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interest rates

For undergraduates and graduates considering student loans to help pay for their education, finding a low interest rate loan is important. Understanding how rates are set and how they potentially change over time can help you decide which loan is best for you. Let’s take a closer look at what determines the interest rate on various types of loans.

Direct Loans

The largest student loan program in the United States is the Direct Loan Program and is offered directly through the federal government. The formulas for setting interest rates for the Direct Loan Program are determined by Congress. Currently, the interest rate is set as a fixed rate for all loans first disbursed on or after July 1 and by June 30 of the following year. So, any loan first disbursed during that one-year window will have the same interest rate for the life of that loan.

The interest rate is the index plus an add-on or margin. In the case of federal loans, the financial index used is the 10-year Treasury note auctioned at the final auction held prior to June 1. That index is then used for new loans first disbursed in that following July 1 – June 30 timeframe.

The following chart represents the interest rate calculations for federal Direct Loans first disbursed on or after July 1, 2020 and before July 1, 2021.

Borrower Type Index (10-Year Treasury Note) Add-On (margin) Fixed Interest Rate
Direct Subsidized Loans Undergraduate Students 0.700% 2.05% 2.75%
Direct Unsubsidized Loans Undergraduate Students 0.700% 2.05% 2.75%
Direct Unsubsidized Loans Graduate/Professional Students 0.700% 3.60% 4.30%
Direct PLUS Graduate/Professional Students and Parents of Dependent Undergraduate Students 0.700% 4.60% 5.30%

Private Loans

For private student loans, the interest rates will still be based off of a financial index (although the exact index may vary by lender) plus a margin. However, other factors will also go into determining the interest rate on private student loans. The borrower’s credit score (or cosigner’s credit score) is a determining factor in the interest rate assigned to a private student loan. A high credit score may translate to a low interest rate. Another factor that can determine the interest rate on a private student loan is the length of the repayment term. Typically, a longer repayment term means paying a higher interest rate.

Fixed Interest Rates

Private student loan lenders will usually set their fixed interest rates prior to July 1 for the upcoming school year. That fixed rate will remain constant for the life of the loan. Lenders may adjust their fixed interest rates each year for new loans or even during the year if there is a dramatic change in market conditions.

However, once you’ve received your loan, your fixed interest rate for that specific loan will remain the same until the loan is paid in full. Your monthly payment will also remain constant for the duration of your repayment term.

Variable Interest Rates

When private student loan lenders set their variable interest rates, they may use a different financial index. Some lenders will use the 1-month LIBOR (London Interbank Offered Rate) where the variable interest rate will fluctuate monthly based on changes (up or down) in the 1-month LIBOR. Other lenders may use the 3-month LIBOR and adjust their variable interest rates quarterly (every three months).

Finally, other lenders may use the Prime Rate as their index and adjust their variable rates monthly. The bottom line is that your variable interest rate will likely change each month or quarter and your monthly payment will also go up or down based on your rate increasing or decreasing.

So, is any particular type of index better than another when evaluating interest rates from different lenders? You really need to know what the index rate is as well as the margin being added. For example, if you see an offer for an interest rate of “Prime + 1.5%” that might sound pretty good compared to an interest rate of “1-month LIBOR + 4.50%.”

Visually, it just looks like the first rate would be lower. However, if the Prime Rate is 4% and the 1-month LIBOR rate is 1%, both rates would equal 5.50%. It’s always a good idea to look for a lender’s Application and Solicitation Disclosure to see the true interest rate calculations.

You’ve finished off the leftover turkey and dressing and have shifted gears into holiday shopping mode. As another year comes to a close, it’s a good time to look back on how your budget planning went this past year.

After an assessment, you can begin to find ways to improve your financial well-being in the upcoming year. In order to be prepared for a bright financial future in the New Year, it’s important to set your budget, contribute to your savings, and pay down any high interest debt.

Now is the Time for Budget Planning

Do you know how much you spent this year on utilities, groceries, housing, or entertainment? Once you have an idea of how much you’re spending on certain categories, you can estimate your projected expenses each month and use budget planning to find places to cut expenses.

There are a number of apps that can assist you with tracking and categorizing your spending, but you can also do it on your own by entering your expenses into a spreadsheet. If you use your debit card for most purchases, you can use your online bank statement to help you identify your expenses. Don’t forget to account for the cash you spend if you want a true picture of all your expenses.

When setting your budget, you’ll likely have fixed and recurring expenses for housing, transportation, student loans, utilities, and other similar areas. Then, you’ll need to set an amount for variable expenses like groceries, clothing, and entertainment.

Knowing your income each month will help you set goals. If you have a steady job, you probably have a consistent weekly or monthly income and can use that to start your budget. Your monthly expenses should be less than your available income each month.

If this is not the case, you can review your expenses to identify areas to trim back and reduce your spending each month. Once you’ve created a budget, try to stick to it as best you can each month. That way, you’ll stay on track and not get into a position of having to use credit cards or possibly getting behind on some of your bills.

Save, Save, Save—The Sooner You Start the Better

Even if you’re in your 20’s, it’s never too early to include retirement in your budget planning. If you start with small contributions, you can make it a habit and priority. If your employer offers a 401(k) plan and matches your contributions, take full advantage of the opportunity for free money.

It’s also important to set aside funds for unexpected expenses or emergencies. A good rule of thumb is to have three to six months of income in a savings account that you can access for those unplanned events. Not only will this give you peace of mind knowing that you have your own safety net, but it will help you avoid putting large charges on a credit card that will likely incur high interest fees.

Pay Down High Interest Rate Debt

Whether you’re paying off a student loan, a car, or a credit card balance, it’s always an accomplishment to know you have extra income to go toward something else (like saving).

If you can allocate some extra resources to pay down your debt, it’s generally best to start by tackling the account with the highest interest rate. That might be a credit card balance that seems like it never gets smaller because of the interest that keeps adding up each month.

Another goal you might have is to simply pay something off with a smaller balance just to get that sense of accomplishment and then move that money toward paying down other debt. It might make sense to look at debt consolidation or refinancing where you may benefit from paying off higher rate loans or debt with a lower interest rate personal loan. This is especially helpful with high rate credit cards. See our article on using personal loans to cure those post-holiday credit card blues. All of us at U-fi From Nelnet wish you a successful and prosperous new year!

If you borrowed student loans to help pay for college, you may not be required to make any payments until after you graduate or drop below half-time enrollment. That sounds like a pretty good deal; no payments and no worries while you focus on your studies. But remember, if you take out a federal Direct Unsubsidized Loan, a federal Direct PLUS Loan, or a private loan, interest accumulates during those months (or years) you’re in school and not making any payments. Here are some ways you can save on your student loans while you’re still in school.

Accruing Interest

Interest that accrues on your student loan will typically be capitalized when you begin repayment. That means any accrued interest during those months you are not making payments is added to the original principal amount of your loan. For instance, if you borrowed a $15,000 student loan with an interest rate of 6% as a freshman and made no payments for the four years you were in school, plus your grace period, 51 months would have passed. In this scenario, when you begin your repayment period, you would actually have a balance of $18,825 when you start repaying your loan 51 months later. That’s because $3,825 in interest (also known as capitalized interest) would have accrued during those 51 months and was added to your original loan amount.

In-School Payments Can Help

Now, let’s say you have a part-time job while you’re in school, working 15-20 hours a week to help with some of your expenses. If you could simply pay around $75 a month toward that $15,000 student loan, you could actually pay all the accruing interest (remember, that’s $3,825 total that would have been added to your loan when your first scheduled monthly payment is due). If you’re able to pay $75 towards your student loan’s accruing interest, the total cost you could ultimately save over the life of a 10-year repayment period would be nearly $1,300.

Example

Paying Interest While In School (No Capitalized Interest) Fully Deferred Payments While In School – No Payments (Capitalized Interest)
Original Loan Amount $15,000 $15,000
Interest Accrued During In School and Grace Period (51 months) $3,825 $3,825
Interest Paid During In-School and Grace Period $3,825 $0
Loan Amount When Entering Repayment $15,000 $18,825
Number of Months of Repayment 120 120
Monthly Payment $166.53 $209
Total Interest Paid on Loan (including any payments during in school and grace period) $8,808.60 $10,080
Total Paid on Student Loan (original loan amount plus interest) $23,808.60 $25,080

As you can see from this example, making interest payments while you’re in school and during your grace period can help you save on your student loans down the road. Plus, making payments during your in-school and grace period also gets you in the habit of making payments on your student loan and better prepares you for successful repayment. Remember, this is just an example of borrowing one loan during your freshman year of college. Imagine what the capitalized interest could look like if you borrow each year of college, or what your savings would be by making continued interest payments while you’re in school. You can learn more ways to save on your student loans and get additional helpful information by visiting our student loan resources.

If you’re getting your first student loan or credit card, you’re likely seeing some terms you don’t recognize. A key component of being an informed consumer is understanding all those financial terms. You’ve probably heard an announcer at the end of a TV commercial speed-reading through a bunch of legal terms. We’re going to slow it down and lay out the most important terms you need to know.

Accrue

This is the act of interest accumulating on your principle balance.

Annual Percentage Rate (APR)

APR is a more accurate reflection of the total annual loan cost. It includes the actual interest rate, plus any other incurred charges or fees (such as upfront origination fees). You can find more information about interest rates and APRs on our website.

Capitalization

Capitalization means adding unpaid accrued interest to the principal balance of a loan. This increases the amount of your monthly payments and the total amount repaid over the life of the loan. You can choose to pay the interest as it accrues to reduce or completely avoid the cost of capitalization. The more frequently interest capitalizes, the more you wind up paying.

Cosigner

A cosigner or co-borrower is an individual who signs the loan promissory note with you. They are equally responsible for repaying the debt. Having a cosigner can often help you qualify for a better interest rate. This is especially true if you don’t have established credit or sufficient income. This article further outlines the potential benefits of having a cosigner.

Compound Interest

Compound interest is interest calculated on the principal loan amount, plus any interest accrued during previous periods. For example, if interest is compounded monthly, you would then pay interest on the interest that accrued in the previous month, as well as the outstanding principal. Compound interest can drive up your total cost of paying off debt.

Credit Bureau

A credit bureau is an agency that collects personal and financial information from various sources about consumers. The agency retains information about the types and amounts of credit you have obtained as well as your timeliness in making payments. Your credit card companies and the various lenders which have made loans to you report this information to the agency.

Credit Score

A credit score is a number, generally between 300 and 850, provided in a credit report and used by a lender as a predictive indicator of your likelihood to repay a loan. The credit score may be used by the lender to determine eligibility and set the terms of a loan, such as the interest rate and fees. The higher the credit score, the better. Higher scores will generally allow you to receive better interest rates. Check out our article on understanding your credit report for more detailed information.

Default

The failure of a borrower to repay a loan according to the terms of the promissory note is a default. For federal student loans, default occurs at 270 days delinquent and has a negative effect on your credit score.

Delinquency

Failure to make payments when they are due is referred to as delinquency. Delinquency begins with the first missed payment. Missed payments or delinquent payments will negatively impact your credit score, so make sure you stay current on all payments.

Finance Charge

The total amount of interest that will be paid over the life of a loan when the loan is repaid according to the payment schedule is the finance charge.

Fixed Interest Rate

A fixed interest rate is an interest rate that remains the same for the duration of the loan or credit obligation.

Interest

This is an amount, calculated as a percentage of the principal loan amount, that lenders charge for borrowed money.

Interest Rate

The interest rate is the rate at which interest is calculated on your loans or credit card balance.

Minimum Monthly Payment

The smallest monthly payment amount that can be made in order for a loan account to remain in a current repayment status is the minimum monthly payment. For a credit card bill, you’ll find that paying more than the minimum monthly payment will help you pay your balance faster and likely help you avoid potential rate increases on your credit card.

Origination Fee

The fee you pay and deduct from the principal of a loan prior to disbursement is the origination fee. For federal loans, you pay this fee to the federal government to offset the cost of your interest subsidy. For private loan programs, you pay the origination fee to the lender to cover the cost of administering and insuring the program.

Promissory Note

The promissory note is the binding legal document you sign for a loan, which lists the terms and conditions of the loan as well as your rights and responsibilities. For federal student loans, another name for the promissory note is the Master Promissory Note (MPN).

Simple Interest

Simple interest is interest only calculated based on the principal amount of the loan.

Truth in Lending Disclosure

This disclosure is a statement lenders provide to you prior to or at the time of disbursement of a private loan that lists the lender name and contact information, amount financed, annual percentage rate (APR), finance charge, payment amount and schedule, and total repayment amount.

Variable Interest Rate

The rate of interest charged on a loan changes periodically (monthly, quarterly, or annually) and fluctuates with a stated base index (such as the Prime Rate or a LIBOR index) is a variable interest rate. The variable interest rate fluctuates as the base index changes. So, your monthly payment amounts will increase or decrease depending on if interest rates rise or fall.

Now you have a basic understanding of some of the common financial terms and how they impact you as a consumer. Remember, always make sure that you understand all of the terms and conditions when you take out student loans, open a new credit card account, or take on a new loan of any kind. Reputable companies will be happy to answer any questions you have so that you have a clear understanding of your financial obligations.

If you have received your financial aid award and still need money for college, private loans may be worth considering. Banks, credit unions, and other lending organizations offer private loans.

First Steps for Private Loans

You take out private loans in your own name. They often require you to apply with a qualified cosigner who has an established credit history. Even if you don’t need a cosigner, using one may still help you obtain a better interest rate. Lenders provide the best rates to borrowers and cosigners with the strongest credit qualifications.

As a general rule, private loans should be the last financial aid option. Always file the Free Application for Federal Student Aid (FAFSA) first, and accept any grants, scholarships, work-study and federal loans offered by your school before taking out a private loan. Federal loans offer more repayment options, income-based programs, and in some cases, loan forgiveness alternatives.

If you decide a private loan is right for you, consider these things when selecting a program.

1. Check to see if your college has a recommended lender list.

Some schools investigate private loan programs and providers on behalf of their students. They provide lists of those they think would best meet their students’ needs. If your school has a list, you can begin there. Your school generally posts school lender lists on their financial aid website. In many cases, the website links you to a third party where your school provided a list of programs. In either case, loan programs are usually listed by feature, so you can compare to see which might best meet your needs. If your school does not have a lender list, you can investigate Credible or other websites which will provide loan program options and help you compare features.

2. Decide which features are the most important to you.

  • Rates – In comparing interest rates, you will see some lenders use an index called London Interbank Offered Rates (LIBOR), and others use the Prime Rate index. Since they aren’t the same, look at the loan programs’ Annual Percentage Rates (APRs). The lowest and highest APR ranges are be displayed. If APRs aren’t listed, be aware that the Prime Rate is typically two to three points higher than LIBOR. The most current rates can be located in the Federal Reserve’s Statistical Release.
  • Fees – Most private loan lenders offer zero application and origination fees. Check all loan programs you are considering to make sure this is true and to determine if there are other fees associated with the loan.
  • Repayment plans and terms – Would you prefer in-school interest payments to keep your costs down? Perhaps multiple repayment period choices like a 5, 10, or a 15 year period are best for you. With private loans, you choose your repayment period at the time you take out your loan. You may also want to check to see if there are deferment or forbearance options if you run into difficulty in repayment.
  • Cosigner release – Your cosigner is responsible for making payments if you do not. The cosigner’s credit report reflects any late or missed payments as well. When investigating options, determine if the program offers a cosigner release, how many payments you will need to make before that is possible, and how involved the release process is.
  • Borrower benefits – Lenders offer a variety of benefits like interest discounts for auto-debit payments, cash back for achieving certain grades, or interest reductions after a specific number of on-time payments. Be sure you determine which are the most important to you and take the required action to meet the requirements.

3. Understand the difference between fixed and variable rates.

As you compare differences between programs, interest rates may be a primary factor. You will need to decide between fixed rates, which may be higher at first but remain the same throughout the life of your loan, or variable rates which may be lower at first but change periodically based on fluctuations in the economy. For more information about the factors to consider before making this decision, go to U-fi From Nelnet’s frequently asked questions.

4. Your rate is the one that matters most.

Lenders may advertise low rates when they share their program’s interest ranges, and many students assume they will receive the lowest rates. See if lenders allow you to use a calculator. If you can enter general information about you and your cosigner, you may be able to obtain a preview of what your interest rate will be before completing the application process and providing authorization for your credit to be pulled.

Private loans can provide a solid financial option for students who need help bridging the gap between financial aid and college costs. Be sure to first research programs fully and understand your responsibilities before taking out any type of education loan. If you have questions, your college financial aid office is the best source of information and guidance about your individual situation.

Thinking about applying for a new private student loan, or refinancing your existing federal and private student loans? Expect the lender to check your credit history and credit score. They do this to ensure you are not a credit risk. You can proactively take steps to improve your credit health and raise your credit score. Start with understanding what’s in your credit report, and what student loan lenders are looking for.

What is Credit?

Have you ever taken out a student loan or credit card? If so, you entered into an agreement to receive funds that must be paid back later. Unlike credit cards, student loans are repaid in installments over a set number of payments. This term is usually 5 to 25 years.

When you take out a student loan, most lenders or servicers notify at least one of the three major credit reporting agencies. These are Equifax, Experian, or TransUnion. They do this so they can include the new account on your credit report as a trade line. Each trade line contains detailed information. This information includes account name and number, loan type, date opened, original and current balance, payment status, and monthly payment.

The lender or servicer notifies the credit agencies of all loan activity. This activity includes payment date, amount of payment applied to principal and interest, and timeliness of payments. The credit agency records this information, which makes up part of your credit history.

Understanding Your Credit Report

While each credit reporting agency’s reporting format may be slightly different, they essentially include the same information:

  • Personal Information, such as your name, address (current and previous), Social Security number, date of birth, and other information that identifies who you are.
  • Credit History, including your open and closed accounts, original loan amounts, current balances, and payment history.
  • Public Records, such as delinquent accounts, liens, and bankruptcies. Public records can remain on your credit report for many years, which will affect your ability to obtain future credit.
  • Credit Inquiries, which are placed on your credit report when you request credit. Credit inquiries remain on your file for two years.

Tip: Federal law entitles you to a free copy of your credit report each year from all three credit reporting agencies. Take advantage of this and check your report from each credit bureau annually. This ensures your personal information is accurate and up to date. To get a free credit report, visit www.AnnualCreditReport.com or call 877-FACTACT. If something on your report looks inaccurate, be sure to contact the credit agency immediately to have it addressed. Unfortunately, the credit reports will not include your credit score.

What Student Loan Lenders Look For When Checking Your Credit

When making a credit decision, private student loan lenders check your credit report and credit score. They do this to determine whether you are an acceptable risk, and what interest rate they should charge you. If you have a cosigner, lender checks their credit report and credit score too.  Most lenders, like U-fi From Nelnet, will want to see an adequate credit history, a track record of making on-time payments, how much debt you have outstanding, and a good credit score. Lenders also ask how much income you have to determine whether you, or your cosigner, have enough monthly income to make monthly payments.

To increase your chances of being approved and receiving a low interest rate for a new student loan or a student refinance loan, you and/or your cosigner will want to have at least two open trade lines, be no more than 30 days past due on more than one account, and have no public records for the past five years. Most lenders will also want to see a good credit score. While each lender is different, if you have a credit score above 700, you will generally be considered a good credit risk.

Tip: When shopping for a private student loan or student refinance loan you should complete all your applications within a short window (e.g. 30 days), since multiple credit inquiries within a brief time period will have little impact on your credit score.

How Does Your Credit History Affect Your Credit Score?

Your credit score is a number that summarizes your credit risk at any moment in time. While there are several types of credit scores, 90% of lending decisions use a FICO score. Fair Isaac Corporation creates the FICO score. FICO scores range from a low of 300 to a high of 850, with higher being better. FICO scores are made up of the following:

  • 35%: Payment History – have you made your past payments on time?
  • 30%: Amount Owed – how much debt do you owe and how much of your available credit has been used?
  • 15%: Length of Credit History – how long have you been using credit?
  • 10%: New Credit – how much of your debt has been opened recently?
  • 10%: Types of Credit Used – do you have different types of credit such as credit cards, installment loans, and mortgages?

Tip: FICO scores can change from month to month due to several factors. Not having too much debt, and making full payments on time, over a long period gives lenders more confidence you will repay them. That increases the likelihood they will extend you credit at a lower interest rate.

Understanding what’s on your credit report and how it impacts your ability to get a good credit rate is extremely important. If you notice something incorrect on your credit report, call the credit agency immediately. Work with them to correct any problems. A better credit history and higher credit score means a better shot at approval and a low interest rate. Your credit could save you a lot of money on your student loans. It can also ensure additional credit is there for you when you need it most.

Ever taken out or refinanced your student loans? You probably know the interest rate of your loan, and may have seen the letters APR on your statement. (APR stands for Annual Percentage Rate.) Understanding the difference between the interest rate and the APR is important. While they both measure the cost of borrowing money, they are not the same. Knowing the difference could save you thousands of dollars on your student loans.

What is the difference between the student loan interest rate and the APR?

The interest rate on a student loan is the cost to borrow money. It is shown as a percentage. Your interest rate does not reflect any fees or other charges you may pay for the loan. The APR goes a step further. It takes the interest rate on a student loan and adds in any upfront costs, such as an origination fee. The APR is also a percentage, but it measures the total cost of borrowing money on an annual basis.

By law, private student loan issuers must show customers the APR. The law requires this to facilitate a clear understanding of the actual interest rates and fees applicable to their agreements. In the U.S., the calculation and disclosure of APR is governed by the Truth in Lending Act.

Tip: While U-fi From Nelnet and many private student loan lenders do not charge an origination fee, some lenders do. Be sure to carefully read the loan terms before applying for and accepting a loan.

Why is it important to know the APR if I know the student loan interest rate?

As mentioned above, the APR gives a more complete picture of the cost of borrowing. For student loans and student loan refinancing, if the lender doesn’t charge an origination fee and you immediately begin making full principal and interest payments, the interest rate and the APR will likely be the same. However, if the lender charges an origination fee or you defer making principal and/or interest payments while you are in school, your APR will not likely be the same as your interest rate. By looking at both the interest rate and the APR, you will be able to get a clearer picture of your expected monthly payment and the total cost of the loan.

Does the interest rate and APR tell the complete story?

Interest rates and the APRs are useful tools to help understand the cost of borrowing and to compare different loans. But, they don’t always tell the complete story. For instance, federal Direct Subsidized Loans, Direct Unsubsidized Loans, and Direct PLUS Loans come with an origination fee, but the fee is deducted from the loan disbursements, so the origination fee is not included in the APR. Thus, if you took out a $10,000 federal Direct PLUS Loan with its 4.272% origination fee, you would only receive $9,572.80, but you would have to pay back the entire $10,000, plus any accrued interest on the loan.

Also, the stated APR may or may not include any borrower benefits associated with the loan, such as an interest rate reduction for auto debit payments or cash back rewards for good grades. Some federal student loans also come with loan forgiveness programs, so be sure to take all these into account when comparing loan offers.

Tip: The interest rate and the APR for a variable rate student loan reflects the interest rate and costs at the time you take out the loan. If interest rates change, the APR changes as well.

Knowing the difference between APR and interest rate helps you make an informed decision when taking out student loans.

You’ve probably heard the term cosigner. But, do you know what it means, how it can help you, or what qualities make a good one? If you find your federal funds aren’t enough to cover the cost of college, consider applying for private student loans. Applying with a cosigner can help you qualify for a private student loan. It can be difficult for student borrowers to meet the criteria and income requirements by themselves. Learn if a cosigner is right for you.

What is a cosigner?

A cosigner is a person who signs for a loan with a borrower. If the borrower misses payments or defaults on the loan, the cosigner takes responsibility for payments and the remaining balance. Since both the borrower and cosigner have equal obligations, missed payments and default affect both their credit.

How does having a cosigner help me?

Including a cosigner on a loan decreases the risk for the lender. That’s because the lender has another person obligated to repay the loan if the borrower defaults. Cosigners allow the lender to take on less risk. Less risk increases the borrower’s chances of getting approved for the loan. It may also lead to better loan terms. These include lower interest rate or shorter repayment length. Both could save considerable money over the life of the loan.

Even if you qualify for a loan without a cosigner, the loan terms are generally not as favorable. However, wanting a cosigner to improve your loan terms and needing one for approval are two different circumstances. You may need a cosigner if you have no income or too little income, have no established credit or poor credit, your debt-to-income ratio is too high, or if you are either unemployed or recently changed jobs and don’t have an employment history. If any of these scenarios apply to you, you should consider applying with a cosigner to qualify for the loan. Applying with a cosigner gives you time to fix any of the above issues. It can also mean you can take out future loans on your own.

Who should I ask to cosign?

The most difficult part of choosing a cosigner is finding someone who is willing to sign on a loan with you and also has strong credit. Typically borrowers will turn to spouses, parents, or close friends to cosign. No matter who you choose, be sure your cosigner is financially stable. Other traits to look for in a credit-worthy cosigner include having a good job with a solid employment history and/or owning a home or other assets.

Asking someone to cosign on a loan with you is a big commitment, so make sure you are prepared. Tell your potential cosigner the reason you are asking them to cosign, your intentions to pay the loan back, and communicate to them that you can afford the payments. You can also ask your lender if there is a cosigner release option. Some loans will allow you to request that your cosigner be removed from the loan after a period of time if you meet certain requirements. Being prepared to answer any questions your potential cosigner has will show that you are serious about taking on the financial responsibilities of a loan.

Cosigning is a big commitment for both the borrower and the cosigner and should not be taken lightly. Make sure both you and your cosigner understand all terms and are clear on the responsibilities of the loan prior to signing.

Considering paying off your student loan debt with your tax return or just a lump sum of money? There can be more to larger payments than meets the eye. Follow these steps to learn how to make the most of your lump sum payment.

1. Make a List

Knowing which loans you want to pay off first will help you get the most bang for your buck. Make a list of all of your federal and private student loans, the balances, and the interest rates. Then, based on your goals, weigh your options. You could put your lump sum payment toward your highest interest rate loans, or pay off your low-balance loans first. Paying off your highest interest rate loans reduces the amount of interest you pay. It also saves you money over the life of the loan. Paying off your lowest balance loans first could save you money on your monthly payment. Paying off your lower-balance loans allows you to put money saved from a lower payment toward your other student loans. This can help you to pay them off faster.

2. Talk to Your Loan Servicer

Check to make sure your loan servicer knows how you want your payments applied to your student loans. If you pay above the minimum payment and don’t specify how you want payments applied, your loan servicer decides for you.

Below is a sample letter put together by the Consumer Financial Protection Bureau (CFPB) that you can send to your loan servicer to ensure payments above your minimum monthly payment amount are being applied to the correct loan(s). For some loan servicers, this can be done online.

I am writing to provide you instructions on how to apply excess payments greater than the minimum amount due. Please apply payments as follows:

  1. After applying the minimum amount due for each loan, apply any additional amount to the loan accruing the highest interest rate.
  2. If there are multiple loans with the same interest rate, please apply the additional amount to the loan with the lowest outstanding principal balance.
  3. If any additional amount above the minimum amount due ends up paying off an individual loan, please then apply any remaining part of my payment to the loan with the next highest interest rate.

It is possible that I may find an option to refinance my loans to a lower rate with another lender. If this lender or any third party makes payments to my account on my behalf, use the instructions outlined above.

Retain these instructions. Please apply these instructions to all future overpayments. Please confirm these payments will be processed as specified. Otherwise, please provide an explanation as to why you are unable to follow these instructions.

3. Things to Keep In Mind

There are a few other things to be mindful of once you’ve decided where to apply your lump sum payment.

  1. Follow up with your loan servicer. Call or check your accounts online to make sure your payment was applied as specified.
  2. Making a payment larger than your minimum payment amount can sometimes advance your due date. This means another payment on your student loans won’t be due until your minimum payments catch up to your lump sum payment. While it can be nice to skip a few months of student loan payments, your loans still accrue interest and won’t save you any money. Even if your due date advances, continue to make your monthly payments to save yourself money in the long run.
  3. You can also save money on your student loans by refinancing. Refinancing allows you to combine both your federal and private student loans into a new loan with a new repayment term and interest rate, which can often save money over the life of the loan, or help lower your monthly payment.

Paying off your student loans is a great accomplishment. As you begin to make decisions around your personal finances, make sure to keep these tips in mind so that you can make the best choices for your financial future.