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Your Student Loan Snapshot

Creating your student loan plan starts with knowing what student loans you have. Thankfully, gathering this information is relatively straightforward if you know where to look.

One last word of advice before you do this: brace yourself

If you haven’t gone through this exercise before, what you see may not be pretty. Your debt may be tens of thousands of dollars higher than expected. This initial step could very well be the most difficult—but necessary—step in gaining control of your loans.

If you are shocked at the number you see after you total up your debt, take some deep breaths. You are going to get through this. It may not be easy, but ignorance is not bliss. Knowing your situation and taking action is key.

For federal student loans, go to the National Student Loan Data System website at https://www.nslds.ed.gov/nslds. You will need to create a Federal Student Aid identification number (FSA ID) if you don’t already have one.4

Once you are logged in, you can see your loans. Clicking on each loan will give you additional information, including the loan servicer, the interest rate, and the history of your loan, including when it went into repayment.

You may also have private loans. If you are unsure which bank or banks serviced your loans, you will want to find out. The best way to do this is to pull your free credit report at AnnualCreditReport.com. Your credit reports will include all your student loans, regardless of whether they are private, federal, or state. Once you identify the lender, get access to their online portal to see detailed information about your loans.

State loans will be on your credit report as well. These are much less common than federal loans, but they do exist. Both my wife and I took out student loans offered by the state of Minnesota to fund our undergrad education.

Even if you are aware of all your loans, it’s always a good idea to pull your credit report from the three credit reporting bureaus, especially if it’s been more than a year since you last pulled it or if you have never done so. You are entitled to a free credit report from each bureau once a year. See a useful overview of credit starting on page 215.

Gather all your student loan information and put it into the student loan spreadsheet found here: StudentLoanSolutionBook.com.

Key information to find out includes:

•Type of Loan

If you have federal loans, note whether they are from the Federal Direct Loan Program (FDLP) or Federal Family Education Loan (FFEL) Program, as well as whether they are subsidized or unsubsidized. This will be indicated when you log in and click on your loan information. It’s okay if this doesn’t mean anything to you right now—it will soon!

•Loan Servicer

There are a limited number of loan servicers for federal student loans. They include companies like Navient, Nelnet, and MOHELA. It’s not uncommon to have a variety of servicers for your loans.

•Principal Amount

The amount of money that you currently owe on your loans.

•Accrued Interest

Interest accrues in certain situations on certain loans, such as when your loans are in forbearance or deferment. Interest can also accrue if you are in an income-driven repayment plan and your monthly payment doesn’t cover all the monthly interest.

•Revised Principal Amount (Principal plus Accrued Interest)

In most cases, the accrued interest is eventually added to the principal of a loan through a process called capitalization. Looking at your principal balance plus accrued interest gives you a look at the true balance of your student loans.

•Interest Rate

The percentage of the principal charged as interest by the lender.

•Fixed or Variable Interest

Federal student loans have a fixed interest rate, but others, such as private loans, can have a variable interest rate that fluctuates over time.

•Monthly Payment (If Known—This Can Be Calculated)

You may have a good idea of what your monthly payment is, especially if you have already started to pay your loans on a standard ten-year repayment plan. You can get an estimate of your monthly payment under that standard plan in one of the tabs of the student loan spreadsheet5 by plugging in your loan variables (principal, interest rate, etc.). If it seems high or unaffordable, don’t panic. For federal student loans, there are income-driven repayment plans available, which we will cover in step two. If you only have private student loans and your payment is unaffordable, we’ll cover that in step two as well.

•Projected End Date (Estimate)

Assuming you are on the standard ten-year repayment plan, this can usually be calculated relatively easily. If you are on an income-driven repayment plan, this will be more difficult to calculate. This date isn’t necessary, but, in some situations, it can be helpful.

As you read about the various types of loans, you can refer back to your spreadsheet to determine which types you have.

The Different Types of Student Loans

Not all loans are created equal. As you likely saw on your student loan snapshot, there are a variety of loan types.

Generally speaking, student loans can be put into three buckets: federal, private, and state. Federal loans are the most common. Private and state loans are less common, though private loans have been increasing in popularity recently.

Going through the different types of loans may be overwhelming, but gaining this knowledge is important for the ultimate goal of feeling in control of your loans.

Federal Student Loans

There are two federal student loan programs: the William D. Ford Federal Direct Loan Program (FDLP) and the Federal Family Education Loan (FFEL) Program.

The FFEL program will only impact you if you took out college loans prior to the 2008–2009 school year (I did). It’s been discontinued since 2008.

The FFEL program was only slightly different from the William D. Ford Federal Direct Loan Program. Loans in the FFEL program originated at private institutions, meaning these private institutions funded the loans. The federal government paid fees to the private institutions to originate and administer the loans. Eliminating the FFEL eliminated the private institutions that were middlemen in the process. This contrasts with the FDLP, where the government raises funds through debt offerings.

The Department of Education administers loans through the FDLP via the Office of Federal Student Aid. These loans are approved through the Department of Education and disbursed by the borrower’s school. Once disbursed, the loans are assigned to a loan servicer (Nelnet, Navient, etc.). The loan servicer is responsible not only for collecting on the loans, but also for communicating information to borrowers while they are in school and when they enter repayment.

Federal student loans come with benefits that you won’t find with private student loans. Interest rates on federal student loans are fixed and are usually relatively low.6 Borrowers have options to consolidate their loans, as well as delay payment on their loans through deferment and forbearance. They also have the ability to enter into income-driven repayment plans and potentially have their loans forgiven.

Not counting consolidation loans, which combine a variety of different types of loans, these are the different loan types offered through FDLP and FFEL:

Federal Direct Loan Program

•Direct Loan Subsidized Stafford

•Direct Loan Unsubsidized Stafford

•Direct Loan Unsubsidized Stafford—Graduate or Professional Students

•Direct Loan PLUS—Graduate or Professional Students

•Direct Loan PLUS—Parent

Federal Family Education Loan Program

•FFEL Subsidized Stafford

•FFEL Unsubsidized Stafford

•FFEL Unsubsidized Stafford—Graduate or Professional Students

•FFEL PLUS—Graduate or Professional Students

•FFEL PLUS—Parent

One of the most important concepts related to federal student loans is the difference between subsidized and unsubsidized loans. Subsidized loans are preferable, especially if you plan on going to grad school, in which case most people put their loans in deferment.

Direct subsidized loans start accruing interest only when you start repaying your loans. Meaning, interest is not building on these loans while you are in undergrad or grad school, nor when you defer your loans. Note that interest does accrue if you enter forbearance (more on that in a bit).

Direct unsubsidized loans are less advantageous than federal direct subsidized loans because interest starts accruing as soon as the loan is disbursed. If you were disbursed an unsubsidized loan as a freshman, for example, you started accruing interest immediately.

Once you enter repayment, typically six months after finishing undergrad, all your accrued interest is added to the principal balance of your loans through a process called capitalization. This pushes up the overall amount you must repay. You then pay interest on that new, higher principal amount. Ditto for grad school.

With unsubsidized loans, the interest is going to continue to build and ultimately be added to the principal of your loan through capitalization. This happens regardless of the reason for deferment. Not surprisingly, 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 the list. Even if you have federal student loans that you are paying on an income-driven repayment plan, you will want to pay as much as you can toward your private student loans. With no option for loan forgiveness, you will eventually need to pay them off.

Refinancing private student loans at a lower interest rate through a private lender usually makes sense. Refinancing federal student loans is a potential misstep, as you would lose all the benefits that come with federal loans. We’ll discuss refinancing in detail in step two. It may or may not make sense for your situation.

State Student Loans

Some states offer student loans to state residents who are attending an eligible school.

I went to college in my home state, Minnesota, and was able to take advantage of their SELF loan program, which is administered by the Minnesota Office of Higher Education. These loans bear a lower interest rate than federal loans.

Besides sometimes having a lower interest rate, state student loans typically are not on par with federal student loans. For example, here are some details of the Minnesota SELF loan, per their website:11

•You need to pay interest every three months while you are in school, starting within ninety days from when you receive the money.

•You must start repaying certain SELF V loans no later than nine years from when you received the money.

•There are no grace periods or deferment options.

•SELF loans cannot be included in a federal loan consolidation.

And here are the two SELF loan repayment options for when you finish your studies (unless you are already in a required repayment period):

•The Standard Plan requires monthly payment of principal and interest starting thirteen months after you leave school or start attending less than half-time.

•The Extended Interest Plan allows you to continue with two more years of monthly interest payments before starting to repay the amount (principal) you borrowed.

These loans are better than private student loans, but they do have their disadvantages, such as not having interest deferment or a forbearance option.

I shared details of this program with you because you may have some loans from a state program yourself. If you do, be sure to read all the documentation available online. If you still have questions or are unclear on anything, reach out to the loan servicer or administrator of the program. It’s important to know what rights you have, what the terms are, and what happens to the loans if you enter grad school.

Key Takeaways

•People often have loans spread across different loan servicers and may have a mix of federal, private, and state student loans. Create a student loan snapshot by putting the details of your student loans into a spreadsheet.

•Federal student loans are the best type of student loans because of the benefits that come with them such as deferment, forbearance, income-driven repayment options, and loan forgiveness opportunities.

•Subsidized loans are better than unsubsidized loans because interest does not accrue during times of deferment.

•In most cases, accrued interest eventually gets added to the principal of your loan through the process of capitalization.

•Consolidating your student loans can be beneficial but should be done with caution and only when you feel you fully understand the implications of consolidation.