Aug
04
2020
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Understanding Student Loan Amortization

By | Fresh Out of School, Student Loans, student_loan, Terminology | No Comments

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 for the money correctly.

For borrowers with multiple federal or private 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 a federal student loan borrower, you should consider all of your repayment opportunities including the opportunity to refinance your student loan debt at a lower APR or to extend your term to achieve a lower monthly payment. Please note that once you refinance federal student loans you will no longer be eligible for current or future flexible payment options available to federal loan borrowers, including but not limited to income-based repayment plans or extended repayment plans.


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SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

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

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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Aug
04
2020

Student Loan Grace Periods: What You Need to Know

By | Debt Payoff, Fresh Out of School, Student Loans, student_loan | No Comments

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 a federal student loan borrower, you should consider all of your repayment opportunities including the opportunity to refinance your student loan debt at a lower APR or to extend your term to achieve a lower monthly payment. Please note that once you refinance federal student loans you will no longer be eligible for current or future flexible payment options available to federal loan borrowers, including but not limited to income-based repayment plans or extended repayment plans.


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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-criteria 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 Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

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

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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Jul
22
2020

Choosing a Student Loan Lender Outside Your Bank

By | Budgeting & Goals, Going to College, Student Loans, student_loan | Comments Off on Choosing a Student Loan Lender Outside Your Bank

When outlining your plans for how to pay for college, student loans may be part of the financial picture. According to information published by the Pew Research Center, roughly one-third of adults under age 30 have some student loan debt as higher education costs continue to climb.

If you’ve already qualified for federal student loans and have sourced other forms of financial aid but still need more funding for school, private student loans can help close the gap. When applying for private student loans, your current bank might be the first place you look. But there are some reasons to cast the net wider and compare other borrowing options.

Here’s some helpful information worth knowing about how to choose a student loan lender other than your current bank and why it might make sense to do so.

Pros and Cons of Getting Private Student Loans With Your Current Bank

Applying for private student loans with your current bank may seem like a natural choice. If you already have checking and savings accounts at the bank or other loans, then it is possible you may feel more comfortable borrowing from a financial institution you’re familiar with.

And that can have certain advantages. For example, some banks might offer an interest rate discount or reduction for private student loans if you have another account with the bank that is in good standing. Scheduling your student loan payments may also be easier if you can link your checking account to your loan account and see balances and payments in one place.

On the other hand, there are some benefits to getting private student loans with another bank or private lender. Banks and other lenders that offer private student loans can vary greatly when it comes to things like:

•   Minimum and maximum loan amounts
•   Interest rates
•   Loan fees
•   Repayment options

Looking for a private student loan with a different bank or lender could give you more options for a better interest rate, fewer fees, being able to borrow more money, or qualifying for more flexible repayment terms. These are important considerations which can impact student loan repayment.

Choosing a Lender for a Student Loan

Whether you’re borrowing a little or a lot, it’s important to find a bank or lender that matches up with what you need for private student loans. If you’re starting from square one with how to choose a lender for a student loan, these tips could help.

1. Considering Loan Limits

When comparing banks, credit unions, or other private student loan lenders one of the first things to look at is the lending limits at each institution.

Some private student loan lenders impose a minimum loan amount and cap on the total lifetime amount you can borrow to finance your education. Being aware of those thresholds matters for making sure that you can borrow what you need.

Keep in mind, however, that the actual amount you’re able to borrow may be lower than the total loan maximum advertised by the financial institution. The amount you ultimately qualify for (or don’t) can depend on many factors including state laws and your credit history. (More on that and other factors below.)

2. Looking at What’s Needed to Qualify

Every private student loan lender is different when it comes to their minimum qualifications to borrow. While thresholds vary from lender to lender, common criteria reviewed to make lending decisions might include:

•   Credit scores and credit history
•   Income
•   Enrollment status
•   Citizenship or permanent residency status

Also, be aware that you may not be able to qualify for a new private student loan if you have any existing loans that are in default. In that case, you’d need to bring your old loans current first before you could be approved for a new loan by most lenders.

3. Checking Co-Signer Requirements

Credit scores and credit history can play a big part in private student loan approval decisions. Borrowers with little or no credit history may need a qualifying co-signer to get approved for private student loans. Depending on the bank or lender, a qualifying co-signer could be a:

•   Parent
•   Grandparent
•   Sibling
•   Spouse
•   Other relative
•   Friend

For those who think they’ll need a co-signer to qualify for private student loans, there are a couple of things to remember.

First, it’s a solid idea to be upfront with the prospective student loan co-signer about the implications of signing off on the loans. As a co-signer, they’re equally responsible for the debt and all loan activity will show up on their credit report the same as it will on a primary borrower’s credit report. So if the borrower pays late or defaults, it could adversely affect both the co-signer and the primary borrower.

Second, you can check to see if the banks, credit unions, or private lenders you’re looking into offer a co-signer release. This allows the co-signer to be removed from the loans once certain conditions have been met. For example, you may be able to get a co-signer release after making a certain number of consecutive on-time monthly payments.

Going forward, then, only the primary borrower’s name would be listed on the loans. Each lender will have different requirements for co-signer release, and some lenders will not offer that option, so understand the policies at each institution before borrowing the loan.

4. Reviewing Repayment Options

Next, look at the different options a bank or lender offers for repaying private student loans. For example, do the loans come with five-year terms? 10 years? 15? Also, consider whether there is an option to make full payments or interest-only payments while in school or whether the lender offers a repayment deferment while enrolled.

Consider whether the lender offers any type of student loan grace period immediately after graduation in which no payments need to be made. And if a deferment or grace period is available, take note of what interest and/or fees accrue on your loan balances during that time.

5. Comparing Interest Rates and Fees

Cost is often one of the most important considerations for how to choose a student loan lender. After reviewing the other details of borrowing narrow the focus down to the interest rates and fees a private student loan lender charges.

Consider whether a bank offers variable rate loans, fixed rate loans, or both. On a variable rate loan, the interest rate is just that—variable. This means it can fluctuate over time, increasing or decreasing, depending on how the underlying benchmark rate moves. With fixed rate loans, the interest rate stays the same for the life of the loan.

Deciding which one to choose may depend on what’s happening with interest rates in general. With interest rates already low, a fixed rate loan option could make sense if you want reassurance that your rates won’t go up over time.

But if rates drop even further, a variable rate loan could allow you to capitalize on that and potentially save money on interest—provided rates don’t go back up again over time!

Other factors to consider when deciding between a fixed and variable rate loan include the length of the repayment term, and whether or not the borrower would be able to cover a higher monthly payment should the variable interest rate increase.

Aside from whether private student loan rates are fixed or variable, take time to compare the rates themselves across different lenders. If a lender offers a range of interest rates, look at how the high end and low end of that range lines up with what other banks or lenders are offering.

Remember, your credit score and history (or the credit score and history of your co-signer, if you need one) can play a big part in determining the rates you qualify for. But looking at how rates stack up overall can help with how to choose a lender for a student loan.

Banks and other lenders typically allow potential borrowers to see what rates they may qualify for. When getting rate quotes, double check that the lender is doing an initial “soft” credit pull. This won’t impact an individual’s credit score1, unlike a “hard” credit inquiry.

After you’ve compared rates, check out the fees a bank or lender charges as well. Some fees to consider include:

•   Loan origination fees
•   Late payment penalties
•   Returned payment fees

The good news is, there are plenty of lenders that don’t charge fees like origination fees for private student loans. These fees could add up, and if there is a fee for paying late or for unforeseen insufficient funds, it can be important to factor those costs in.

6. Asking About Loan Discounts or Other Benefits

Another item on the list of things to consider for how to choose a student loan lender are the “extras” a bank might offer. For instance, it’s not uncommon for lenders to cut you a break on interest when you enroll in automatic payments for your loans.

While the specifics vary by lender, some may offer a reduction of the interest rate when the loan is enrolled in autopay, which can help reduce the cost of interest over the life of the loan. Another consideration may be whether a bank offers things like hardship programs or forbearance options in case there are issues repaying the loan at some point.

Unlike federal student loans, private student loan lenders aren’t required to offer hardship deferment or forbearance programs, but some do. SoFi members, for example, may qualify to pause their payments temporarily through the Unemployment Protection Program.

And finally, look at whether a lender offers anything else that could make help make your life as a student loan borrower easier. That could include an easy-to-use mobile app for managing loans, free online educational resources to help you better understand student loans, or career counseling.

All of those features can add value when choosing a student loan lender that isn’t your primary bank or another lender.

Doing Your Homework Can Pay Off When Choosing a Student Loan Lender

When considering private student loans, it’s important to remember that all banks and lenders aren’t created equally. If you’re willing to spend some time researching loan options, it might become easier to find a lender that’s the best fit for your personal needs and budget.

While we believe exhausting your federal aid options first before taking on private student loans is wise, when looking for private student loans beyond your bank, consider adding SoFi to your list of potential lenders.

SoFi offers no-fee private student loans for undergraduate and graduate school and for parents, too, all with flexible repayment options and competitive interest rates.

Looking into borrowing a private student loan to pay for school? Learn more about how SoFi can help.

1Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

SoFi 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-criteria for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

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

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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Apr
09
2020

Student Loan Options: What Is Refinancing vs. Consolidation?

By | Fresh Out of School, Student Loans, student_loan, Terminology | No Comments

Student loans can have a way of making you feel like a hamster in a wheel—spinning like crazy but getting nowhere fast. And while knowing that around 44 million Americans carry student loan debt might offer some comfort in a “misery loves company” kind of way, the magical loan-forgiveness fairy is still—as far as we know—a myth.

In the meantime, though, there’s a bit of good news—you may have more control than you think. We are here to help illuminate some options available to student loan holders, so they can make decisions that fit best with their financial goals.

Have you been considering one of those options—choosing whether to consolidate or refinance student loans?

But what is consolidation, what is refinancing, and how do you know which one (if either) may be right for you?

This could be a somewhat complicated question, especially since these terms are sometimes used interchangeably. For example, consolidation simply means combining multiple student loans into one loan, but you have different options and can end up with different results by consolidating with the federal government vs. consolidating with a private lender.

Student loan refinancing is when you receive a loan with new terms and use that loan to pay off one or more existing student loans.

Consolidate vs. Refinance. Let’s break it down.

Here’s a simple overview of the different types of student loan consolidation, how they differ from student loan refinancing, and some tips for evaluating whether one of these options might work for you.

Federal Student Loan Consolidation

Federal student loan consolidation is offered by the government and is available for most types of federal student loans—no private loans allowed. When you consolidate with the government, your existing federal loans are combined into one new loan with a new rate, which is a weighted average of your old loans’ rates (rounded up to the nearest eighth of a percent).

This option may not save you any money, but there are still a few potential benefits:

1. Fewer bills and payments to keep track of each month.

2. The ability to switch out older, variable rate federal loans for one, new, fixed rate loan, which could protect you from having to pay higher rates in the future if interest rates go up. (Note: the last variable rate federal student loans were disbursed in 2006. Since then, all federal student loans have been fixed-rate.)

3. Lower monthly payments. But beware—this is usually the result of lengthening your repayment term, which means you might pay more interest over the life of the loan.

Private Loan Consolidation

Like federal consolidation, a private consolidation loan allows you to combine multiple loans into one, and offers some of the same potential benefits listed above. However, the interest rate on your new, consolidated loan is not a weighted average of your old loans’ rates.

Instead, a private lender will look at your track record of managing credit and other personal financial information when deciding whether to give you a new (ideally lower) interest rate on your new consolidation loan.

Bottom line: when you consolidate student loans with a private lender, you are also in fact refinancing those loans. When federal student loans are consolidated or paid off using a private loan, however, it’s important to know you will lose access to certain benefits such as income-driven repayment plans, forbearance and deferment options, and Public Service Loan Forgiveness (among others).

Student Loan Refinancing

As noted above, student loan refinancing is when a new loan from a private lender is used to pay off one or more existing student loans. If your financial situation has improved since you first signed on the dotted line for your original student loans(s), you may be able to refinance student loans at a lower interest rate and/or a different loan term, which could potentially allow you to do one or more of the following:

1. Lower your monthly payments.

2. Shorten your loan term to pay off debt sooner.

3. Reduce the money you spend in interest over the life of the loan.

4. Choose a variable interest rate loan, which can be a cost-saving option for those who plan to pay off their loan relatively quickly.

5. Enjoy the benefits of consolidation, including one simplified monthly bill.

Unlike federal loan consolidation, student loan refinancing is only available from private lenders. However, SoFi will refinance both private student loans and federal student loans, so well-qualified borrowers can consolidate all of their loans into one with loans and/or terms that work better for them.

Things to Consider

While there are advantages to both consolidation and refinancing, sometimes the answer—depending on timing, your budget, or other outside factors—could be to leave well enough alone. As you research your options, consider asking yourself these questions:

What kind of student loans do you have?

Refinancing federal student loans through a private lender might result in a lower interest rate, but you will also lose access to the benefits that come with federal loans, such as Public Service Loan Forgiveness (PSLF), flexible repayment plans, the ability to pause payments, and an interest rate that’s determined by Congress—not your credit score.

If your loans are private, they were issued based on creditworthiness to begin with, so a refinanced loan will follow similar qualifications, and each private lender will have its own underwriting criteria.

What is the loan payoff amount?

While the amount of a monthly payment is important, especially if a refinance could reduce it, it’s wise to read through all the terms of the loan to understand the big picture.

Are the monthly payments lower because the loan is now on a 20-year term instead of a 10-year term? Are there loan origination fees rolled into the payment? Knowing the full, total repayment amount can help ensure that short-term gains don’t bite you in the long run.

Named a Best Student Loan Refinance Company
by U.S. News and World Report.

What’s the goal?

Consider your reasons for a refinance or consolidation—lowering monthly payments, keeping better track of due dates, or paying off debt as quickly as possible will likely lead to different strategies.

Your monthly budget and what you can (and can’t) afford to put toward your loan repayment will also play a factor here. One way to help ensure the right decision for you is to play with your budget a bit to see which loan options might benefit you most.

What factors do lenders review?

This isn’t typically an issue when it comes to consolidating loans through the federal government. But people interested in refinancing student loans with a private lender will likely need to meet various lender requirements, much like they would for a mortgage or personal loan.

Lenders generally review information like the borrower’s credit history, income, debt-to-income ratio, and other factors to determine what type of interest rate and loan terms they may qualify for.

You may not be able to change the fact that you have student loans, but you can make smart decisions about them. And that’s what ultimately gives you power over your debt. For more information about student loans, you can explore SoFi’s student loan help center to find guidance and gain knowledge to help point you in the right direction.

Ready to refinance your student loans? Start today!



$500 Student Loan Refinancing Bonus Offer: Terms and conditions apply. Offer is subject to lender approval, and not available to residents of Ohio. The offer is only open to new Student Loan Refinance borrowers. To receive the offer you must: (1) register and apply through the unique link provided by 11:59pm ET 11/30/2021; (2) complete and fund a student loan refinance application with SoFi before 11/14/2021; (3) have or apply for a SoFi Money account within 60 days of starting your Student Loan Refinance application to receive the bonus; and (4) meet SoFi’s underwriting criteria. Once conditions are met and the loan has been disbursed, your welcome bonus will be deposited into your SoFi Money account within 30 calendar days. If you do not qualify for the SoFi Money account, SoFi will offer other payment options. 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. SoFi reserves the right to change or terminate the offer at any time with or without notice.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SoFi Student Loan Refinance
If you are a federal student loan borrower, you should consider all of your repayment opportunities including the opportunity to refinance your student loan debt at a lower APR or to extend your term to achieve a lower monthly payment. Please note that once you refinance federal student loans you will no longer be eligible for current or future flexible payment options available to federal loan borrowers, including but not limited to income-based repayment plans or extended repayment plans.


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.

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 .

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Apr
09
2020

The Growth of Post–Medical School Debt

By | Budgeting & Goals, Student Loans, student_loan | No Comments

Studying medicine and working in the medical field can be highly rewarding as you assist people with illnesses and injuries and help them to live their healthiest life.

In this career, how you help others could literally be life-changing. Other benefits of a medical career might include the wide variety of opportunities in an array of specialties, from pediatrics to geriatrics, medical research, and more.

Medical school might be considered a safe investment in the future as well, with the possibility of a high salary in a chosen field. In fact, according to the United States Department of Labor’s Bureau of Labor Statistics , in 2019, nine out of the top 10 highest-paid professions are in the field of medicine.

Read on for more good news on medical careers and finances, plus some information about what it might cost to earn a medical degree.

Medical Professionals and Their Salaries

According to the Medscape Physician Compensation Report 2019 , physicians’ incomes are increasing. Primary care physicians, for example, are earning an average of $237,000 annually, a 21.5% increase over their average earnings in 2015 ($195,000). Specialists, meanwhile, earn an average salary of $341,000, a 20% increase over the 2015 average of $284,000.

When looking at specialties, orthopedics ($482,000) and plastic surgery ($471,000) top the list in 2019. The lowest physician salaries are pediatrics ($225,000) and public health and preventive medicine ($209,000).

Salaries may also vary by state, with these three having the highest overall in 2019:

•   Oklahoma: $337,000/yr
•   Alabama: $330,000
•   Nevada: $329,000

As lucrative as a medical career can be, the commitment to medical school is significant, and the educational journey can be pricey. According to the Association of American Medical Colleges (AAMC), here are the average costs of tuition, student fees, and health insurance for medical students during the 2018–2019 school year (costs include discounts from stipends, scholarships, or grants):

•   Public school, resident: $36,755
•   Private school, resident: $59,076
•   Public school, nonresident: $60,802
•   Private school, nonresident: $60,474

Medical Students and Debt

Although the costs of attending medical school are significant, the number of medical school students who are graduating with no debt continues to rise, with the AAMC noting that, in 2019, 28.7% of students completed medical school with no student loan debt. In 2018, the figure was 27.7%.

Another study of medical students and corresponding student loan debt was conducted by researchers who have inferred that more and more students entering medical schools come from wealthy backgrounds.

This implies that some students might be discouraged from pursuing medicine, based on financial considerations alone. Also, students incurring a lot of debt might feel pressured to specialize in more lucrative fields, because when they have student loan debt, cardiology (with a 2019 average salary of $430,000) might look better than endocrinology (with a 2019 average salary of $236,000) simply because cardiologists make so much more.

Medical Student Loan Debt by State

When it comes to debt, not all medical programs are equal. According to U.S. News and World Report’s “Best Grad School ,” the range can be quite significant. Out of 114 medical schools listed, the three that left its grads with the most debt in 2018 were:

•   Rocky Vista University in Parker, Colorado: $364,000
•   Nova Southeastern University Patel College of Osteopathic Medicine (Patel) in Fort Lauderdale, Florida: $272,764
•   Western University of Health Sciences in Pomona, California: $272,311

On the other end of the spectrum, the schools that graduated students with the least amount of debt in 2018 were:

•   Johns Hopkins University in Baltimore, Maryland: $104,016
•   Stanford University in Stanford, California: $104,988
•   Baylor College of Medicine in Houston, Texas: $107,469

Average Medical School Debt and Loan Options

Although the percentage of medical students who have no debt is rising, when students do have student loan debt, the amount is going up, with the 2019 average for medical students at $200,000 , a 2.7% increase over the 2018 amount of $195,000.

Note that, when it comes to borrowing for medical school, loan interest rates offered by the federal government, along with their terms and conditions, might be different from borrowing as an undergrad.

Types of federal student loans available to medical students include Direct Unsubsidized Loans, with loan limits up to $20,500 each year, and $138,500 overall. Rates for this type of loan are currently less than for the other type of federal aid available to people going to medical school—Direct PLUS loans .

There isn’t a financial need requirement for either type of loan, so many borrowers qualify for both. With Direct Unsubsidized Loans, there is no credit check, but there is a credit check for PLUS loans.

Medical students can also apply for private student loan funding, with different private lenders offering different rates, terms, and overall loan programs. Typically, you need good credit for private student loans, among other financial factors that will vary by lender.

Federal loans do come with many important student protections that private loans typically don’t, such as loan forgiveness for working in public service, income-driven repayment, and deferment programs; some medical students defer loans during their residency.

High Debt Loads—and Compound Interest

Unfortunately, debt doesn’t necessarily pause when deferred. There are some federal student loans that, when deferred, will continue to accrue interest. The problem those in medical fields can face, then, is debt accumulation during their residency, which can last anywhere from three to seven years depending on the specialty.

Here’s a very high-level, simplified example. Say, for instance, a med student defers loan payments on a $180,000 Direct PLUS Loan with an annual percentage rate (APR) of 7%. If the student defers payments for a seven-year residency, this could lead to a debt increase of around $88,200. With a 6% interest rate, debt could increase by around $75,600.

Even while making a modest income—in 2018, the average resident earned just under $60,000 —the debt would grow substantially.

Other than deferral, the federal government does offer additional income-driven payment protections for federal student loans—for example, certain
programs are offered during the years of residency, lowering payments to match current income so monthly loan payments are more manageable..

The Revised Pay As You Earn Repayment Plan (REPAYE) caps payments at 10% of discretionary income for qualifying borrowers. If you are married, the government will factor in a spouse’s income when determining monthly payments.

Options for Paying Back Medical School Loans

Once you are ready to get serious about paying back student loans, refinancing with a private lender might help save you money. Although refinancing your federal student loans does mean forgoing government protections such as loan forgiveness and income-driven repayment, some companies offer refinance interest rates that are lower than federal rates.

The bottom line: Student debt should not be the thing standing between you and your goals. Between a variety of repayment plans, loan consolidation, or refinancing, there are ways to repay your debt that are manageable.

Loan Consolidation vs Loan Refinancing

The word “consolidating” can have more than one meaning in connection with student loan financing. The federal government, for example, offers Direct Consolidation Loans, through which eligible federal student loans are combined into one, with the interest rate on the new loan being a weighted average of each of the original loans’ interest rates (rounded up to the nearest eighth of a percent).

When the word “consolidating” is used by private lenders, though, the loans are combined into one, but you get a brand new interest rate, not a
weighted average, based on personal financial factors. This means that when you “consolidate” student loans with a private lender such as SoFi, you’re also refinancing them.

If you consolidate your federal loans via a Direct Consolidation Loan with the government, and your payment goes down, that’s likely because the term has been extended from the standard 10-year repayment to 20 or even 25 years. This means that although you may be paying less each month, you’ll also be paying more in interest over the life of your loan.

If, though, you refinance your student loans with a private lender, and you get a better rate, you could choose a term that allows you to pay your loan off more quickly, which should save you in interest. Again, refinancing isn’t right for everyone—especially those who have federal student loans and may wish to take advantage of Public Service Loan Forgiveness, income-driven repayment, Direct Consolidation Loans, and other federal benefits and protections.

Medical Resident Refinance

If it’s time to refinance and you are interested in exploring a private lender, SoFi has created a student loan refinance program that’s specifically for medical residents. Potential borrowers can quickly and easily find their interest rate online and might benefit from low rates and low monthly payments during residency.

Is student debt getting in the way of pursuing a career in medicine? Check out SoFi’s medical resident student loan refinancing. By refinancing, you could save on your student loans, so paying for your M.D. is that much easier.

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.

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.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

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-criteria 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 Student Loan Refinance
If you are a federal student loan borrower, you should consider all of your repayment opportunities including the opportunity to refinance your student loan debt at a lower APR or to extend your term to achieve a lower monthly payment. Please note that once you refinance federal student loans you will no longer be eligible for current or future flexible payment options available to federal loan borrowers, including but not limited to income-based repayment plans or extended repayment plans.


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