For many people, attending college and graduating with a degree is a cherished dream. The challenge, though, is affording that education. As a result, many students have to look at student loans. According to the Federal Reserve Bank of New York, Americans owe over $1.5 trillion in student loan debt, and they’re having a hard time paying off that debt.
With this in mind, you need to avoid defaulting on your loan. This is because even if you file for bankruptcy, it’s highly unlikely that your loan will be forgiven. Also, defaulting on your loan could lead to your loan being handed to collection agencies, your wages being garnished, or your credit score being negatively affected, hampering your future borrowing ability.
To prevent defaulting on your student loan, it’s important to keep track of your student loan payment costs. In this post, we will dive into the factors that can influence these costs.
Factors That Can Affect Student Loan Payment Costs
The factors that can affect the amount that you are required to pay include:
Repayment Plan
Federal student loans tend to have more flexibility when it comes to repayment than private student loans. This section primarily focuses on federal student loans as a result.
To reduce student loan costs, you need to make sure you choose the right repayment plan. However, keep in mind that you will pay more in the long term by choosing lower monthly payments. Federal student loan repayment options include:
- Standard Repayment Plan: Payments are fixed to ensure the loan is paid off within 10 years.
- Graduated Repayment Plan: Payments start lower and gradually increase to ensure that the loan is paid off within 10 years.
- Extended Repayment Plan: The loan must be repaid within 25 years, so payments are fixed or gradual.
- Revised Pay As You Earn Repayment Plan (REPAYE): Payments are 10% of the borrower’s discretionary income, and this can change from year to year. The outstanding balance is forgiven after 20 to 25 years.
- Pay As You Earn Repayment Plan (PAYE): Similar to REPAYE, payments are 10% of the borrower’s discretionary income but will never be more than under the 10-year Standard Repayment Plan. The outstanding balance is forgiven after 20 years.
- Income-Based Repayment Plan (IBR): Payments are 10% or 15% of the borrower’s discretionary income but will never be more than under the 10-year Standard Repayment Plan. The outstanding balance is forgiven after 20 to 25 years, but the borrower may owe taxes on the forgiven amount.
- Income-Contingent Repayment Plan (ICR): Payment is either 20% of the borrower’s discretionary income or the amount they’d pay with a fixed repayment plan over 12 years, adjusted for income. The outstanding balance is forgiven after 25 years.
- Income-Sensitive Repayment Plan: Payment is based on annual income, but the loan has to be paid off within 15 years.
Origination Fees
An origination fee is a percentage that is deducted from your federal student loan at disbursement. It’s a fee that is applied to cover the costs of processing and funding the loan. That means that the total loan money you receive will be less than what you requested. Many people are unaware of this.
Origination fees on federal student loans range between 1% and 5% of the loan amount. For instance, if you have a $6,000 loan, you owe an extra $240 with a 4% origination fee. So, you would really only receive $5,760. It may not seem much, but to put it into perspective, consider this:
According to the National Association of Student Financial Aid Administrators (NASFAA), for a four-year program, the average undergraduate borrower in a standard 10-year repayment plan will pay almost $294 in origination fees. On the other hand, for graduates in a two-year program, the fees climb to $1,174.
Interest Rates
Interest is the cost of borrowing money and is dependent on the type of loan you take. Simply, it’s a percentage of the unpaid principal amount. As a result, interest considerably increases the amount that you owe. Interest rates are charged on both federal student loans and private student loans. Additionally, for private student loans, the rates can be fixed or variable.
Generally, federal student loans have lower interest rates. Private student loans usually have higher interest rates, but this is dependent on you or your co-signer’s credit score.
Federal student loans have fixed interest for the life of the loan. However, the rates are reevaluated annually by Congress but without affecting the existing loans. For instance, federal student loans interest rates for the academic year 2019-2020 are between 4.53% and 7.08%.
For fixed interest student loans, it’s possible to determine the interest rates beforehand. However, it can be difficult to predict variable interest rates because they change according to the market.
Application Fees
Application fees are mostly applied to private student loans. It’s a nonrefundable fee that is paid once and varies by lender. Whether your loan is approved, you have to pay the fee. However, in recent years, most lenders have scraped application fees.
Always carry out due diligence on the standard approval requirements for the type of loan you intend to obtain. That way, you will be able to determine if there are application fees charged.
Late Payment Fees
Most often, late payment fees are a percentage of the missed payment. The exact amount you will pay depends on your loan servicer and how late the payment is.
Also, your loan is considered in delinquency when you miss the due date by even a single day. This doesn’t mean that you will be penalized. However, you need to act quickly because if your loan account remains delinquent for 90 days or longer, then your loan servicer can report you to the major credit bureaus. Moreover, if the delinquent status persists, then your loan risks going into default. At this point, your entire unpaid balance becomes due, or you could be taken to court.
Always check the terms of your loan agreement. Somewhere in the fine print, there will be guidelines on late payment fees.
Returned Payment Fees
Returned payment fees are charged when you pay your student loan, but the payment doesn’t go through due to insufficient funds. This can either be a flat fee or a percentage of your payment amount. At other times, it creates another problem.
When you receive a returned payment, you end up missing the payment due date. As a result, it leads to a double charge in the form of a returned payment and late payment fee.
Check the small print of your loan agreement. By carefully reviewing your contract, you will be able to determine the returned payment fees.
Loan Collection Fees
Loan collection fees are one of the most expensive loan costs, but they must be “reasonable.” The fee is charged when you default on your loan, usually 270 days for most federal student loans (for private lenders, the default time varies). First, the outstanding balance becomes due immediately, and then the borrower is charged a portion of their payment or loan balance. For federal loans, collection fees are usually limited to 25% of the loan payment or balance.
The loan collection fees are clearly stipulated in your loan agreement. Make sure you review the document carefully.
Deferment and Forbearance Fees
If you have difficulty making loan repayments, then deferment and forbearance are viable alternatives. With these arrangements, you can reduce your monthly payments or even stop them completely. Also, depending on the student loan, interest may or may not accrue.
Deferment and forbearance are common with federal student loans, but private lenders also offer them. When they do, these private lenders may charge a flat or monthly fee for the duration that the loan is suspended.
Always carry out due diligence before committing to such an agreement. The last thing you want is extra charges when financial difficulties are what led you to seek deferment or forbearance in the first place.
You Can Determine Student Loan Payment Costs Over Time
It’s always advisable to know beforehand the list of fees you will be paying as a student loan borrower. The good news is that the list above gives you a guideline on the various costs and how to determine them.
Also, some lenders may hide payment costs in the fine print of your contract, so read it carefully. When armed with this knowledge, it becomes easier to plan for any extra fees that you may face over time.
Student loan repayment doesn’t have to be tricky, though. At College Finance, we provide in-depth resources on the college experience, whether you’re in the planning stage, are looking to borrow, or are figuring out how to repay your student loans.
