Consumer Financing Student Loan

Consumer student loan

A consumer student loan can build your future

Your financial situation is different from someone else. The consumer student loan financing option that works for someone may not be the best choice for someone else. You should take the time to understand all the consumer student loan financing options available to you to find the best solution for your needs and goals.

 

What Is A Consumer Student Loan?

A consumer student loan is a financial product specifically designed to promote student enrollment in higher education institutions.  This loan product also serves to provide the option of refinancing  of an  existing student loan, normally after student graduation and entering the workplace.

The largest segment of consumer debt in the U.S. is now student loan debt, having surpassed consumer credit card debt.  This consumer student loan debt consists of both federal government backed and private lender student loans.  With this growing debt burden, students are looking for a variety of  consumer student loan refinancing options as they enter their adult lives.

If  you are considering a student loan to begin financing your higher education studies or you need a better way to pay off your existing student loan debt, there are a variety of alternative consumer student loan products for you to consider.  Understanding the type of student loan you might need, based on your unique financial situation, and how debt refinancing works, will help prepare you for a strong financial future.

New Consumer Student Loan Options

You have two options for financing your higher education studies:  Federal student loans and private student loans.  The basic difference between the two is that federal student loans are offered by the U.S. government, while private student loans are offered by a private-sector lender. These two types of consumer student loans offer very different benefits, interest rates, and repayment options.

Student Loan Type
Federal student Loan
Private Student Loan
Average Interest Rate Undergraduate – 4.45%, Fixed
Graduate – 6%, Fixed
Undergraduate – 3.0+%, Variable
Graduate – 7.99%, Variable
Personal Credit Matters? No – Need Based Yes – Credit Worthiness
Restrictions Only for education-related expenses while in school For education and post-graduate expenses (e.g., bar exam or medical residency)
Loan Repayment Deferred for six months after school. Term 10 years. Fixed monthly repayments. Debt relief graduated and income-based options. Normally deferred for six months after school. Term varies. Fixed monthly repayments. No debt relief options.
Are Loans Subsidized? Sometimes No
Debt Relief Income Driven Repayment? Yes No
Debt Relief Loan Forgiveness? Yes, If You Qualify No

 
 

Is A Federal Student Loan Right For You?

FeDERAL Student Loan

Federal student loans are generally recommended as the first choice for consumer student loan financing since they offer fixed rate interest rates and more flexible repayment options. There are however restrictions to the loan amounts and how they can be used.

Since Federal student loans have fixed interest rates, your loan payments remain the same, regardless of changes in the market rates. Federal student loan rates are currently fixed at 4.45% for undergraduate and 6% for graduate studies.

Some Federal student loans are also subsidized, paying the interest on the loan while you are in school or deferment.  Additionally there are a variety of repayment schedules and student loan forgiveness programs.

Once you have graduated, federal student loans will afford you more accommodating repayment options. However, if you are unable to make your student loan payments, the Federal government offers various debt relief programs to help you move forward with your life while honoring your financial obligations.

Federal Student Loan Relief is where your student loan payment can be adjusted to reflect your income and family size (your ability to pay) rather than the terms of the loan. An Income Driven Repayment (IDR) plan is basically a Federal subsidy acknowledging that for many, the salary you earn after graduating does not match the educational expenses you incurred in the process.

Is A Private Student Loan Right For You?

PRIVATE Student Loan

Consumer private student loans are offered by private lenders, non-federal institutions, credit unions and state loan programs. Whether it is a student loan offered from Sallie Mae or by your university, it is considered a private loan. There are two main benefits to private student loans.

  • Potentially a higher borrowing limit.
  • A lower interest rate, if you have excellent credit.

A consumer private student loan is often used to supplement the difference when a Federal student loan does not cover all of a student’s school expenses.

These loans are lender-approved not based on your economic need but rather by your credit worthiness. Similar to any type of personal loan, a private student loan has an interest rate (fixed or variable), a monthly payment amount, a term length and other lender conditions.

While private student loans have a higher interest rate on average, it is possible to get an interest rate as low as 3% or 3.5%.  For those students with little credit history, a parent co-signer is usually required (same with Federal student loans). People who are able to qualify for these low rates may choose private over federal student loans.

There are disadvantages of consumer private student loans. Many come with a variable interest rate that can increase with the market prime rate. Since they are not subsidized like Federal loans, interest costs start accruing when you take out the loan.  Also, these loans offer less flexibility in terms of repayment and debt relief options if you are unable to make your loan payments.

 

For a federal student loan you can apply online at Federal Student Aid (FAFSA) for both undergraduate and graduate studies.

Private student loan providers typically offer online application forms that you can complete in a short period of time. If you will apply with a cosigner, they can fill out their portion of the application, once you have completed yours.

For a federal student loan there is only one source and the loans are the same for all.

Private student loan providers operate in a competitive market and it will pay to compare loan offers. Typically they provide online application forms that you can complete in a short period of time. If you will apply with a cosigner, they can fill out their portion of the application, once you have completed yours.

You may not have a choice in deciding. A cosigner is often required by lenders to sign on a consumer student loan application to guarantee payment in the event of your defaulting on payment. If you don’t pay, your cosigner will pay. For young adults just starting out, they often have little credit history to meet the lender’s credit requirements for loan approval or to allow them to offer the most favorable loan terms.

There are other financing options to help pay for your higher education. Money is money. The challenge is the effort you are willing to invest to find it. Your goal is simple. Complete your higher education with the least amount of debt to repay after graduation.

  • Grants | Scholarships – These are programs that governments, schools, corporations and individuals use as a charitable means to give back to society. Grants are often based on need. Scholarships are usually based on merit. Students normally do not ahve to repay the money they receive. Usually this type of support will not cover all your student tuition, so it is usually combined with some other type of financial aid. It will be worth your time to investigate the Internet and fill out paperwork.
  • Income Shared Agreements – Schools are businesses and adjust to their marketing efforts to recruit new clients. An ISA is a financial agreement between you and your future college. Your college agrees to advance you a fixed amount of money from a private investment account or college endowment toward toward your school expenses. You agree in turn, to pay a percentage of your post-college income (10-20%) over a fixed period of time, normally 10 years. Your school is betting that you will be a good future financial investment and wants to take you on as a minority silent partner. This option is limited to particular student careers.
  • Personal Loan – A personal loan can be used to to pay for college expenses or supplement a Federal student loan. Generally the interest cost will be higher than a personal student loan.

Consumer Student Loan Refinancing

Consumer student loan refinancing is a means for you to reduce the financial burden your current student loans have on your life. It can be a great option for most people, but it isn’t always the best option for everyone.

This process allows qualified borrowers to reduce the interest rate and repayment terms on the new student loan, saving thousands in total interest over the term of the loan. Consumer student loan refinancing permits you to make monthly payments that pay off your loans faster, lock in a fixed interest rate, or remove a parent as the cosigner of a student loan. Depending on the interest rate and number of years it will take to pay off your new loan, refinancing can reduce your monthly payment, your total interest paid, or both.

Refinancing Federal Student Loans

The Federal government does not do refinancing of student loans. So, if you choose to refinance your Federal student loan, it will only be with a private lender. While you can do this, it is probably not the best decision for you.

When you refinance or consolidate your federal loans with a private lender, you lose several important benefits that include student loan forgiveness for teachers and public servants, deferment payment programs and other debt relief repayment options.

Federal loans also generally come with some of the lowest fixed interest rates available in the market. It is most likely that you will not find a private lender with a similar offering. However, when in doubt, talk with a private student lender and see what offers are currently available.

How Do Student Loan Repayments Work?

Consumer student loans are one of the few types of debt you can take on without knowing clearly when and how you are going to repay the loan back. This loan debt repayment “ambiguity” is related to the lender’s acknowledgement that the borrower (normally an undergraduate student) has little source of income until after graduation and beginning a career. There is also ambiguity as to if and when graduation occurs, other than sometime in the future.

That is why consumer student loans are different from personal loans and come with multiple repayment options. Often you can defer deciding on your repayment plan until after you graduate. This allows you a period of time to get your career going, set up a repayment budget plan and establish long-term goals. Federal student loans offer much more flexibility of repayment than private student loans as will be discussed below.


 
 

Federal Student Loan Repayments

Federal Student Loan
When Funds Are Disbursed

The government directly sends your school the loan money. It is used to pay for your tuition and fees. You are then given the option of using any leftover funds for other education-related expenses or returning them to the government. Repayment is based on the Federal student loan type:

  • Subsidized Loan – Nothing you have to do.
  • Unsubsidized Loan – Nothing you have to do (interest costs accumulate).
  • Unsubsidized Loan – You can make interest-only repayments.
  • PLUS Loans – You start immediate full repayments on your interest and principal.

Once you graduate, leave school or drop below half-time enrollment, you will have an exit counseling session with your loan servicer to learn the process for repaying your student loans.

Post Graduation | Drop Out

Your loan servicer will review the repayment process after graduation or ceasing to be a full-time student. Repayment is based on the student loan type:

  • Subsidized Loan – You begin monthly repayments 6 months after leaving school (principal and accrued interest).
  • Unsubsidized Loan – You begin monthly repayments 6 months after leaving school (principal and future interest).
  • PLUS Loans – You continue full repayments on your interest and principal.

If you have more than one Federal student loan, you have the option of consolidating them by applying for a Direct Consolidation Loan. This loan consolidation may reduce the interest rate (weighted average of your previous loans).

Post Six Months

Regardless of which type of Federal student loan you obtained, it is now time to begin repaying the government. You make payments to your loan servicer. If you choose to use an electronic auto-payment process, you can reduce your student loan interest rate by 0.25%.

Private Student Loan Repayments

Private Student Loan
When Funds Are Disbursed

You lender directly sends your school the loan money. It is used to pay for your tuition and fees. Any remaining funds from your private student loand and then sent to you. Repayment is based on your lender agreement and there is no ambiguity:

  • Immediately begin monthly repayment (principal and interest).
  • Immediately begin monthly repayment (interest only).
  • Defer payments until after graduation.

Post Graduation | Drop Out

You lender agreement will specify the repayment process after graduation or ceasing to be a full-time student. Again, there is no ambiguity:

  • You begin monthly repayments 6 months after leaving school.
  • You immediately begin monthly repayments (principal and interest).
  • Immediately you begin monthly repayments (interest only).
  • You immediately begin monthly repayments (small token amounts).

Post Six Months

You lender agreement will specify the repayment process after the six month grace period:

  • You begin monthly repayments after leaving school.
  • You continue you monthly repayments (principal and interest).
  • You begin monthly repayments (principal and interest).
  • You now change from small token to normal monthly repayments.

Student Loan Repayment Options

Generally Federal student loans offer greater repayment flexibility than private student loans. Private student loans offer fixed payment terms from five to twenty years, independent of you income potential. Federal student loans, offer flexibility of change as your income and financial life changes over time.

For those students with an uncertain financial future after graduation, a federal student loan is a better choice.


 
 

Credit Repair | Identity Theft

Frequently Asked Questions

Financing Student Loan

Most likely not. If you have a Federal student loan, you can’t transfer it. You will need to begin the process of a new student loan application.

If you have a private student loan, you will need to consult your lender as each has their own terms and conditions.

Whenever you are applying for credit, such as a student loan, the lender will do a “hard” credit check to determine your credit worthiness. This hard credit check will reduce your credit score slightly.

However, if you demonstrate consistency of on-time payment of your student loan, this is positive for your payment history component of your credit score and should improve it.

Note that with a student loan, you have assumed additional debt. This will affect your debt-to-income ratio. Lenders review this percentage to determine whether your available income allows you to pay off the debts that you have.

Yes, but your lender and loan terms will be limited. Most private student loan lenders require that you have successfully completed a 4 year degree as part of a loan refinancing. This is primarily a matter of risk avoidance. If you have graduated, you have greater financial potential to repay a loan. If not, the terms of any refinance loan will be less attractive.

Most students have not established a credit history, so this is not unusual. In this case your private student loan lender will likely require a cosigner on the loan to serve as a guarantee of repayment. Often the cosigner is a parent or relative.

Once you have established your own credit history, there are ways so that you can have your cosigner removed.

Yes. If you have the credit history and income to meet the student loan lender loan approval guidelines, there is no need for a cosigner on the loan. However, even if you do qualify, your student loan lender may advise you to consider a cosigner to add to the loan application to improve the loan terms (e.g., interest rate) and reduce the overall interest cost of the loan.

Student loan refinancing is when you take out a new student loan to pay off an old (one) student loan.

Student loan consolidation is when you take out a new student loan to pay off the combined debt of more than one student loan.

The purpose of either is to either: a) extend the term length of the new student loan to reduce your monthly student payment; b) lower the interest rate of the new student loan to reduce your interest costs; c) if the new student loan interest rate is lower you can apply more of your monthly payment to the loan principal, reducing the time needed to pay off your student debt.

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Consumer Credit Repair

The Fair Credit Reporting Act (FCRA) was written in 1970 as an amendment to the Consumer Credit Protection Act. The FCRA provides additional measures of consumer protection in the areas of fairness, accuracy, and privacy of the information collected by the credit bureaus. It also allows you to personally engage in credit repair and maintenance processes, verifying that the information in your credit report is correct.

A credit bureau – sometimes called a “consumer reporting agency” – is a business that collects relevant consumer information from creditors and courthouses, and then sells that information to interested parties such as potential lenders. Such information is sold in the form of a credit report. In the U.S., the three major credit bureaus are TransUnion, Experian, and Equifax.

Normally negative items will remain on your credit report for seven years, with the exception of bankruptcy (ten years). You may choose to dispute a negative item, but if it is accurate, the dispute will be rejected and the item will remain on your credit report. However, if the negative item violated consumer protection laws, it may be removed.

When an account is unpaid for more than 180 days, a creditor usually writes off the debt as a loss on their financial statements. This is known as a charge off. Once a debt is charged off, it is either transferred to an in-house collections department or sold to a third-party collection agency who will likely contact you in attempt to recoup the balance.

The time it takes to repair your credit is completely dependent upon your personal situation. Six months should be your guide if you have many issues with your credit report.

It is a common myth that negative items must remain on your credit report for a minimum number of years. In fact, there is no minimum time-frame. Creditors control the information they provide to the credit bureaus. They can also choose to remove negative items as well. The Fair Credit Reporting Act requires all reported information to be fair, accurate, and substantiated. If these conditions are not met, the credit bureaus are required to remove it.

Credit Repair is actually the process of removing inaccurate, unfounded, out of date, false, and erroneous information from your credit report.  Your credit report dictates your credit score.  The 3 major credit bureaus collect information from lenders, creditors, and debt collectors and apply it to your credit report.  Based on that information, your credit score is determined.  This information could include the balances on loans or credit cards, credit inquiries, debt to income ratio, and most importantly, credit utilization (the percentage of debt you have to available credit)

This is determined by what your goal is.  Perhaps you are trying to buy a house.  If this is the case, you might want to get started at least 6-9 months before you plan on purchasing.  If you plan on purchasing a car, then you might to get started in 2-3 months.

You have the ability to dispute any information on your credit report you deem as inaccurate, unfounded, or incorrect.  However many consumers have tried doing this themselves only to find out that the process takes too long, is confusing, and full of challenges they deem too stressful to deal with themselves.  A third-party credit repair company can take the burden of disputing off your hands and have the ability to speed up the process through their experience.  Think of a third-party credit repair company like you would think of a Tax preparer, Legal Service, or even a plumber.  You could probably do it yourself, but perhaps not with the same end results. We highly suggest that all of our clients and prospective clients take some time to learn about their credit, credit reports, as well as the process of repairing their own credit.  You may feel doing it yourself is the better route for you and your situation.

A good credit score helps you obtain low interest rates and long term loans, like home loans or car loans. Lenders may charge high interest rates or impose undesirable repayment plans for you. Given the stakes and the consequences involved, it is clearly to your advantage to work toward recovering from a bad credit rating.

Credit Bureaus are companies that maintain records of your credit lines and performance. Records can go back for up to ten years, in the case of bankruptcy data. Creditors, banks, mortgage companies and other financial institutions supply this information to the credit bureaus. The credit bureaus then compile this data into your a credit report. A credit report has details of how you have managed credit in the past, so other lenders can judge your credit worthiness.

Most likely your credit report has errors.

The Federal Trade Commission reported in a study conducted in 2012 that 26% of the credit reports they analyzed had errors. Of those with errors, 5% who disputed these errors increased their credit scores at least 25 points. That is a significant change in a credit score.

You should not assume that your credit reports are completely accurate.

No. Your credit report is independent of your spouse. The same is true of your credit scores. However…

A lender will likely take into consideration both of your credit reports when deciding on a home mortgage, for example. If your credit report is bad and your spouse’s good you may find that the loan, if approved, has a higher interest rate than if both were good.

It certainly can. Many employers will do a credit check of a potential employee to determine the stability of the job candidate. For job positions that entail financial responsibility, it is most likely you would experience a credit report check.

When you are initially contacted by a debt collector regarding an unpaid debt, you have the right to request proof of the debt within 30 days of initial contact. This is called debt validation. Unless the debt collector can validate that you are responsible for the debt, they must stop all further collection efforts.

The debt validation letter from collector needs to include: 1) Proof the debt exists; 2) Proof that you are responsible for the debt; and 3) Proof that the debt collector has legal right to collect on the debt.

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