Student loans: From repayment to forgiveness to consolidation, your 5 biggest questions — answered

Whether you’re gathering FAFSA forms as you apply for financial aid or graduated long ago and are still paying off student loans, dealing with the cost of education (and the debt that comes with it) is confusing and not very fun.

For those at the beginning stages of trying to pay for higher education, it might feel like you are constantly hurtling toward deadlines. Thursday, for example, is the last day to submit an application for state financial aid in Connecticut — one of the earliest state deadlines. You have until June 30, 2018, to apply for federal aid for the 2017 to 2018 academic year. And your dream school likely has special deadlines of its own coming up.

In other words, it’s go time, Kal Chany, author of Paying for College Without Going Broke, said in a phone interview: “Financial aid gets billed sort of like you’re playing tee ball, in that just by participating you get a trophy. But it’s more like the SAT. You have to sign up and show up, of course, but... how you do it is what matters.” To squeeze more out of your financial aid office, Chany recommended submitting forms the day you pay off a substantial debt or make a tax prepayment — since forms generally require you to declare income as of that day. The more tapped out you are when you hit send, the better.

Still, no matter how shrewdly you navigate the process, like most people you may very well need to complement your aid with some loans — particularly if you’re not lucky enough to be a graduate of one of a dozen or so colleges offering free rides to students whose families earn below a certain threshold.

One estimate suggests the average debt burden for graduates entering the workforce is more than $37,000. And yet, for all their ubiquity, most students don’t seem to understand how their student loans actually work, according to a recent LendEDU survey.

For example, only 35% of students know that the federal student loan program charges you extra fees (on top of your principal and interest) to underwrite the program’s costs. Those amount to about 1.07% of the total loan amount and are deducted from each check the federal government sends to your school.

So what other student loan surprises are there? Read on for answers to five of the most common questions around.

1. Does paying off my student loan faster save me money?

One surefire way to reduce the overall cost of your student loans is to pay it off early. A person with a $15,000 loan balance, paying about $150 month at a 6% loan rate would pay roughly $2,000 more than the same exact borrower who pays $250 a month, according to MakeLemonAid’s student loan calculator. When you pay off your debts faster than the estimated repayment period, you’ll end up paying less in overall interest.

The tricky part is figuring out which of your debts to pay down first. Chances are you have a bunch of different loans with different interest rates. Focusing on higher interest loans will save you more in the long run, although it may be more satisfying to knock off the little guys first.

Then there’s the matter of your other debts: A high-interest credit card, for example, will almost certainly accrue new interest much faster than your subsidized loans will.

Here is a helpful guide to prioritizing your financial goals.

2. I’ve been repaying. Why is it taking so long for my loan principal to go down?

Interest starts accruing the moment your loan is disbursed, meaning the balance of your student loan was actually growing while you pursued your degree. You may also be making less progress against the principal than you realized if you took full advantage of the six-month grace period on student loan payments that many students utilize to get financially settled after college. That whole time, interest was piling up.

Then, when you finally do start repaying, your money goes first toward fees, then toward interest, then toward the principal — which is why it can seem like it is taking forever for that number to grow smaller.

That said, paying off interest while the principal sits untouched does come with something of a silver lining: Unlike payments against the principal, payments against student loan interest are tax deductible. If you paid $600 in student loan interest or more, you should receive a form from your servicer known as a 1098, which will tell you how much you’ve paid in interest over the last year. The more you paid, the more you’ll be able to deduct come tax time.

3. Should I use extra cash to pay down my debt?

When you come into extra money, whether it’s a birthday check or a bonus from your boss — it’s always a good idea to put it toward some of your debt.

This helps you kill two birds with one stone, by improving your net worth and making yourself more resistant to lifestyle inflation (our expenses tend to climb alongside our paychecks, for better or worse).

If you’re on the fence, again, use a repayment calculator to figure out if the option makes sense — or if the payoff is so low you’d rather keep your cash.

4. Can private student loans be forgiven?

Be wary of anyone claiming they can get your student loans forgiven. Generally a student loan can be forgiven or discharged only in exceptional circumstances, like if your school shut down while you were pursuing your degree or you become permanently disabled due to an illness or injury.

Sometimes student debt can be discharged in bankruptcy, if you can prove that repaying your loans would pose “undue hardship” on you and your dependents. Just be aware that bankruptcy proceedings can be expensive and devastating for your credit.

Another possibility? Some private loans — roughly 11% of the market, according to Money — have been purchased by a company called National Collegiate Student Loan Trusts, which may at the end of the day be forced to erase billions of dollars in student loan debt due to missing paperwork.

Finally, if you have federal loans, depending on your line of work, you also might qualify for the public service loan forgiveness program.

5. Should I consolidate or refinance my student loans?

Different from federal loan consolidation — which combines together multiple debts and might actually increase your interest rate, but qualify you for additional repayment or forgiveness options — student loan refinancing is all about getting a lower interest rate.

It emerged in part due to an arbitrage opportunity, which is sort of an economic price mismatch. Students who went to college before the recession — and the ensuing lowering of interest rates — often had to pay much higher rates, with loans charging as much as 8.25%. To take advantage, numerous startups began buying up that debt and charging a lower interest rate.

Refinancing might be particularly attractive for highly employable top earners with lots of student loan debt — including doctors and lawyers, because their large incomes help them qualify for the lowest interest rates, some of which are below 3%, according to Student Loan Hero.

People in those sorts of professions are also insulated from student loan refinancing’s downside: losing eligibility for federal programs like income-driven repayment, an important protection for people who don’t necessarily have the most job security.

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