student loans

Do You Have to Pay Back Unsubsidized Loans?

June 10, 2020 By Kathryn Vercillo Leave a Comment

There are a lot of questions going around right now about student loans. The political landscape is filled with ideas about how to address outstanding student loan debt. In the midst of all of the potential changes, you might wonder if you have to repay your own loans. In particular, you might wonder about any differences that exist between subsidized and unsubsidized loans.

Subsidized vs. Unsubsidized Loans for Students

First of all, you’ll need to know the difference between subsidized and unsubsidized loans.

Similarities of Subsidized and Unsubsidized Loans

These are both types of student loans.
Both of these loans are issued by the federal government.
You must be enrolled in higher education with at least part-time credits in order to receive one of these loans.
You are allowed six months grace period after school ends before you have to begin repaying either loan.
Both types of loans have several repayment options.

Differences between Subsidized and Unsubsidized Loans

Here are the important differences between the two types of student federal loans:

You must meet an income requirement of financial need in order to qualify for a subsidized loan.
Subsidized loans are for undergraduate education only. Unsubsidized loans are for both undergraduate and graduate school programs.
Typically you are able to access more money with unsubsidized loans.

But here is the really big difference: you do not pay the interest on subsidized loans. The US Department of Education covers that interest for you. In contrast, you do pay interest on unsubsidized loans. Therefore, you have to repay more than the cost of the original loan for an unsubsidized loan.

If you have the option, get a subsidized loan. You can also get both. For example, I got as much money as possible from subsidized loans for my undergraduate education. Then I supplemented that with additional funds from unsubsidized loans, for which I have to pay the interest. When I went to graduate school, I got additional unsubsidized loans.

You Have to Repay All Student Loans … But You Have Options

There are many potential changes taking place in the political landscape when it comes to student loans. For example, one of the COVID stimulus payment plans recommended a stipulation that $10000 of student loans be wiped out across the board for all borrowers. Note: that did not pass! But it is one of many ideas floating around the political landscape in regards to student loans.

That said, you do currently need to repay student loans. You have to repay both subsidized and unsubsidized student loans. With unsubsidized loans, you also have to pay interest on the loan.

Remember, a loan is money that you borrow. It might seem like “free money” at the time. Young students especially feel this way. However, it’s borrowed money. You accepted it with the stipulation that you would repay that loan. If you have unsubsidized loans, you further agreed to pay interest on the loan.

Options for Repayment, Deferment, or Forbearance

That said, student loans are some of the easiest loans to work with when you don’t have enough money to make your full payment. You can contact the lender and figure out the best option given your current financial state.

Repayment Plans

Here are a few common options available to people with unsubsidized loans:

Standard repayment plan in which you pay a specific amount every month for a set amount of time (typically ten years)
Graduated repayment plan in which you pay less per month at the start and gradually increase over that ten year period
Extended repayment plan in which either the standard or graduated repayment plan is extended over the course of 25 years
Income-based repayment plans, of which there are several, allowing you to pay based on what you earn

Options When You Can’t Make Payments

Many people find themselves unable to make their student loan payments for one reason or another. That is particularly true during times of financial stress, such as the COVID-19 pandemic. You might have the option to apply for deferment or forbearance. There are different types of each but essentially both are methods of delaying your payment for a period time.

Note that with unsubsidized loans you are still responsible for the interest that accrues during the period of non-payment. If you are able to pay the interest as it accrues, rather that postponing those payments, it is in your best financial interest to do so.

You Do Not Have to Pay Unsubsidized Loans During the COVID-19 Pandemic

Here’s something important to learn about: There are special payment rules in place during the coronavirus pandemic. This is part of the CARES Act.

First of all, all student loan repayments are automatically canceled through 9/30/20. Therefore, you do not have to pay back unsubsidized loans (or any student loans) during this time. You don’t have to do anything to qualify this; it is automatic for everyone.

That said, you can still choose to make your payments if you want to. If you can, then you should. You’ll repay your debt more quickly.

0% Interest During COVID-19 on Some Loans

Do be aware that certain student loans are set at 0% interest during this COVID-19 “special rules” period. Therefore, although you usually accrue interest on unsubsidized loans, it’s possible that you will not during this time.

Generally speaking, you will not accrue interest on your loans during this time if the loans are serviced directly by the Education Department. This may include Direct Loans, FFEL, and Perkins Loans – both defaulted and non-defaulted loans. It also includes some defaulted HEAL loans.

That said, it is very important to check with your lender to make sure that you clearly understand whether or not your loans accrue interest during this period. Remember that if you have loans that aren’t covered under these temporary 0% rules, you might be able to qualify for an Education Department student debt consolidation loan through which the rules would then apply.

Again, if you can afford to pay your loans, do so. If you ave unsubsidized loans that qualify for zero interest during this period, then any payment you make will go directly to pay down the principal on your balance.

What If I Just Learned I Didn’t Need to Make Payments During COVID-19?

CARES went into effect in March. The 0% interest and no-payment period extends through September. It’s already June. What if you didn’t realize this and have been making payments? First, check to see that you’ve really made them. If you had them set to auto-debit, chances are that the automated withdrawal was canceled without you doing anything.

That said, if you did make payments since CARES went into effect, and you weren’t required to, you can actually get that money back! If you are in a dire financial situation and really need that money, contact your loan servicer to request the refund.

In summary, unsubsidized loans do need to be repaid eventually. However, during COVID-19, you might not have to make payments. You might not even accrue interest. Even after the CARES Act ends and you ave to make payments again, you have options. These include lower payments, deferment, and forbearance options. Check with your student loan provider to review all of your options.

Here Are the Upcoming Changes for Student Loan Borrowers

May 25, 2020 By Amanda Blankenship Leave a Comment

There has been a lot of talk surrounding the United States student loan debt over the past few years. Given the additional financial struggles that came along with COVID-19, many lawmakers are looking for a way to help student loan borrowers manage their debt. Here is what that may look like in the months to come.

What Changes Are Coming?

Since the coronavirus outbreak, it has become increasingly clear that there is something fundamentally wrong with the way the U.S. finances higher education for students. Not to mention, 2020 college graduates are entering one of the worst job markets in recent history. The pandemic gave lawmakers a basis for introducing relief programs to the Senate floor.

They have already passed temporary assistance that will waive all interest on student loans until at least October 2020. However, many politicians think more is needed. House Democrats have proposed the zero-interest period should extend through October 2021.

Additionally, the new HEROES Act would give up to $10,000 in loan forgiveness to private borrowers who are struggling financially. Democratic presidential candidate Joe Biden has even gone as far as to say he would forgive student loan debt for any borrowers who attended public college.

The country’s leaders will be meeting to discuss possible changes for student loan borrowers in the coming months. For now, it is hard to say what will happen.

Student Loan Borrowers, Keep This In Mind

No matter what happens with student debt in America, student loan borrowers need to maintain payments up until a decision is made. Putting off payments until a decision is made in Washington regarding a relief program can seriously hurt your finances.

Don’t forget, there are also a number of payment arrangements you can make as well as forbearance options if you are having trouble paying. Call your loan provider to discuss your options if you need help.

Should You Use Student Loans to Pay Off Credit Card Debt?

May 14, 2020 By Tamila McDonald Leave a Comment

In some cases, when a person takes out a student loan, they get more cash than they need to cover their tuition, housing, and other college costs. When this happens, figuring out what to do with the excess can be challenging. At times, the simplest choice is to send it back to the student loan company. But, if you have credit card debt, is that the best move? If you are wondering whether you should use student loans to pay off credit card debt, here’s what you need to know.

Student Loan Interest Rates Are Lower

Typically, the rate you’ll get on a student loan is far lower than what you’ll have on a typical credit card. For the period between July 1, 2019, and July 1, 2020, the interest rate on direct subsidized loans and direct unsubsidized loans from the federal government is 4.53 percent. Compare that to an average credit card interest rate of 15.09 percent, and it is easy to see why using a student loan to pay off a credit card would be an attractive idea.

With the lower interest rate, you’d pay less over time by paying off your credit card with your student loan. That’s an important consideration.

Streamline Your Monthly Payments

By rolling your credit card into your student loan, you’d streamline your monthly payments. You’d have one set amount to pay each month, making your budget easier to manage thanks to the increased predictability.

If stability is a goal, then using your student loan to pay off a higher interest credit card could give you that. The two debts become a single line item, making it easier to track.

Empty Credit Card Temptation

When you pay off a credit card, you have the ability to charge that amount all over again. If you don’t intend to close your credit card account, then that temptation may be hard to resist. As a result, you may begin ringing up a new credit card balance quickly, creating even more debt.

If you aren’t sure you could refrain from using the credit card after its paid off and don’t intend to close the account, you might not want to pay it off with your student loan. If you do, you could be getting yourself into deeper financial trouble, which isn’t ideal.

Issues During Bankruptcy

While few people plan to file for bankruptcy in the future, it certainly happens. If you get in a bad financial situation and have to file, credit card debts are often dischargeable. You could rid yourself of that burden during the bankruptcy process.

In contrast, federal student loans can’t be discharged during bankruptcy. They stick with you regardless of the financial hardship. If you pay off your credit cards with your student loan, you are effectively moving a dischargeable debt into one that isn’t. That’s a risk that exists, so it’s important to take it into consideration.

It Might Be Against the Rules

When you have money from a student loan, there can be rules about how you use it. Federal student loans are limited to educational expenses at your school. Usually, this includes tuition, room and board, certain transportation costs, and specific tools, supplies, and equipment.

Technically, if you use your federal student loan to pay off a credit card, you could be misusing those funds. You’d be violating your lending agreement, and that could come with ramifications.

Now, it could be hard for your lender to prove that’s what occurred, which is why some people decide to use the money inappropriately. But that doesn’t mean it’s impossible.

Additionally, it’s crucial to note that private student loans may have different rules. With those, each lender can decide what is and isn’t permitted, so you might legally be in the clear to take the funds to pay off other debts. If you’re considering it, review your agreement to find out whether it’s allowed.

Have you considered using student loans to pay off credit card debt? If so, did you go through with it? Why or why not? Share your thoughts in the comments below.

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What You Need to Know About the Trump Student Loan Interest Waiver

March 16, 2020 By Amanda Blankenship 1 Comment

President Trump announced the United States government would waive federal student loan interest amidst the coronavirus outbreak. Because many people are being forced to stay at home, not work, or work less, many people will need this break financially. However, the Trump student loan interest waiver doesn’t mean what you think it does.

So, What Does It Mean?

Friday afternoon Trump announced he would like to waive interest on student loans during the coronavirus outbreak. For those out of work, it sounds like great news, but it doesn’t mean you don’t have to make your payment.

When Trump announced this change, the Department of Education immediately went to the drawing board to figure out how this will work. They came up with this…

Your same payment will be due but the full amount will go to the principal and none of it will be going towards the interest. At this time, no interest will be applied to your account. This will give short-term relief to borrowers during the outbreak.

Other Options

Individuals who aren’t working at this time may need to pause their payments while they are out of work or until they get back on their feet. For these borrowers, you have a few options.

Income-Driven Payments: If your income is changing or you need to make a smaller payment, call your loan provider and discuss your options. Many of them will decrease the amount you have to pay based on your monthly salary.
Deferment: Deferment will give you a break from making payments on your student loans and you won’t be responsible for any interest accrued on subsidized loans during this time. There is a short list of reasons you might be granted deferment, including unemployment, cancer treatment, economic hardship, education, military duty, or rehab.
Forbearance: Similar to deferment, forbearance will give you a break from paying your student loans. However, you will be responsible for any and all interest during this time. You don’t have to have specific reasons why you are applying for forbearance.

People looking for deferment or forbearance will not have to make payments for a determined period of time. Typically, your loans would continue accruing interest during this time. With President Trump’s proposal, people needing a break from payments won’t have any interest added to their accounts.

However, it is a good idea if you can keep up your student loan payments at this time to do so. Don’t take the interest-free period to take a break from paying off your loan. In fact, paying on it now can actually benefit you.

Questions About The Waiver

So far, there are still a lot of unanswered questions surrounding the Trump student loan interest waiver, including some the Department of Education can’t answer. For instance, will the interest being waived now be added on later? DOE officials don’t yet have an answer to this.

Also, it isn’t yet clear as to whether or not federal PLUS loans will be covered under the waiver. This includes parent PLUS loans and graduate education loans.

All in all, the changes that need to happen for this waiver to take effect will be difficult for loan providers to implement in such a short period of time. Not to mention, some of these service providers will need to send their call center employees home to decrease the risk of contracting coronavirus. So, if you are looking to contact your provider about this, be patient.

The Trump Student Loan Interest Waiver Can Benefit You

Although you will still have to make payments on your loans, the Trump student loan interest waiver can help you if you aren’t in need of forbearance or deferment. Actually, you can take a good chunk off the amount you borrowed and shorten the amount of time you’ll be paying it back.

This waiver will be available to more than 35 million borrowers who have received a federal student loan. Private lenders, like Sallie Mae, will not be covered under the waiver.

Lastly, if you are wondering about what you need to do to benefit from the interest waiver, it’s nothing! You don’t have to contact your loan provider. The interest will automatically be waived during this time and will be retroactive to Friday when Trump announced the change.

5 Tax Breaks You May Have Overlooked

January 3, 2020 By Tamila McDonald Leave a Comment

When a typical person or couple files their taxes, they are usually eligible for at least a few tax breaks. The trick is, deductions and credits aren’t typically applied automatically. In many cases, you have to choose to pursue that tax deduction on your return. If you don’t, then you end up overpaying.

Most Overlooked Tax Breaks

There are certain tax breaks that people are fairly familiar with, regardless of whether they apply to their tax situation. For example, most people know about the child tax credit and earned income credit, even if they don’t personally qualify.

However, there are many others that aren’t as widely known. As a result, tax filers may miss them simply because they don’t realize the deductions or credits are available.

By understanding which tax deductions are frequently overlooked, you can decrease your odds of overpaying. See if any of the situations apply to you and, if so, make an effort to secure that tax break.

Here is a look at five tax breaks that taxpayers frequently miss.

1. Gambling Losses

Whether you live in a state with casinos, spent some time at the track, played the lottery, or took a trip to Las Vegas in 2019, you might be eligible for a tax break. Gambling losses are deductible in some situations.

If you want to claim the deduction, you do have to itemize. In some cases, that approach won’t make sense. But, if you are itemizing anyway, it could help you lower your tax bill.

Additionally, the deduction is limited to how much you report as gambling winnings as part of your taxable income. As a result, it could help you offset how much you owe if you happened to come out ahead when gambling.

2. Jury Pay Given to Your Employer

If you work for a company that pays you your usual wage when you’re on jury duty but requires you to hand over your jury duty pay to them, then you are eligible for a small tax break. Jury pay has to be reported as taxable income. But, if you had to give that check to your employer, you can deduct that amount.

3. Child Care Expenses

Through the Child and Dependent Care Tax Credit, you might be to reduce your tax bill. You can get between 20 and 35 percent of up to $3,000 or $6,000 of your dependent or child care costs back as a credit if you qualify.

Eligibility is based on a few factors. First, you have to be using the service so that you can work. Second, for child care, the child must be under the age of 13. For spouses’ or parents’ or other dependents’ care, they must be deemed incapable of self-care and live with you for more than half of the year.

The size of the credit decreases for higher-income households, though it never disappears completely. While the credit isn’t refundable, it can help you reduce your liability significantly.

4. Dependent Tax Credit

Even if a dependent no longer qualifies you for the child tax credit, that doesn’t mean you can’t get a break. Older children, including college-aged kids, as well as aging relatives who you are providing care for in your home, can make you eligible for a dependents credit of $500.

This tax credit does phase out for higher-income households. If your adjusted gross income is above $200,000 ($400,000 if you are married filing jointly), you’ll fall in that category.

5. Student Loan Interest Paid by Parents

If a parent is paying back your student loans, you are the one who can legally claim the student loan interest deduction. Only the person who is responsible for the debt can deduct the interest, regardless of who is actually paying the bill. This includes adult children who aren’t being claimed as dependents by their parents.

The best part about this deduction is you don’t have to itemize to claim it. That makes it significantly more accessible. Additionally, you aren’t taking a deduction from your parents, as they can’t legally claim it anyway.

Claiming a Tax Break

In most cases, the federal government doesn’t just take your word when you say you are eligible for a tax break. Instead, it requires some form of evidence or proof.

Depending on the deduction or credit, what you need to support your claim varies. You might need details from a specific tax document, like a 1098-E for student loan interest. For the child care tax credit, you have to provide information about the care provider and have proof that you incurred the expenses.

Incorrectly claiming a tax break has consequences. If you aren’t sure you have what you need to claim a deduction or tax credit, it’s wise to review the IRS website. It will outline what you need in each scenario. You can also speak with a tax professional, as they are typically well aware of what it takes to qualify.

Do you know of any other tax breaks people accidentally overlook? Share them in the comments below.

5 Things You Should Know Before You Take Out a Direct PLUS Loan

June 27, 2019 By Tamila McDonald Leave a Comment

Today, at least 3.4 million people have a Direct PLUS Loan, a form of student loan available through the federal government that parents can take out to help fund their child’s education. Together, they owe around $90 billion. While many parents want to help pay for their child’s college degree, taking out a PLUS loan is not without risk.

What You Should Know Before You Take Out a Direct PLUS Loan

Parents of eligible college students have access to Direct PLUS Loans through a federal government program. The US Department of Education serves as the lender, leaving many to believe that Plus loans are a safe option to help fund a child’s education.

However, like any loan, there are pros and cons to using PLUS loans. Here are five things you need to know before you take out a PLUS loan to help fund your child’s education.

PLUS Loan Eligibility, Amounts, Fees, and Interest Rates

First and foremost, it is important to understand that not every parent can receive a Direct PLUS Loan. Along with being a biological, adoptive, or (in some cases) stepparent of a dependent student who is going to an eligible school at least half-time, you also have to have a decent credit history. There are situations where parents with adverse actions on their credit report can qualify, but that usually involves having a cosigner or proof of extenuating circumstances.

Parents can borrow amounts that cover their child’s cost of attending their selected college, minus the value of any other financial aid the student receives. Each school defines its own cost of attendance so that that number can vary from one institution to the next. However, this means there is no formal limit on how much a parent can borrow each year through the PLUS loan program.

The federal government sets the interest rate on a PLUS loan. For disbursements made between July 1, 2018, and July 1, 2019, that rate was 7.6 percent fixed. While the rate on loan will not fluctuate, the federal government can change rates on new loans during each subsequent one-year period.

Direct PLUS Loans are unsubsidized. Interest begins accruing immediately. While you can defer the payments until your child leaves college, your balance will grow based on the interest added to the loan over time. If you do not request a deferment, payments start right away.

Along with interest charges, parents also have to contend with a loan fee. The percentage also varies depending on the year, though sits at 4.248 percent from October 1, 2018, to October 1, 2019. This fee is deducted proportionately from each disbursement. It does not increase the amount of the loan. Instead, it reduces the amount that is sent to the school or can be used for qualifying costs, keeping the loan balance the same.

Repayment Programs for Parent PLUS Loans are Limited

Like other federal student loans, there are several repayment options for PLUS loans. Along with a standard repayment structure – equal payments over 10 years – there are alternatives. The graduated repayment plan has lower payments initially. Every two years, the size of the payment increases throughout 10 years.

On the extended payment plan, the payments can be spread out over 25 years. This leads to lower monthly payments, but you pay significantly more in interest based on the longer life of the loan.

Federal student loans obtained by students come with additional repayment options that simply aren’t available on PLUS loans. As a result, it is important to understand which plans are and are not available, ensuring you can factor that in before you take out a PLUS loan.

Loan Repayment Responsibility is Non-Transferable

Some parents may consider funding a child’s education with a PLUS loan believing that they can transfer the debt to their child after they graduate. However, that isn’t an option. The parent is the legal borrower and cannot transfer responsibility.

There are instances where the debt may be discharged. For example, should the borrower or their student die, the remaining balance is discharged. This can also happen if the parent becomes permanently disabled.

Otherwise, the expectation is that the parent will repay the loan in full during the designated time frame.

PLUS Loans Impact Credit Scores and Borrowing Power

Federal student loans are reported to the major credit bureaus, including PLUS loans. If you obtain a PLUS loan, the balance and payment history appear on your credit. Even if you make on-time payments, the balance of the PLUS loan can impact your borrowing power. Lenders consider the total amount you owe and payment sizes when determining if you qualify for more credit, and these factors also affect your credit score.

Additionally, like any other loan, late payments, missing payments, and defaults are reported on your credit history, impacting your credit score.

Default Comes with Serious Consequences

Failing to repay a PLUS loan comes with serious financial ramifications. Defaulting puts a parent at risk of being subjected to a range of forced repayment efforts, including wage garnishments, tax refund offsets, and Social Security offsets.

Even if you are in a dire situation and file for bankruptcy, you can’t escape a PLUS loan. These loans can’t be dismissed during bankruptcy, regardless of the hardship they create or the severity of your financial situation.

There are steps parents can take if they cannot repay a PLUS loan, including requesting a deferment or forbearance. However, these are only temporary solutions that stop payments for a period or allow for lower payments. Neither forbearance or deferment stop the accrual of interest, so the balance of the loan can still increase if at least the monthly interest charges aren’t paid during that time.

Ultimately, PLUS loans are not risk-free. Since there aren’t formal borrowing limits, parents can find themselves with massive loans. If repayment becomes challenging, there are few options to pursue that can provide relief, as even bankruptcy won’t stop these loans in their tracks. While PLUS loans can be viable options to help fund a child’s education, it is important to consider the risks before you sign on the dotted line. Otherwise, you could be putting your financial well-being in jeopardy.

Have you taken out a Direct PLUS loan? Is there anything you wish you knew before you did? Share your thoughts in the comments below.

If you enjoy reading our blog posts and would like to try your hand at blogging, we have good news for you; you can do exactly that on Saving Advice. Just click here to get started.