So your student’s currently in college? And he borrowed a Federal Direct Unsubsidized Loan for this fall? He can save a lot on that loan by prepaying during the next 6 weeks. This is worth considering, because only 38.6% of college seniors look back and feel all they borrowed was essential to continuing their education.
Federal regulations say any prepayment received within 120 days of disbursement must be used to reduce that disbursement’s principal — and interest and loan fees on the prepaid principal must be automatically cancelled, too.
For example, a college freshman prepays $100 of his fall 2017 Federal Direct Unsubsidized Loan within this 120 day period. This’ll reduce the total amount he must repay by an additional $175. Actual savings will depend on his choice of the federal repayment plans he’ll be offered — a choice he’ll make after leaving school.
These regulations also apply to upperclassmen. Their savings may be a bit less, but they’re still significant.
How to do this? First, your student should check with his financial aid office to see if it’ll submit his prepayment for film. If so, he should follow its directions. Otherwise:
Meet the 120-Day Deadline: He’ll write a check to his loan servicer for the amount he wants to prepay and mail it 7-10 days (for delivery and processing) before the 120th day after disbursement.
Direct the Prepayment’s Application: To make sure his prepayment goes 100% to his most expensive federal loan — that Federal Direct Unsubsidized Loan — he should write “Apply to [INSERT LOAN DATE] Unsubsidized Loan” on his check’s memo line before mailing it.
But be careful. You student should only prepay funds he doesn’t need to finish the current term. So if he doesn’t already have a spending plan, help him build one when he’s home for Thanksgiving. More about this next Wednesday.
The right to prepay at any time without penalty helps make federal loans superior to most other forms of credit available to America’s college students. And prepaying within 120 days of disbursement saves extra money, making them even better!
College Affordability Solutions offers 40 years of experience in a wide variety of student finance issues, including student loan debt management. Contact us at (512) 417-7660 or email@example.com for cost-free consultations.
Did you get your bachelor’s degree this past spring? While in college, did you borrow Federal Direct Unsubsidized Loans? If so, you’re fast approaching the last day of your 6-month “grace period.” The next day what you’ll repay on those loans could easily multiply.
Lenders charge interest on student and other loans they make, and what borrowers repay equals the principal amount they borrowed and the interest they’re charged. Interest on your Federal Direct Unsubsidized Loan installments began building when you received them, and any of this interest outstanding at the end of your grace period gets added to those loans’ principal.
It’s a legal practice called “capitalization.” Many lenders do it, including the government on Federal Direct Unsubsidized Loans. Once capitalized, your outstanding interest gets added to your principal. This inflates the total amount you repay because, the greater your principal, the more interest you get charged as you repay it.
Fortunately, this can be prevented — if you can afford it — by prepaying your outstanding interest before capitalization occurs. Say you borrowed the maximum allowable Federal Direct Loan amount during each of the last 4 years. Assuming you earn the average starting salary for a 2017 graduate, every $100 you prepay during your grace period reduces the total amount you’d repay by an additional $94 to $113.
Prepay Before Your Grace Period Ends: Prepay as much interest as you can. Ask your servicer how to send this prepayment electronically, or mail it a check 7-10 days before your grace period ends.
Any payment made before it’s due is a prepayment. You can prepay any time without penalty on Federal Direct Loans. Prepayments reduce outstanding interest first, then loan principal. So if you can prepay even more than interest during your grace period you’ll also diminish your loan principal, further shrinking the total you end up repaying.
Prepaying during your grace period will save you money in the long run, giving you more to invest and spend on other things. So use your grace period to prepay as much as you can!
Look here next Wednesday for how currently enrolled students can save even more in the total amount they repay.
Seeking ways to manage the repayment of your student loans? Consult College Affordability Solutions at no charge. Contact us at firstname.lastname@example.org or (512) 366-5354 to do so.
Almost 70% of college graduates borrow. They leave averaging more than $29,000 in student loan debt. Hence, most strive to keep their initial monthly payments as low as possible. Toward this end:
Keep and Use Thorough Records: Never discard a single paper or electronic document you ever receive on your student loans — whether it comes from your school, lender, or loan servicer — and use those documents to know what you and those other parties are obligated to do.
Don’t Refinance: Avoid refinancing with private lenders because you’ll lose benefits the government provides for your federal student loans.
Ex-students also strive to reduce the overall amount they repay to free up money for other uses. To do this:
Prepay: Cut the total interest you repay by prepaying – i.e. paying early or paying extra — whenever possible.
Reassess Your Repayment Plan: Annually compare monthly payment amounts under your current plan to such amounts under other repayment plans. Switch plans if you can afford to pay more each month. This’ll create big savings.
No Negative Amortization: Some federal repayment plans allow you to pay less than the monthly interest charged on your debt. It’s better than defaulting, but you’ll pay more in the long run.
Use Loan Forgiveness: Washington offers some generous forgiveness plans on its loans. Pursue them if you qualify.
Your College Finance Plan (CFP) needs strategies for you and you student to implement before, during, and after college. Let’s look at the “During College” phase.
Research at a major university indicates that, looking back, almost 4 out of every 10 seniors conclude part or all of their student loans weren’t essential for their educations. Therefore, some of these strategies focus on personal money management so students can spend and borrow less of the interest-bearing educational debt that, over time, increases college costs. These include:
Spending Plan: You know mapping out income and expenses is critical to staying financially fit. But mentor your student on doing a “spending plan,” not a “budget.” To many, budget is like diet — a dirty word.
Educational Tax Benefits: These can help you and your student reduce federal income taxes. The savings can be plowed back into funding his education and lessening his need to borrow.
Also, the faster your student gets her degree, the less cost and debt she’ll incur. Still, the latest national data show that only 39.8% of undergraduates earn their bachelor’s degrees within 4 years. Here are some strategies that’ll help your student graduate on-time, if not before:
Keep Applying for Grants and Scholarships: Complete the FAFSA every year and never stop pursuing scholarships. More grants and scholarships can help your student borrow less and speed her time-to-degree by funding a heavier course load.
Work Part-Time While Enrolled: By working, even during her first year, your student can earn a higher GPA and reduce her chances of dropping out, provided she does not work too much. And her earnings can help limit her borrowing.
Look here for why you need a CFP. You can find summaries of strategies for your plan’s “Before College” phase here. And next Wednesday there’ll be samples of “After College” strategies for your CFP here.
Beginning October 16, check this website every Wednesday for a more detailed account of a strategy you may want to use in your CFP’s before, during, or after college phase.