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How Student Loans Work and How To Avoid Scams

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Some companies promise to help reduce student loan debt for a fee. But there’s nothing they can do for you that you can’t do for yourself for free. And some companies that promise student loan debt relief are scams. It’s illegal for companies to charge you before they help you. Here are some more things to know about how student loans work — and how to avoid scams.

Paying for School

There are several types of financial aid available to help you pay for your education beyond high school. Those include grants and scholarships, federal work-study jobs, and student loans. If you’re trying to decide whether a financial aid offer will cover enough of the costs to be affordable, the CFPB’s financial aid offer tool can help.

Grants and Scholarships

Grants and scholarships are free money that you don’t have to pay back. So they should be your first choice to pay for your education. The simplest way to apply for a grant is to complete the Free Application for Federal Student Aid (FAFSA®) form. Also, check out these other sources to find grant and scholarship opportunities:

  • the financial aid office at a college or career school
  • a high school or TRIO counselor
  • the U.S. Department of Labor’s free scholarship search tool
  • federal agencies
  • your state’s educational agencies
  • searches online and at your library
  • foundations, religious or community organizations, local businesses, or civic groups
  • organizations related to your field of interest, like professional associations
  • ethnicity- and heritage-based organizations
  • your or your family’s employers

Federal Work-Study Jobs

Federal work-study jobs are another way to help pay for college. Work-study is a need-based grant that requires you to work part time while you’re in school. To qualify for work-study, you’ll need to fill out the FASFA® form and meet the needs-based criteria of the program. You are paid only for the hours you work. Talk to your school’s financial aid office for more information.

Student Loans

Student loans fall into two categories: federal loans and private loans.

Federal loans include:

  • Direct Loans issued directly by the U.S. Department of Education.
  • PLUS loans, federal loans that graduate or professional students and parents of dependent undergraduate students can use to help pay for college or career school.
  • Two types of federal loans that are no longer available, but people might still be repaying:
    • Federal Family Education Loans (FFEL), where private lenders made loans backed by the federal government and
    • Federal Perkins Loans, low-interest federal student loans for undergraduate and graduate students with exceptional financial need.

Private loans, sometimes called “alternative loans,” are offered by private lenders, like banks and credit unions. They are not backed by the federal government and do not include the benefits and protections that come with federal student loans. They may also require a co-signer (someone else who will also be required to pay back the loan) and a credit check (a review of your credit history).

Federal Loans vs. Private Loans

Federal Loans

Private Loans

 

Applying 
for the loan

You won’t need a co-signer or credit check to get a federal student loan in most cases (except for PLUS loans).

You may need a co-signer and a credit check. Your (and your co-signers) credit scores will affect your loan’s interest rate.

Interest rates

(the cost of borrowing money)

Federal loan rates are usually fixed, and often lower than private loans.

Private student loans can have variable interest rates.

Repayment terms

You won’t have to start repaying your federal student loans until you graduate, leave school, or change your enrollment status to less than half time.

Many private student loans require payment while you’re still in school.

Undergrads with financial need usually qualify for a subsidized loan. The government pays the interest while you’re in school on at least a half-time basis.

Private student loans are not subsidized. You must pay the interest on your loan.

Federal loans can be consolidated into a Direct Consolidation Loan for free. Learn about your consolidation options.

Some lenders give options for consolidation, but there’s usually a fee.

There is no fee to repay your loan more quickly. That’s called a prepayment penalty fee.

Prepayment penalty fees may apply.

If you have trouble repaying your loan, you may be able to temporarily postpone or lower your payments.

Private student loans may not offer options to temporarily postpone or lower your payments.

There are several repayment options, including options that tie your monthly payment to your income.

Private lenders are unlikely to offer repayment options tied to your income.

You may be eligible to have some portion of your loans forgiven if you work in public service.

Private lenders are unlikely to offer a loan forgiveness program.

Applying for Financial Aid

FAFSA® stands for Free Application for Federal Student Aid. It’s the only way to apply for federal student aid. It’s free to apply. Fill out your FASFA® form at fafsa.gov every year that you’re in a college, university or career school — including the year before you start school, which could be the year you graduate high school.

Many states and colleges use your FASFA® data to decide whether you’re eligible for state and school aid. Some private financial aid providers may use your FASFA® information to figure out whether you qualify for their aid, too.

Filling out your FASFA® form

When you fill out your FASFA® form, you’ll also create your Federal Student Aid Identification, known as your FSA ID. The FSA ID is a username and password that lets you:

  • get into your Federal Student Aid account to view your loan, grant, and enrollment history
  • fill out your FAFSA® form
  • learn about and compare repayment plans tailored to your situation
  • complete your Master Promissory Note, which is a legal document that you complete to promise to repay your loan(s) and any accrued interest to the U.S. Department of Education
  • apply for income-driven repayment plans or loan consolidation, and complete other loan related documents

Only you can create and use your FSA ID. Don’t share your FSA ID with anyone, no matter who asks or what they say. Dishonest people could use your FSA ID to get into your account and steal your personal information.

Repaying Your Loans

Student loans are debts you have to pay back, even if you don’t finish your degree. But depending on your situation and the kinds of loans you have, you might be eligible for a different repayment plan or loan forgiveness. Some companies might contact you, saying they can get you prequalified for a special government payment reduction or forgiveness program. But when it comes to qualifying for repayment and forgiveness programs, there’s nothing a private company can do for you that you can’t do yourself for free. It’s totally free to sign up for these programs by either calling your loan servicer, which is the company that manages the billing for your student loan, or going to StudentAid.gov.

If you do decide to use a company to lower your repayment, remember that it’s illegal for them to charge you before they help you.

Repaying federal student loans

For federal loans, the Department of Education has free programs that could help, including:

  • income-driven repayment plans — your monthly payment is based on how much money you make.
  • deferment and forbearance — you can postpone making payments, if there’s a good reason you can’t repay right away, though interest might cause what you owe to increase.
  • loan forgiveness or loan discharge — in some circumstances, you don’t have to repay some or all of your loans. You might qualify if, for instance, you work for a government or non-profit organization, if you become disabled, or if your school closed or committed fraud. Also, under certain income-driven repayment plans, any balance still there after 20 or 25 years of payments is forgiven. But in some cases, you may owe income taxes on the forgiven or discharged amount.

These options are free. Learn more at the Department of Education’s site, StudentAid.gov/repay or by contacting your federal student loan servicer.

Repaying private student loans

With private student loans, you typically have fewer repayment options for loan forgiveness or cancellation. To explore your options, contact your lender directly. If you don’t know who your lender is, look at a recent billing statement.

Avoiding default

Are you behind with your federal student loan payments? Here are some things you can do yourself, for free, to get back on track.

  • If you’ve missed a few payments, take steps to avoid default and limit the amount of late fees you need to pay.
  • If you’ve missed payments for 270 days, you may be in default, but there are still options to get out of default.

There are a few reasons you could be in default on your private loans. You might be in default if you: miss three monthly payments (120 days), declare bankruptcy, or default on another loan. If you think you’re in default, or at risk of defaulting, contact your lender to see what your repayment options are.

Review your private loan contracts carefully to better understand what rights you have if you’re worried about going into default. If you haven’t gotten a letter from your servicer and you believe you may be in default, contact your servicer immediately to discuss repayment options and determine if it’s possible for you to avoid default.

Loan Consolidation

When you consolidate your student loans, you’re combining multiple loans into one loan. You might consolidate your loans to simplify monthly payments, to extend the repayment terms, or to reduce the interest rate. When you consolidate your loans, you get a brand new loan with new terms.

If all of your education loans have fixed interest rates, it may not matter when you consolidate. If some or all of your loans have variable interest rates, consolidating them into a fixed loan may mean you’ll save money on the total amount of interest you’ll pay over the life of the loan.

Consolidating your federal student loans into a Direct Consolidation Loan

Consolidating federal loans directly with the federal government is free. Some companies may offer to help consolidate your federal loans with the federal government, for a fee. But you don’t have to pay for this service. Consolidating your federal student loans with the federal government is a process you can do on your own. Contact your student loan servicer at no additional cost to you.

When you consolidate your federal student loans, you’ll get a Direct Consolidation Loan. That has a fixed interest rate for the life of the loan.

Before you consolidate your federal student loans, consider the type of loans you have. It might not make sense to consolidate certain loans. For example, Perkins Loans come with unique deferment and cancellation rights that might be lost upon consolidation. And, if you’re in public service, you could also lose progress towards Public Service Loan Forgiveness. Once your federal student loans are combined into a Direct Consolidation Loan, they can’t be separated again. So consider the pros and cons of consolidation.

Reasons to consolidate federal loans into a Direct Consolidation Loan

  • Makes repayment simpler. Consolidating several loans with different servicers into one loan can give you a single loan with just one monthly bill.
  • More time to repay your loans. If you consolidate, you can get up to 30 years to repay your loan, which can mean a lower monthly payment. (But see the cons, below.)
  • Access to different repayment plan options. Consolidating federal student loans might give you access to additional income-driven repayment plan options and Public Service Loan Forgiveness. (But not all federal loans will qualify. For example, the FFEL program is not eligible for this benefit.)
  • Switch variable-rate loans to a fixed interest rate. This can give you more certainty over your monthly budget.

Reasons not to consolidate federal loans into a Direct Consolidation Loan

  • You’ll pay more in the end. A longer time to repay your loans means more (but lower) monthly payments, which means paying more in interest than you would without consolidating.
  • You might lose existing borrower benefits. Certain types of federal loans come with borrower benefits — like interest rate discounts, principal rebates, or some loan cancellation benefits — that you might lose if you consolidate.
  • You could wipe out the progress you’ve made. Consolidating loans with an income-driven repayment plan, or where you’ve paid toward Public Service Loan Forgiveness, means you’ll lose credit for the number of payments you’ve made under those systems.

Not sure about loan consolidation but having trouble making your monthly payments? Consider contacting your loan servicer about deferment or forbearance as options for short-term payment relief, or consider switching to an income-driven repayment plan.

Consolidating your private loans

If you want to consolidate your private student loans, the only choice is a private lender. There might be a cost to consolidate your loans, but avoid companies that tell you to pay up front.

Make sure you understand all the conditions of your consolidated loan before you agree to consolidate — especially if you have both private and federal student loans. Some debt relief companies and lenders offer to consolidate private and federal loans together. They offer one new loan to lower your monthly payments or interest rate. Don’t do it.

Consolidating private and federal loans turns all your loans into a private loan. That means you’ll lose federal repayment benefits and protections, like deferment and forbearance, and will no longer have access to income-driven repayment plans and potential loan forgiveness programs.

Deciding whether to consolidate

Before you consolidate your loans, take your time. Find out what consolidating could mean for your specific situation. If you have private loans, talk to your lender. For federal loans, call the Department of Education’s Loan Consolidation Information Center at 1-800-557-7394.

*INSERT REPAYING STUDENT LOANS? AVOID SCAMS INFOGRAPHIC*

How To Avoid a Student Loan Debt Relief Scam

You’ve probably seen ads from companies promising to help with your student loan debt. But know that there’s nothing a student loan debt relief company can do for you that you can’t do for yourself for free. And some of the companies that promise relief are scams.

Here are some ways to avoid a student loan debt relief scam:

  • Never pay an up-front fee. It’s illegal for companies to charge you before they help you. If you pay up front to reduce or get rid of your student loan debt, you might not get any help — or your money back.
  • Don’t sign up for quick loan forgiveness. Before they know the details of your situation, scammers might say they can get rid of your loans. They might promise a loan forgiveness program — that most people won’t qualify for. Or they might say they’ll wipe out your loans by disputing them. But they can’t get you into a forgiveness program you don’t qualify for or wipe out your loans.
  • Don’t trust a Department of Education seal. Scammers use official-looking names, seals, and logos. They promise special access to repayment plans, new federal loan consolidations, or loan forgiveness programs. It’s a lie. If you have federal loans, go to the Department of Education directly at StudentAid.gov.
  • Don’t be rushed. To get you to act fast, scammers say you could miss qualifying for repayment plans, loan consolidation, or loan forgiveness programs if you don’t sign up right away Take your time and check it out.
  • Don’t give away your FSA ID. Some scammers claim they need your FSA ID to help you, but don’t share your FSA ID with anyone. Dishonest people could use that information to get into your account and steal your identity.

Where To Go For Help

You don’t have to pay for help with your student loans. There’s nothing a company can do for you that you cannot do yourself for free. If you have federal loans, start with StudentAid.gov/repay. If you have private loans, contact your lender directly.

What To Do If You Paid a Scammer

Scammers often ask you to pay in ways that make it tough to get your money back. No matter how you paid a scammer, the sooner you act, the better. Learn more about how to get your money back.

Report Scams

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