Slay those Student Loans Part 2: Prudence
By Victoria Sechrist (ConsumerCatholic.com)
Part 2 of a 5-Part Series on Student Loans
In this series, we’re drawing upon the four cardinal virtues (prudence, temperance, fortitude, and justice) to help you in the process of paying down student loans. Last week in Part 1, we talked about hope, which is one of the theological virtues, and how we need hope for everything. If we don’t have hope, then we probably won’t keep going when the going gets tough.
Now, in Part 2, we’re focusing on prudence, which helps us to plan the right course of action in any situation. So if you’re feeling like you don’t even know where to begin with your student loan mess, then start right here! Make sure to have your “numbers” handy from last section as we move forward.
The Catholic News Agency says prudence “gives us the knowledge of what must be done, when it must be done, and how it must be done.”
That begs the question: how do you discern the appropriate course of action for your student loans when there’s so many terms thrown around?! So, let’s go through a few basics.
Federal vs. private
It’s important to know whether you have a Federal or private loan because your repayment options will vary based on this.
You may have student loans issued by the government (Federal) or a private lender. The easiest way to find out whether your loans are Federal is to check out the National Student Loan Data system at https://nslds.ed.gov/nslds/nslds_SA/. If you don’t see your loans on there, then they’re not Federal loans!
Some student loan servicers are known for Federal student loans:
- Great Lakes
- FedLoan Servicing
The government’s website for student loans provides contact information for all Federal loan servicers: https://studentaid.gov/manage-loans/repayment/servicers
Subsidized vs. unsubsidized Federal loans
Both of these types are guaranteed by the Federal government. Think of this as fancy vs. shmancy student loans. Fancy, subsidized student loans are ones where the Federal government subsidizes the interest while you’re in school (clever name, right?), meaning they:
- Are based on your financial neediness
- Don’t accrue interest while you’re in college since the government pays it for you (score!)
The interest on shmancy, unsubsidized student loans are (you guessed it!) not subsidized by the Federal government, meaning they:
- Are not based on your financial neediness
- Do accrue interest while you’re in school
Direct vs. Indirect
Further, your Federals loans may be direct or indirect (there’s no such thing as direct or indirect private student loans). Really, this just means whether your loans were directly or indirectly guaranteed by the Federal government.
This is important to know if you’re interested in getting on an income-based repayment plan or the Public Service Loan Forgiveness because you must have Direct loans for those programs (more on that in Part #5).
You have indirect loans if you have: FFELs (Federal Family Education Loan). These types of loans are no longer being issued, but that doesn’t mean they were wiped away, so you’d still be on the hook to pay them back.
If you do have indirect loans, you can consolidate them into Direct loans through the Federal Student Aid website. https://studentaid.ed.gov/sa/repay-loans/consolidation. Now, before you go do that or make any big changes with your student loans, there is more to know! Prudence and patience!
It’s possible that you may have Federal student loans and private student loans. For example, you may pay $200 per month to FedLoan Servicing as part of an income-based repayment plan. Those are your Federal loans. You may also pay $150 per month to Wells Fargo, which is a private lender for student loans.
Sometimes private loans can have lower interest rates than Federal loans, especially when you hear on the news that “the Fed has lowered interest rates.” For example, you may see private loan rates hovering around 3%, and that could be much lower than the 6.8% you’re paying on your Federal student loans. BUT, private student loans can also carry much higher interest rates than Federal loans (e.g. 12%). So that’s why it’s good to know what interest rate you’re paying.
One website that can help you go over your student loan repayment options is Student Loan Hero, which is a free service where you input your student loan information and they will make recommendations on repayment options. https://studentloanhero.com/ (PS: The reason it’s a free service is that sometimes they make a recommendation that you refinance and if you do so with them, they will earn a commission.)
Keep in mind that we’re in an information gathering phase. You’re learning and collecting data so that you can make a prudent decision. Like Father Mike Schmitz says when you’re discerning a decision, you want to collect. At this point, you’re just collecting data.
Refinance vs Consolidation
Something that a lot of people tell me is that they want to refinance their student loans. In theory, this makes sense. What they’re telling me is that they want a lower interest rate. And who wouldn’t?
But, unfortunately, it’s not that straight forward.
If you have Federal student loans and you refinance them, that means they are going to become private loans (more on why this is a big deal later). If you already have private loans and you refinance to a lower interest rate, then your loans remain private. Finally, if you have several Federal loans and consolidate them into one Federal loan, then you haven’t “refinanced” per se, your new interest rate is weighted average of the loans you consolidated.
Private → refinance → private
Federal → refinance → private
Federal → consolidation → One Federal loan
When you refinance a Federal loan into a private loan, you lose certain advantages, such as:
- Income-based repayment plans
- Eligibility for Public Service Loan Forgiveness (PSLF)
- Discharge for total and permanent disability
So, maybe you’re asking yourself: Should I refinance my student loans? We’ll address that in the next section. Saints Edwiges, Matthew the Apostle, Anthony of Padua, and Saint Jude pray for us!
In part 3, we’ll dive deeper into repayment options, including refinancing, while focusing on temperance.