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Reducing Your Debt

All loans are not created equal. Loans can be acquired from the government, a school, a private lender, or even from a private trust or foundation. They all have different interest rates, limitations on borrowing, and different repayment terms.

If you find yourself in need of a loan – and most students do – you need to shop around for the loan best suited to your needs and ability to pay.

Specialized Loans

In addition to loans available through the government, private lenders, and schools, there are many organizations across the country that sponsor their own loan programs.

The reason it’s a good idea to look for nontraditional loans is that qualified students can receive low – or even zero-percent – interest rates, or even forgiveness for their loans for services rendered. For example, the North Carolina Office of Budget and Management offers loans for students in the health, science, or math fields that don’t have to be repaid until after graduation and can be excused if you agree to work at an institution that participates in their program. While it’s harder to qualify for specialized loans than it is for other types of loans, they are much better deals than government or school loans. Students who have the best chance of qualifying are those who are studying in the medical fields. However, many specialized loans are based on other criteria, such as age and state of residence.

College Student Poses for Photo


Picking a Private Lender

TIP…Instead of only considering traditional loan venues, seek out a specialized loan that offers low interest rates or loan forgiveness possibilities to students with unique skills or qualifications.

Who Should Try This: High school students, undergraduates, or graduate students

Just as you should always shop around when making a big purchase, such as a car or a home, you should do the same when picking a bank or other lending institution to help you finance your college education. While interest rates are controlled by lenders and the federal government, there are still ways to have expenses chipped off the costs of a loan.

When a school offers you one or more loans, the money comes either from the government or from a private lender that the school selects, depending on the type of loan. But not only are you not obligated to accept any of these loans if you don’t wish to, you also don’t have to use the same lending institution your school selects. Find out the terms of your school loan (interest rates, payment terms, fees), before you accept it. If you feel you can get a better deal with a different lender, then by all means do so. Here are some tips as to some of the terms you should seek out when picking your lender:

  • Find out if the banks in your state offer discounts for students who are attending school in their home state. These banks will take anywhere from 0.25% to 1% off the interest rate of government-sponsored loans in these cases, an offer that is definitely worth inquiring about.
  • Some lenders will offer to cut your interest rate by 0.25% or reduce fees if you allow them to deduct payments directly from your account. It’s worth it to the bank to do this because it reduces processing expenses.
  • Some lenders also give student discounts to those who faithfully meet their payment deadlines. For example, if you do not miss a single payment in three or four years, the bank may lower your interest rate or refund some of its fees.
  • Check to see how your loan will be capitalized. The less frequently interest on your account is compounded, the better you are. If, for example, the interest on your loan is calculated annually, you will end up paying less interest than if it were calculated quarterly because the interest will be compounded more frequently.

Check Out Default Rates

Investigate the opportunities at your lending institution for reducing the interest rate and fees on your loan, then select the lender who offers the best deal.

Who Should Try This: High school seniors, undergraduate, and graduate students

It is a good idea to check out the loan default rate of students at the schools you are considering attending. A high default rate (20% or more) can indicate two things:

1) your college serves a student body that comes from families with somewhat lower incomes that have trouble paying off loans;

2) graduates haven’t been able to get jobs that pay well enough to afford their loans. While there is nothing wrong with a school trying to serve a lower-income student body, there is definitely a problem if the reason for a school’s high default rate is because graduates aren’t getting well-paying jobs.

While it is difficult to discover the underlying reason for a school’s high default rate, it is an important statistic to find out, because school’s with high rates are less likely to have government-subsidized loan programs that may help you. You can easily confirm a school’s loan default rate with a quick call to the Federal Student Aid Center at (800) 4-FED-AID. Tell them what schools you are interested in and they can tell you what the default rate is for that particular institution.

College Payment Plans

TIP…Confirm that your preferred school has a student loan default rate of less than 20% to insure that they are likely to have government-subsidized loans that will help you pay for tuition.

Who Should Try This: High school seniors; adult, nontraditional students

If you can’t reduce your loans, or even if you can but are still anticipating a hard time paying for them, you can in many cases arrange a payment plan with your school. What’s great about this option is that college payment plans are often interest free, although there is usually a small fee of $50 to $75 or so. This way, instead of paying for the semester or quarter in one lump sum, you can spread out your costs over several months. Contact your school to investigate payment plans further, or you can also call the following organizations, which specialize in payment plans for college students:

Knight College Resource Group
855 Boylston Street
Boston, MA 02116
Phone: (800) 225-6783

Tuition Management Systems
127 John Clarke Rd.
Newport, RI 02842
Phone: (800) 722-4867

Prepaying Loans

TIP…Instead of paying for your schooling with large lump sums, spread your payments out with a college payment plan. Because you will likely pay a fee for this privilege, you won’t save much money, but it will probably make payments more manageable for you if you’re having financial difficulties.

Who Should Try This: Undergraduate or graduate students

If you are fortunate enough to find yourself in a comfortable economic situation after college, you should seriously consider paying your loans off as early as possible. The earlier you pay them off, the more you’ll save. For example, if you have a $5,000 loan that accrues interest at 8% over ten years, you will end up paying an extra $4,000 in interest fees alone! Another option to consider is finding a new, low-interest loan to pay off a high-interest loan. For example, if you have a student loan with 8.25% interest but can get a home equity loan at 7%, you will actually be saving about 3.75% because interest paid on a home loan is tax deductible. With some lenders allowing people to borrow against their homes even when they have little or no equity, this strategy becomes a possibility for anyone who has purchased a home.


Loan consolidation is a convenient way to simplify your payments as well as reduce monthly payments.

TIP…Repay high-interest loans with low-interest loans, such as those borrowed against home equity.

Who Should Try This: College graduates

If All Else Fails …

TIP…Try consolidating your loans to get a lower interest rate and lower monthly payments.

Who Should Try This: College graduates

Not being able to pay off a loan conjures up images in some people’s minds of being pursued relentlessly by collection agencies, or the government, or the IRS. But even if you have tried everything and still can’t manage to pay off your loan, there are still avenues you can pursue. One option is to go to your lender, explain your financial situation honestly, and work out a new payment plan. Remember, a bank would rather do this than have you default on a loan or hire an expensive collection agency. You could also, if you wish, go to another bank and take out a new loan to pay off the remainder of the old one. This will buy you five or more years of precious time.

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