Student Loan Solution. David Carlson
unsubsidized loans can accrue considerable interest while you are in grad school, whereas subsidized loans accrue nothing.
One thing to keep in mind is that, if your loans are in deferment, you can continue to make payments toward them. If possible, it’s typically a good idea for grad students to continue to make payments toward their loans, at least enough to cover the interest on their debt. Doing this will prevent your accrued interest from building while you complete your grad degree. Some people can take years to finish their master’s or PhD, and, if no payments are made, the balance will continue to grow on unsubsidized loans.
Direct subsidized loans are only available for undergraduate students. Once you enter grad school, you either have to take out unsubsidized loans or PLUS loans, which we will go over next.
Direct PLUS Loans
Direct PLUS loans are available to graduate students, as well as parents of dependent undergraduate or graduate students. Similar to unsubsidized direct federal student loans, the interest starts accruing as soon as the loan is disbursed.
We will go over income-driven repayment in step two; however, it’s worth mentioning that if you consolidate your loans and the consolidation loan pays off a Parent PLUS loan, your repayment options are more limited when it comes to income-driven repayment than if you had left that loan out of the consolidation. If you’ve already done this, no worries—I will lay out your options. If you haven’t done it yet, I would advise proceeding with caution if you are looking into consolidation.
Direct Consolidation Loans
Consolidation is just what it sounds like: combining multiple loans into one loan. Contrary to popular belief, consolidating your loans will not save you money or make your interest rate “cheaper.” All the loans being consolidated are weighted, so the final interest rate and monthly payment that gets set for your loan will be just as “expensive” as what you were previously paying for all your loans.
If you are curious or considering consolidating, you can see what your weighted interest rate is by using the tool on one of the tabs within the student loan spreadsheet. If you haven’t downloaded it yet, you can get it here: StudentLoanSolutionBook.com.
Consolidation is different from refinancing. Refinancing your student loans through a private lender can save you money by giving you a lower interest rate, but you also no longer have a federal loan and give up all your rights to income-driven repayment and the potential for forgiveness.
Consolidation may make sense for you for a number of reasons:
•Simplicity—You may have ten or more student loans, and they may be spread out among various loan servicers. Consolidation combines your loans into one loan that will have one servicer.
•Variable to Fixed Interest—Your new consolidation loan will have a fixed interest rate, which can be ideal if interest rates continue to rise.
•If You Have a FFEL Loan—Direct loans are the only loans eligible for most of the income-driven repayment plans. If you have an old FFEL loan, you can, in essence, turn it into a direct loan, because any consolidation loan created today is a direct loan.
You can also include Federal Perkins loans in a Direct Consolidation Loan, but it does come with drawbacks. Federal Perkins loans that are included in a Direct Consolidation Loan are bucketed under the “unsubsidized” portion of the loan. That means interest accrues during times of deferment. Normally, Perkins loans do not accrue interest during deferment.
•To Exit a Grace Period Early—The six-month grace period following graduation is a mandatory grace period that cannot be waived. Why would you want to get out of a grace period early? For one, if you are working toward Public Service Loan Forgiveness and want to start making progress toward your 120 required payments, you need to be out of the grace period and in an income-driven repayment plan. Consolidating your loans gives you the option to forgo the remainder of your grace period and start making payments immediately.
•To Make Defaulted Loans Current—Loan consolidation is one of the ways a borrower can make their defaulted student loans current.7
Drawbacks of a consolidation loan include:
•If you are on an income-driven repayment plan and working toward loan forgiveness, either through Public Service Loan Forgiveness or the standard forgiveness route, by consolidating, you are creating a new loan. That means any payments made on the old, now nonexistent, loans would not count toward forgiveness. The clock resets and the timeline starts over.
•When you keep loans separate, you can focus on paying off those with the highest interest rates first. If you consolidate, you have one loan with one interest rate, so you can’t strategically pay off individual loans.
•There is no “undoing” a loan consolidation. Similar to refinancing your student loans through a private lender, loan consolidation cannot be undone.
•You generally can only consolidate your loans once.
•If you consolidate a Parent PLUS loan, your new consolidation loan is only eligible for one income-driven repayment plan: Income-Contingent Repayment (ICR). While this is better than having no income-driven repayment option, it’s best to keep any Parent PLUS loan out of a consolidation loan, so that you can potentially have other income-driven repayment options.
Because of the complexities around consolidation loans and student loans in general, I recommend you hold off applying for loan consolidation until you feel comfortable with all your repayment options and fully understand how loan consolidation would impact your options.
If you do want to consolidate your student loans, you can do so at studentloans.gov.8
Perkins Loans
Perkins loans are made through the Federal Perkins Loan Program. They are much less common than FDLP and FFEL loans, but they do exist, and you may have them. They differ from FDLP and FFEL loans in that Perkins loans are issued by your school. In other words, your school is the lender.
Some schools do not participate in the Federal Perkins Loan Program, so for some borrowers they were never even an option.
These loans have a low interest rate of 5 percent. They are available to undergraduate, graduate, and professional students. They are only available to those with “exceptional financial need.”
Private Student Loans
Based on data collected by the College Board, we know that, over the past eight years, the number of private student loans has increased.9
There are a number of factors driving the recent uptick. The cost of college has increased, forcing more undergrads to supplement federal student loans with private student loans. Additionally, the student loan refinancing market has seen explosive growth, with more and more banks offering student loan refinancing products.
Private student loans are not inherently a bad option, but they do have disadvantages compared to federal student loans. Federal loans typically offer lower interest rates, with some private student loans reaching 10 percent and beyond. This can potentially be adjusted to a lower interest rate through refinancing down the road, but there are restrictions that banks put on the refinancing products that make it difficult or impossible to refinance while in school and without, at a minimum, a good credit score.10
Many of the advantages that federal student loans provide are not offered for private student loans. For example:
•Income-driven repayment is not an option.
•Loan forgiveness is not offered.
•When in deferment, federal subsidized loans do not accrue interest, but private student loans do accrue interest (similarly to unsubsidized federal loans).
•Private student loans technically are in default as soon as you are behind on payments, while federal student loans go into default much later (after nine or more months of non-payment).
When you are prioritizing which loans to repay first, it makes sense to put private student loans at the top of