid on your student loans). There are different types of federal student loans, and each type has varying eligibility requirements and maximum borrowing amounts.

Some federal loans offer loan forgiveness after a certain number of payments and meeting certain stringent qualifications—like working in certain public sector or non-profit jobs. (Meaning, it’s currently difficult to qualify for loan forgiveness, so it’s not something to bank on—more on that later in this post.)

Federal Grants

Unlike student loans, federal grants do not need to be repaid. It may be possible to receive some grant funding to help you pay for graduate school. Filling out the FAFSA is the first step to determine whether you’re eligible. You can find the full list of federal student grant programs here .

Federal Work-Study Program

Just like undergrad, you might be eligible for work-study jobs during grad school. Eligibility for work-study jobs is also based on your FAFSA. These jobs often pay you to work at your university for a set number of hours.

They can oftentimes be doubly beneficial because in addition to earning money, you can sometimes secure a work-study position that is relevant to your field of study. You usually have to go through an application process in order to secure a work-study job.

Work-study is a type of financial aid available to students who qualify based on their financial need. You can apply for the program when you fill out your FAFSA. If you qualify for work-study it will be part of your federal financial aid award.

Even if you receive your work-study award you may still have to find a job that qualifies. Many schools have online databases where you can look for and apply to jobs.

Typically, financial aid is awarded on a first-come, first served basis, so the earlier you file your FAFSA the better chance you’ll likely have of securing work-study as a part of your financial aid award.

Figuring out What Your University Can Offer You

After narrowing down your federal options, make sure to consider what university-specific funding might be available. Many schools offer their own grants, scholarships, and fellowships. Your school’s financial aid office likely has a specific program or contact person for graduate students who are applying for institutional assistance.

Many schools will use the FAFSA to determine what, if anything, the school can offer you, but some schools use their own applications.

Although another deadline is the last thing you need, seeking out and applying for school-specific aid can be one of the most successful ways to pay for grad school: Awards can range from a small grant to full tuition remission.

Thinking Outside the Box

There are a variety of lesser-known ways to pay for grad school out there. They sometimes take extra research and effort to find, but any additional funds are worth it. Here are some of the ways to pay for grad school that you just might find hiding under a rock.

Employer Tuition Reimbursement

It might sound too good to be true, but some employers are happy to reimburse employees for a portion of their grad school costs. Employers that have tuition reimbursement plans set their own requirements and application process.

Make sure to consider any constraints your employer puts on their tuition reimbursement program, including things like staying at the company for a certain number of years after graduation or only funding certain types of degree programs.

If your employer doesn’t already have a program in place, don’t despair. It is almost always worth asking your company if they offer any benefits to employees pursuing a higher degree.

Some employers might offer professional development funding that can be used to help you pay for school or let you keep a more flexible work schedule to accommodate your classes.

Becoming an In-State Resident

If you’re applying for graduate school after taking a few years off to work, you might be surprised to find how costs have changed since your undergraduate days. Graduate students interested in a public university can save tens of thousands of dollars by considering a university in the state they already live in.

Each state has different requirements for determining residency, so if you are planning on relocating to attend grad school be sure to look into the requirements for the state the school you are planning to attend.

Certain states require only one year of full-time residency before you can qualify for in-state tuition, while others require three years. During that time, you could work as much as possible to save money for graduate school. More savings could mean fewer loans, and taking on less debt is definitely appealing to most grad students!

Becoming an RA

You probably remember your undergrad Resident Advisor (RA). They were the ones who helped you get settled into your dorm room, showed you how to get to the nearest dining hall and yelled at you for breaking quiet hours.

RAs may be under-appreciated, but they’re often compensated handsomely for their duties. Students are typically compensated for a portion or all of their room and board. Some schools even include a meal plan and sometimes even reduced tuition or a stipend.

The compensation you receive will depend on the school you are attending, so check with your residential life office to see what the current RA salary is at your school.

While there are plenty of perks to being an RA, don’t underestimate the responsibility that comes with the position. It can be a time-intensive position, requiring round-the-clock supervision.

Still, the perks of being an RA may be measured in saving money each year. By having a free place to live and a free meal plan, you could save more and eat a diet that doesn’t just consist of ramen and stale pizza. RAs rarely have to share a room, so you’ll also have more privacy than you would in an apartment with roommates.

Because RAs receive so many benefits, competition for the job can be fierce and selective. Polish your resume and hone your interview skills before applying. The difference between working as an RA and having to take out loans for rent could affect your life for years to come.

Finding a TA Position

If you’re a graduate student, you can often find a position as a Teaching Assistant or Research Assistant for a professor. The position will be related to your undergrad or graduate studies and often requires grading papers, conducting research, organizing labs or prepping for class. You probably had several TAs during your undergraduate classes and didn’t even realize they were students too.

TAs can be paid with a stipend or through reduced tuition depending on which school you attend. Not only can the job help you to potentially avoid student loans, but it also gives you networking experience with people in your field.

The professor you work with can recommend you for a job, bring you to conferences, and serve as a reference.
Being a TA may help boost your resume, especially if you apply for a Ph.D. program or want to be a professor someday. According to PayScale.com, the average TA earns around $13 an hour .

Similarly to a job as an RA, securing a TA position can be competitive. Apply early and get to know the professors who will make the decisions.

Applying for Grants and Scholarships

Do you remember all those random essay contests and company scholarship applications your classmates fired off senior year of high school? Well, grad school is no different. There are private scholarships out there, you just need to find them.

Scholarship for the unusually tall? Check. Essay contest on automatic sprinkler systems? You betcha. In addition to the weird and wonderful one-off scholarships, there are industry-specific scholarships that are intended to help graduate students pursuing your specific field of study.

An easy way to search for scholarships is through one of the many websites that gather and tag scholarships by criteria. Keeping all your grad school and FAFSA materials handy means that you’ll have easy access to the information you’ll need for scholarship applications.

As we mentioned at the top of this post, grad students have to submit the Free Application for Federal Student Aid (FAFSA®) in order to potentially qualify for federal grants—just as undergrads do. Grants and scholarships are a great source of financing for graduate school because they don’t need to be repaid.

Grants are available from both the federal and state governments, as well as from the university itself (again, many universities use the FAFSA to determine their own institutional aid, so filling it out is essential). Some companies provide their own grants or scholarships, and many private organizations sponsor grants.

It never hurts to apply for a grant or scholarship, no matter how small it might seem. Think of it this way—every dollar received is one less dollar you need to borrow or earn.

Private Student Loans

If you’re not eligible for scholarships or grants, or you’ve maxed out how much you can borrow using federal student loans, you can apply for a private student loan to help cover the cost of grad school.

Private graduate school loan rates and terms will vary by lender, and some private loans have variable interest rates, which means they can fluctuate over time. Doing your research with any private lender you’re considering is worth it to ensure you know exactly what a loan with them would look like.

Make sure to consider several different types of private student loan lenders before you make your decision. Private student loans are one area where it pays to be a savvy shopper. You’ll want to consider origination fees, payment schedules, and interest rates.

Federal Student Loan Forgiveness Programs

Federal student loan forgiveness programs either assist with monthly loan payments or can discharge a remaining federal student loan balance after a certain number of qualifying payments.

One such program is the Public Service Loan Forgiveness (or PSLF) program. The PSLF program allows qualifying federal student loan borrowers who work in certain public interest fields to discharge their loans after 120 monthly, on-time, qualifying payments.

Additionally, some employers offer loan repayment assistance to help with high monthly payments. While loan forgiveness programs don’t help you with the upfront cost of paying for grad school, they may offer a meaningful solution for federal student loan repayment. (Unfortunately, private student loans don’t qualify for these federal programs.)

Refinancing Your Undergraduate Loans

If you currently have loans from your undergraduate degree, you may be able to refinance them to get a lower monthly payment by extending your repayment term length. That can free up more money to put towards grad school, although that usually means you’ll pay more in interest.

Or refinancing student loans at a lower interest rate can help you pay less interest over the loan’s lifetime. That may not seem like such a big deal now, but could come in handy when you’re saving up for a down payment on your first house.

Switching to a lower monthly payment can give you more flexibility in your budget, which is perfect for a time when money is tight. Once you finish grad school, you could start making extra payments and repay your loans ahead of schedule.

We get it: Going back to school, and possibly taking on more debt, is nerve-wracking. You’re making a big investment in your education, but the good news is there are grants and scholarships that you won’t have to pay back.If you need more funding to cover the cost, there are federal and private student loans.

Taking the time to find the best combination of loans and funding is crucial. It might sound scary, but taking it one step at a time can help you to assess all the options available and make the best financial decision for you.

SoFi is a leader is the student loan space—offering both private student loans to help pay your way through school, or refinancing options to help you pay off your loans faster.

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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 DECEMBER 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.

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SoFi loans are originated by SoFi Lending Corp (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.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
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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Understanding Student Loan Amortization

When deciding on a student loan repayment schedule, some folks might think the one with the lowest possible monthly payment is best.

What these same folks might not realize is that often the lowest monthly payment means the loan is stretched out over a longer time frame, which results in the borrower paying more in interest than they otherwise would have with a shorter loan term and a higher monthly payment.

Why does this happen? Because of a process called amortization. Amortization is the process of paying back a loan on a fixed payment schedule over a period of time.

With a loan, such as a student loan, each monthly payment is the same, but a calculation is done to determine what proportion of each payment is allocated to a loan’s interest and to its principal balance. This schedule of payments is called a student loan amortization schedule.

You may have heard people complain about how much of a loan payment goes toward interest during the beginning stages of a loan. This is what they’re referring to; the process by which interest is spread out over the life of the loan according to an amortization schedule.

Over the course of making monthly payments on your student loans, the payments are often applied primarily to the interest especially toward the beginning of your repayment timeline.

We’re going to get into some of the nitty-gritty amortization info, but before we go there, we just want to be straight with you: This is an incredibly complex topic.

We’re going to try to break it down the best we can, but please understand that 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 always recommends that you speak to a professional about your unique situation.

Below we’ll do our best to cover how and which loans amortize, take a closer look at student loan amortization, and explore some ways a student loan borrower might be able to lower the amount that they’ll pay in interest over the course of their loan.

Exploring Amortization

First, it’s important to understand how to calculate the cost of a loan. You’ll need to know these three variables:

  1. The value of the loan, also known as the principal

  2. The interest rate and annual percentage rate (APR)

  3. The duration, or term, of the loan (usually given in months or years)

Using this information, it is possible to determine both the monthly payment on the loan and the total interest paid on the loan. An online student loan interest calculator can help you figure this out.

The next step is to determine how much of each monthly payment is going toward both interest and principal. That’s when the amortization schedule comes into play. You can calculate amortization using this calculator to get an idea. But we want to understand what’s going on behind the calculator, and it helps to understand that amortization happens only on “installment” loans—and all student loans are installment loans.

There are two types of loans: installment loans and revolving credit. A mortgage, student loan, or car loan are all examples of installment loans. With an installment loan, the borrower is loaned an amount of money (called the principal) to be paid back over a designated amount of time, with interest.

Revolving credit, on the other hand, is not a loan disbursed in one lump sum, but is a certain amount of credit to be used as the borrower pleases, up to a designated limit. A credit card and a line of credit are forms of revolving credit. A borrower’s monthly payment is determined by how much of the available credit they are using at any given time; therefore, minimum payments can change from month to month.

Student Loan Amortization Examples

Because student loans are an installment loan—meaning a specific amount of money is disbursed to the borrower—student loans are amortized. Parts of each payment are applied to both the loan’s principal and its interest. But at the beginning of the loan, a much larger proportion is typically allocated to interest on student loans, per the lender’s requirements.

Due to the way compounding works, the effect is more dramatic the longer the length of the loan. Take, for example, a $30,000 loan at 7% interest rate amortized over a 10-year repayment period.

The borrower’s monthly payment should be around $348. Each year, the borrower will pay $4,180 total towards their loan. This doesn’t change, although the proportion that is allocated towards principal and interest does change.
(All examples calculated above were from using this student loan calculator. Example calculations below are from Bankrate’s calculator .)

Example Amortization Schedule Student Loan $30,000, 7% interest over 10 years starting January 2019

Date

Interest Paid

Principal Paid

Balance
Jan, 2019 $175 $173 $29,827
Feb, 2019 $174 $174 $29,652
Mar, 2019 $173 $175 $29,477
Apr, 2019 $172 $176 $29,301
May, 2019 $171 $177 $29,123
Jun, 2019 $170 $178 $28,945
Jul, 2019 $169 $179 $28,765
Aug, 2019 $168 $181 $28,585
Sep, 2019 $167 $182 $28,403
Oct, 2019 $166 $183 $28,221
Nov, 2019 $165 $184 $28,037
Dec, 2019 $164 $185 $27,852
2019 $2,032 $2,148 $27,852
           
2020 $1,877 $2,303 $25,852
           
2021 $1,710 $2,470 $23,079
           
2022 $1,532 $2,648 $20,431
           
2023 $1,340 $2,840 $17,591
           
2024 $1,135 $3,045 $14,546
           
2025 $915 $3,265 $11,281
           
2026 $679 $3,501 $7,780
           
2027 $426 $3,754 $4,026
           
Jan, 2028 $23 $325 $3,701
Feb, 2028 $22 $327 $3,374
Mar, 2028 $20 $329 $3,045
Apr, 2028 $18 $331 $2,715
May, 2028 $16 $332 $2,382
Jun, 2028 $14 $334 $2,048
Jul, 2028 $12 $336 $1,712
Aug, 2028 $10 $338 $1,373
Sep, 2028 $8 $340 $1,033
Oct, 2028 $6 $342 $691
Nov, 2028 $4 $344 $346
Dec, 2028 $2 $346 $0
2028 $154 $4,026 $0

Using this estimated example, during the first year, the borrower’s monthly payments would be made up of about half interest and half principal. At the end of the year, the hypothetical borrower has paid $4,180 towards their student loan, and $2,032 of that went to interest, while $2,148 went to paying down the principal. The loan is now valued at $27,852 (that’s $30,000 minus $2,148).

With each passing month and year paying down debt, more of each payment is allocated towards the principal. By the ninth and final year, the imaginary borrower above pays only $154 to interest and $4,026 to principal.
(P.S., we got this rough estimation using the amortization calculator we mentioned above.)

Let’s look at another example of a hypothetical student loan amortization schedule, but along a longer timeline, such as twenty years. It should be noted that a twenty-year payback period isn’t “standard” for federal student loans, but the important takeaway here is the impact of time on amortization calculations.

Here’s a table with the results of a hypothetical $60,000 student loan at a 7% fixed rate, paid back over 20 years.

Amortization Schedule Student Loan $60,000, 7% interest over 20 years:

Date

Interest

Principal

Balance
Jan, 2019 $350 $115 $59,885
Feb, 2019 $349 $116 $59,769
Mar, 2019 $349 $117 $59,652
Apr, 2019 $348 $117 $59,535
May, 2019 $347 $118 $59,417
Jun, 2019 $347 $119 $59,299
Jul, 2019 $346 $119 $59,179
Aug, 2019 $345 $120 $59,060
Sep, 2019 $345 $121 $58,939
Oct, 2019 $344 $121 $58,817
Nov, 2019 $343 $122 $58,695
Dec, 2019 $342 $123 $58,573
2019 $4,155 $1,427 $58,573
           
           
           
Jan, 2038 $31 $434 $4,942
Feb, 2038 $29 $436 $4,506
Mar, 2038 $26 $439 $4,067
Apr, 2038 $24 $441 $3,626
May, 2038 $21 $444 $3,182
Jun, 2038 $19 $447 $2,735
Jul, 2038 $16 $449 $2,286
Aug, 2038 $13 $452 $1,834
Sep, 2038 $11 $454 $1,379
Oct, 2038 $8 $457 $922
Nov, 2038 $5 $460 $462
Dec, 2038 $3 $462 $0
2038 $206 $5,376 $0

In this example, each monthly payment for the 20-year duration is $465.18 (again, rounded down to $465 for simplicity’s sake above). In January 2019, the first month of the first year of the loan, $350 is paid towards interest, and just $115 is paid towards the principal. That’s less than 25% of the total payment, compared to 50% in the previous example.

By the end of the hypothetical loan, hardly any of the payment is allocated towards interest, and the majority is applied to the principal. In the very last monthly payment in the last year, only $3 goes towards interest and $462 to principal. In the last year, only $206 total goes towards interest versus $4,155 in the first year.

If you’re interested in expediting your loan payoff, it may inspire you to play around with a student loan repayment calculator to get your own estimate of just how much you could save on interest if you shorten your loan term.

Alternative Repayment Plans and Amortization

Some borrowers may be using one of the alternate repayment plans for federal student loans, which are generally referred to as “income-driven repayment plans.” There are several different options, including Pay As You Earn (PAYE) and Income-Driven Repayment (IDR), but all of these similar repayment plans use your monthly income and family size to determine what you’ll owe each month.

Depending on discretionary income and family size, monthly payments are generally lower than with the standard, 10-year repayment plan because repayment is stretched out over 20 or more years.

Not only will you likely pay more in total interest over the course of a longer loan, but it is possible that your payments will dip into what is called negative amortization. Negative amortization happens when your monthly payment is low enough that it doesn’t even cover the interest for that month.

When this happens, it is possible that this unpaid interest will be capitalized, which means that it will be added to the principal balance of the loan. All interest calculations thereafter will be made on the new principal balance, which means that the borrower could be paying interest on top of those previously unpaid interest payments.

This is not ideal, of course, but utilizing an income-driven repayment plan is a much better option than missing payments altogether or defaulting on a federal student loan. Using an income-driven repayment plan is also necessary if the borrower plans on utilizing the Public Service Loan Forgiveness (PSLF) program.

Managing Student Loan Amortization

If an amortized student loan payment seems frustrating to you, that’s because it is. One way to alleviate the pain is to pay your student loans back faster than the stated term.

Making additional payments on your loan can do a lot to lower what you’ll owe in interest, because knocking out the interest can prevent it from capitalizing on your loan. Furthermore, paying off the loan before the stated term can allow you to pay less interest over the life of the loan.

If you opt to pay more than your minimum payments or consistently make additional payments on your loans, it’s a good idea to let your lender know that the additional payment is to be applied to the principal of the loan, not the interest, so you can be sure your extra payments are working towards lowering the principal amount you’re paying interest on.

If you are mailing a check, you might want to include a note. If you’re making a payment online, you can call your loan service provider to make sure that they apply the money correctly.

For borrowers with multiple student loans who want to expedite their debt repayment, it can be hard to know where to start. If your goal is to reduce the overall amount of interest you owe , you might want to consider the “debt avalanche” method of debt repayment.

Using this method, you would choose the student loan debt with the highest interest rate and work on “attacking” it first. You would do this while making the minimum payment on all other loans or sources of debt. After the highest interest rate loan is paid off, redirect any additional funds you were paying toward the first loan to the loan with the next highest interest rate.

Graduates can also consider refinancing their loans. When you refinance, you’re essentially paying off your old loan or loans with a new loan from a private lender, like SoFi. Ideally, you refinance in order to get a lower rate on the loans than you currently have.

Student loan refinancing companies are generally able to offer a lower interest rate or more favorable loan terms to graduates who have met their lending criteria, which may include having a strong financial history and income among other things.

It’s usually worth checking to see if you qualify for a lower rate than you’re currently paying. With refinancing, you’re also usually able to adjust other aspects of your loans, such as the repayment schedule. You may be able to extend it, if you’re looking for lower monthly payments, or shorten it, if you want to pay less in interest—and outsmart amortization—on your loan.

When deciding to refinance, borrowers should consider their current financial situation and any benefits their federal student loans currently have, such as an income-driven repayment plan or Public Service Loan Forgiveness option. When you refinance with a private lender, you will lose access to these federal programs.

Want to spend more money on the things you love, and less on student loan interest? See if refinancing your loans with SoFi is right for you.


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 DECEMBER 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 (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.

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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Student Loan Grace Periods: What You Need to Know

With graduation comes a fair share of celebration and changes. From grad parties to finding your first job to possibly a major move, life moves pretty fast during that first year out of school. While you’re busy setting up a new life, you may not even have time to think about those student loans you might’ve taken out for school.

When it comes to student loans, however, it’s not as easy as out of sight, out of mind. You might be busy setting up the next phase of your life, but don’t forget that your loan repayment will come calling, and likely sooner than you think.

But one possible avenue for relief is that many student loans come with a grace period. A student loan grace period can be a helpful tool—especially if you don’t have a steady source of income after college—but it’s important to pay attention to the specifics of your student loans so that you understand if you have a grace period, how long your grace period is, and what it entails.

What is a Student Loan Grace Period?

You might not have to pay your federal student loans back immediately after you graduate college. Depending on the loan type, former students may be given a six-month grace period before loan repayment starts. This “grace period” gives new graduates some breathing room before they start making student loan payments.

Without a grace period, you’d need to pay student loans back immediately. This could be challenging if you’re not yet on your feet with a steady income, post-college.

Remember, it’s not just graduation that kicks off the grace period. Grace periods for federal student loans can apply to anyone who has graduated, left school entirely, or dropped below half-time attendance.

If you have one, a grace period won’t magically end one day without notice and leave you scrambling to find out where to send your monthly loan payment. Your student loan servicer is obligated to provide you with the following information:

•   Your loan repayment schedule.
•   The date of your first payment.
•   The number of payments.
•   The frequency of payments.
•   The amount of each payment.

A grace period can provide an opportunity for borrowers to plan for the future. How you use your grace period can make a difference in your ability to pay down your student loans later on. Establishing yourself in the workforce and earning a regular income can be helpful, but try not to worry so much if that doesn’t happen immediately after college.

Finding a job after college might require a bit of hustle. Some people may find themselves filling out countless job applications, networking, participating in a post-graduation internship, or relying on side hustles to start earning money.

As you prep your resume and polish off your interview skills, it can be tempting to push the thought of student loans to the back burner. But your grace period can provide a valuable reprieve that could give you a bit of breathing room to sort through financial obligations and determine a repayment plan.

Here are a few more ins and outs of student loan grace periods so you can enter the “real world” with your best foot forward.

You May Have a Longer Student Grace Period Than You Think

Not all grace periods fall within the six-month range. Your grace period could be longer than six months or you might not have a grace period at all. It all depends on your lender and the types of loans you have.

Direct Unsubsidized and Direct Subsidized student loans have a six-month grace period. Interest accrues from the time the loan is disbursed and will continue to accrue during the grace period on unsubsidized loans. Borrowers with subsidized loans generally will not be responsible for accrued interest during the grace period.

The grace period on Federal Perkins loans can vary. The Perkins loan program expired in 2017. Borrowers with existing Perkins loans can check with their loan servicer or the school that made the loan to get more information about the repayment plans available to them.

Federal PLUS loans for graduate or professional students don’t have a grace period, but graduate or professional student borrowers receive an automatic six-month deferment when they drop below half-time enrollment, leave school, or graduate. During this deferment, borrowers are not required to make payments but interest will continue to accrue.

Parents who borrowed PLUS Loans to pay for their child’s education are able to request a six-month deferment when their child drops below half-time enrollment, leaves school, or graduates.

Some federal student loan grace periods can be extended even longer, for active duty military for instance.
What about private student loans? Typically, private lenders don’t offer grace periods, but options will vary from lender to lender. Some lenders, however, may offer a six-month grace period.

For example, SoFi will honor the first six months of any existing grace period of the loans you refinance. With other lenders, payments may begin as soon as the loan is disbursed. The terms of the loan should specify what grace period, if any, is available.

You Might Not Owe Interest During Your Student Loan Grace Period

A grace period can be a welcome break from making payments, and on some loans, hitting pause won’t lead to additional interest. But depending on the type of loan you have, this isn’t always the case. Certain loans will continue to accrue interest during the grace period.

Direct Subsidized Loans (sometimes known as Stafford Loans), Grad PLUS, and Perkins loans don’t accrue interest during the grace period. That means that you won’t have six months’ worth of interest added to the life of your loan that accrued during your grace period.

But if you have Direct Unsubsidized Loans, your interest will begin to accrue when the loan is disbursed and will continue to accrue while you are in school and during your grace period.

By the time you’re ready to make your first payment, your balance will be slightly higher than it was when you took out your loan (unless you’ve made interest-only payments).

At the end of the grace period, any unpaid interest is capitalized on Direct Subsidized loans (same goes for Grad PLUS loans and their deferment period). This means that the accrued interest is added to the total outstanding balance of these loans.

Interest payments calculated after this will use the new, capitalized balance. This means you’d be paying interest on top of interest, unless you make interest payments of course! For private loans, check with the specific lender regarding their policy.

Extending Your Student Loan Grace Period is Possible (in certain situations)

There are certain situations in which your grace period on a federal student loan may be extended. These depend on the loan type, but generally include:

•   If you’re serving in the military and are deployed on active duty for more than 30 days before your grace period ends. In that case, you’ll receive a reinstated six month grace period when you return from active duty.
•   If you re-enroll in school even part-time before your student loan grace period ends, you won’t be required to pay your student loan back while in school. When you finish or drop below half-time attendance, you’ll receive a six month grace period.

Consolidating your federal student loans with a Direct Consolidation loan during the grace period will eliminate the time remaining on the grace period. You’d then be responsible for repaying the Direct Consolidation when it’s disbursed. Generally, the first payment is due about two months after the loan is disbursed.

There are options available to federal student loan borrowers who might want to pause repayments after the grace period ends. During certain periods of financial hardship, borrowers might consider applying for deferment or forbearance. These options allow borrowers to temporarily pause payments on their loans.

Depending on the type of loan you have, interest may or may not accrue during deferment. You can take a look at this article for an in-depth explainer of the differences between deferment and forbearance.

Choosing How to Handle Your Student Loan Grace Period

If you decide that the pros of the student loan grace period outweigh the cons, you could use that payment-free time to start setting aside funds for later. During your grace period you can:

•   Use a student loan calculator to estimate your monthly payments.
•   Work with your lender/servicer to see what your actual payments will be.
•   Make it a goal to try and put away at least a partial amount each month.

If you get used to living on a budget that doesn’t include your student loan payment, you may be setting yourself up for future stress. Instead, you could consider:

•   Waiving the grace period and starting student loan payments immediately. If you have enough wiggle room in your budget, you can start paying your loans down immediately. Since your loan wouldn’t be accruing unpaid interest during the grace period, it could lead to savings in the long term.
•   Setting aside a part of your monthly paycheck to start paying down the interest. If your budget doesn’t allow for monthly payments yet, you could try saving what you can to pay off some of the interest on your student loans during the grace period. Even a small contribution can make a difference.
•   Making payments that even just cover your loan’s interest during that time could help you avoid having a higher balance than when you graduated (due to pesky capitalized interest, discussed above).

Finding your federal student loans can be a challenge in and of itself. If you want to track down your loan to confirm the grace period or make interest-only payments during it, you can take a look at the National Student Loan Data System (NSLDS).

This site is operated by the U.S. Department of Education and can provide a comprehensive overview of a borrower’s federal student loans, including the loan servicer assigned to each loan.

Grace periods are all about giving you some financial space. If you have the room in your budget to make interest-only payments during the grace period, it could help keep you on track to pay off your loans even sooner. It’s a small sacrifice now that could potentially make a difference later.

But if your budget doesn’t allow for any payments during your grace period, don’t sweat it. Your grace period is there for a reason, to give you some breathing room while you sort things out financially.

Some Ways Student Loan Refinancing Can Help

Unlike using a Direct Consolidation Loan, refinancing your student loans doesn’t automatically mean that you’ll have a shorter grace period.

Refinancing is when a private lender pays off your loans and gives you a brand new loan. Refinancing with a private lender could potentially result in a lower interest rate or more favorable terms.

If you are managing a number of student loans, refinancing may help to simplify your life by giving you one loan to pay, instead of multiple loans to remember.

However, not all private lenders will honor your federal student loan grace period—if you choose to refinance during your grace period, you may have to begin repayments as soon as the refinance loan is disbursed.

Some private lenders will still honor your six-month grace period, and SoFi is one of them. If you want to get ahead of those student loan payments, and are searching for a lower rate and more flexible terms, refinancing might be worth considering.

A grace period can be a helpful time to pause and consider your finances. As a recent graduate, you probably have a lot on your plate as you find your footing in your career and figure out how to become an adult in the working world. Part of adulting might include creating a student loan repayment plan.

If you’re considering refinancing, take a look at SoFi. You can find out if you prequalify in a few minutes.
An important thing to note: Refinancing your federal student loans with a private lender will eliminate them from federal benefits and protections—like deferment, forbearance, and income-driven repayment plans—so refinancing won’t be right for everyone.

Don’t let your grace period’s end catch you off guard. If you plan ahead, and plan for future payments, you could end up on more solid financial footing.

Thinking about refinancing, but don’t want to eliminate the loan’s grace period? SoFi honors the first six months of any existing grace periods on refinanced loans. Find your rate today!


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 DECEMBER 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.

SoFi Loan Products
SoFi loans are originated by SoFi Lending Corp (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.

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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A Guide to Student Loan Interest Rates in 2020

Student loans and interest rates go hand in hand. Millions of Americans borrow student loans every year to pay for educational pursuits. Approximately 45 million borrowers currently hold over $1.6 trillion in student loan debt .

What does 2020 and beyond have in store for student loan interest rates? That depends on the type of student loan. Federal student loan interest rates are set differently than private student loan interest rates.
Here’s what you should know about what could happen to federal and private student loan interest rates in 2020 and 2021.

Federal Student Loan Interest Rates

Interest rates on federal student loans are set by the government. Each spring, interest rates on federal loans for the coming academic year are set based on the 10-year Treasury note. The rates set for the 2020 to 2021 school year will take effect on July 1, 2020.

Undergraduate students borrowing Direct Subsidized Loans and Direct Unsubsidized Loans will pay a 2.75% interest rate for the 2020 to 2021 school year, down from 4.53% in the 2019 to 2020 school year.

Graduate or professional students borrowing Direct Unsubsidized Loans will pay an interest rate of 4.30% for the 2020 to 2021 school year, down from 6.08% in the 2019 to 2020 school year.

Parents and graduate or professional students borrowing Direct PLUS Loans will receive a 5.30% interest rate for the 2020 to 2021 school year, down from 7.08% in the 2019 to 2020 school year.

Interest rates on federal student loans are fixed for the life of the loan. That means that if you borrowed a Direct Subsidized Loan for the 2019 to 2020 school year, and your interest rate was 4.53%, that interest rate is locked in at 4.53% for the life of that loan.

But, if you qualify to borrow another Direct Subsidized Loan to pay for the 2020 to 2021 school year, your new loan will be disbursed with the 2.75% interest rate.

Since 2006, interest rates on federal student loans have fluctuated from anywhere between 2.75 to 8.50%, depending on the type of loan.

Private Student Loan Interest Rates

Unlike federal student loans, interest rates for private student loans are set based on economic factors and underwriting unique to each lender that issues them. Lenders typically take into account a borrower’s credit history, earning potential, and other personal financial factors.

If you borrowed a private student loan, you might have applied with a cosigner to secure a more competitive interest rate. That’s likely because most college students don’t have much credit history or employment history, so interest rates on private student loans can be higher than those on federal student loans without a well-qualified cosigner.

While federal student loans have a fixed interest rate, private student loans can have either a fixed or variable interest rate. Borrowing a variable rate loan means that the interest rate can change periodically.

The frequency of changes in the interest rate will depend on the terms of the loan and on market factors; typically, private lenders adjust the interest on variable-rate loans monthly, quarterly, or annually. Interest rates on private student loans are typically tied to the London Interbank Offered Rate (LIBOR) or the 10-year Treasury yield.

So as the LIBOR changes, for example, interest rates on variable rate student loans can change as well. Typically, lenders will add a margin to the LIBOR, which is determined based on credit score (and, the credit score of your co-signer if applicable).

Generally, the LIBOR tracks the federal funds rate closely. In June 2020, the Federal Reserve announced that it plans to keep the federal funds rate close to zero, likely through 2022.

This means that, so long as the federal funds rate remains low, the interest rates on private student loans are not likely to increase during that time period. However, it’s important to pay attention to interest rates, especially for borrowers with private student loans with a variable interest rate, since these changes could cause fluctuations to the interest rate of the loan.

And given that LIBOR is scheduled to be discontinued around the end of 2021 , rates could change in other ways as new indices are chosen by lenders.

Can You Lock in a New Interest Rate in 2020?

Worried about interest rate volatility? There are options available that can help prevent an interest rate hike on your variable rate loan. One such option is switching to a fixed-rate loan via student loan refinancing.
When you refinance your student loans, you take out a new loan (typically with a new lender).

The new loan effectively pays off your existing loans, and gives you a new loan with new terms, including a new interest rate. Private lenders, like SoFi, review personal financial factors like your credit and employment history, among other factors, to determine a new interest rate.

If you qualify to refinance, you’re then able to choose between a fixed or variable rate loan, so if you’re worried about rising interest rates in the future, you may have a chance to qualify to lock in a new (hopefully lower) fixed interest rate.

You should also have the opportunity to set a new repayment plan, either extending or shortening the term of the loan. If you extend your student loan repayment term, you’ll likely have lower monthly payments, but will pay more in interest over the life of the loan.

Shortening your repayment plan typically has the opposite effect. You may owe more each month, but will most likely spend less on interest over the life of the loan.

Federal student loans can be refinanced, too. However, refinancing a federal student loan with a private lender means you’ll no longer be eligible for federal programs and protections like income-driven repayment, forbearance, or Public Service Loan Forgiveness (PSLF).

If you are currently taking advantage of one of the federal repayment protections, refinancing may not be the best alternative. To get a general idea of how much refinancing your student loans could impact your repayment, take a look at our student loan refinance calculator, where you can compare your current loan to current SoFi refinance student loan rates.

If you refinance your student loans with SoFi, there are no origination fees or prepayment penalties. The application process can be completed online, and you can find out if you prequalify for a loan, and at what interest rate, in just a few minutes.

Ready to take control of your student loans in 2020 and beyond? See how refinancing with SoFi can help.


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 DECEMBER 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 Loan Products
SoFi loans are originated by SoFi Lending Corp (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 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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