Sparrow Nest

Author: Aaditya Shah

  • When Should Parents Start Saving for College?

    When Should Parents Start Saving for College?

    The short answer is… parents should start saving for college as soon as possible.

    Nonetheless, figuring out how much to save for college and when to start can be confusing. The answers aren’t always crystal clear. However, saving for college is a massive undertaking that requires a strategic savings plan to reach your goals. If you’re working on your savings plan, you’re in the right place.

    Here’s what parents should know about when to start saving for college, including the most important factor: beginning early.

    Start Saving Early

    The cost of college is rising every year. In fact, education expenses in the US have risen by over 180% since 1980. This makes an early savings plan not only useful but necessary.

    Saving early gives you more time to contribute money and take advantage of compound interest — provided you invest the money. If you wait until the last minute to start saving for college, you’ll need to contribute a lot more. Likewise, the earlier you start investing college savings, the more time your money has to grow with interest.

    >> MORE: Best parent loans for college

    Make Sure You’re Supported First

    As enticing as it is to set aside money to grow, it’s vital that you are already financially secure.

    Get an Emergency Fund in Place

    Before looking into the future, you should always have an emergency fund, if possible. An emergency fund is intended for dire situations such as a natural disaster, unexpected job loss, or medical bills. In general, your emergency fund should equate to three to six months’ worth of your salary. 

    Lower High-Interest Debt

    In addition to that, you should prioritize lowering any existing high-interest debts. While saving for college is important, the interest you’ll have to pay on debts might be more than what you can save.

    That said, there are a few exceptions. For example, if you only have low-interest debt, it may be better to invest the money for college expenses. However, this takes serious time, planning and requires higher risk tolerances so it may not be suitable for all.

    Best Savings Plans for College

    The current financial system provides a number of ways to start save for college. There are many instruments that are unique in their own regard, so understanding which to choose can be confusing. 

    >> MORE: Best student loans for parents

    529 Plan

    A 529 Plan offers federal and state tax benefits when used for educational expenses. A 529 Plan has restricted investment options. However, it’s a great choice because it can be used as a tax shelter while your money grows. In addition, these plans are considered parent assets, which means you don’t need to report them on the FAFSA.

    Mutual Funds

    Mutual funds create a diversified portfolio of individual investments —think bonds, stocks, or other securities. Unlike a 529 Plan, investing college savings in a mutual fund provides you with a bit more flexibility in terms of what you can invest in. That said, they are run by portfolio managers, who will usually charge a fee for their service. In addition, mutual funds are subject to annual income tax, and any money transferred to your child is viewed as income on the FAFSA.

    Custodial Account

    Custodial accounts are brokerage accounts that you open on behalf of your child and then subsequently transfer to them once they reach 18, 21, or 25 years of age. Like mutual funds, the FAFSA considers custodial accounts as student assets, which can reduce your child’s financial aid eligibility. 

    Savings Bonds

    Saving bonds are securities that are backed by the U.S. Government. They are one of the most risk-averse investments and safest options as you are guaranteed to get money back. Due to this guarantee, the rate of return for saving bonds is usually quite low, meaning that in periods of high inflation and higher costs, you may still end up losing money as the value of your dollar diminishes.

    Some benefits of these vehicles include being federally tax-deferred and state-tax free. That said, the maximum amount you can invest is $10,000 on your own and $20,000 as a married couple per year. 

    Roth IRA

    With only 37% of the nation’s population using this type of account, Roth IRAs are underutilized but can provide a great investment strategy.

    A Roth IRA is an investment account where you can earn tax-free interest on your contributions. While earnings are intended to be withdrawn once you are 59 years old, you can withdraw contributions prior to then with no taxes or penalties. There are no obligations or restrictions to when you withdraw and the FAFSA does not consider them assets. However, there are some downsides like the inability to invest more than $6,000 per year. 

    Regardless, all these options are great ways to start saving for college and growing your money to help with future college expenses. But what if you’re getting a late start on saving? Perhaps you weren’t able to invest right away? There are still many options available and the same principle applies, start as soon as you can.

    >> MORE: Compare student loan rates for parents

    What to Do If You’re Getting a Late Start on Saving

    If you are starting late on saving for college, it may be smarter to take on less risk as market fluctuations can be a detrimental player to your college savings goal. Perhaps it would be wiser to look into more safe, secure investments or age-based plans. 

    If you don’t reach sufficient savings, you should look into the different types of financial aid for college. Additionally, you can use Sparrow to find the best parent student loan rates and compare across multiple lenders in minutes.

    The latest rates from Sparrow’s partners

    See a rate you like? Click Apply and we’ll take you to the right place to get started with the lender of your choosing.

    Compare your personalized, pre-qualified rates from these lenders in minutes.

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    Final Words

    At the end of the day, saving for college should not put you in financial stress currently or in the future. Preparing a strategy to best manage your money and meet your goals is the best way to enjoy your financial future. Look at all the options available to you, and talk your strategy out with a qualified financial advisor and your loved ones, as these financial decisions have great impact. Once you settle on a plan, don’t stress too much about the short-term and try to focus on the long-term advantages.

    The content of this article is not, nor should it be, taken as financial advice. The content of this article is for educational purposes only. For personalized financial advice, please consult a financial or investment advisor.

  • Should I Accept All of the Financial Aid Offered to Me?

    Should I Accept All of the Financial Aid Offered to Me?

    College is expensive, but that doesn’t mean you should accept every last bit of financial aid. Now I know, that probably sounds counterintuitive. I mean, who wouldn’t use all the offered financial aid?!

    However, there are many instances where financial aid can actually be detrimental rather than helpful, so knowing when to decline certain financial aid options is very important. The general rule is to borrow only what you need for direct educational expenses (things like rent, tuition, books, etc.). Avoid wasting financial aid on non-educational items, as that could lead to greater issues in the long run.

    To know whether you should accept the aid offered to you, it’s important to understand the different types of financial aid available to you. Here’s what you should know.

    >> MORE: What are the different types of financial aid?

    What is Considered Financial Aid?

    Financial aid can be anything from grants, scholarships, work-study jobs, loans, and even aid from local or state sources. Essentially, financial aid is provided to students to help you focus on what’s important —your education. Using financial aid for other expenses can make for a sticky situation.

    Do I Have to Accept All of My Financial Aid?

    Absolutely not! In fact, many financial aid experts recommend that you only accept what you really need.

    While accepting scholarships and grants is often harmless, you should be careful about how much you accept in student loans. While borrowing money is often necessary for many students, borrowing more than you need can wind up costing you a lot more in the long run. This happens as the cost of borrowing money is compounded by the interest rate of the loan. 

    >> MORE: What is the average student loan interest rate?

    Estimating your budget and expenses to determine the amount of money you will need to borrow is the best way to only borrow what is needed. 

    Accept Aid in This Order

    As mentioned before, financial aid comes in various forms: grants, scholarships, work-study jobs, and loans. If you want to save money,  however, you should accept aid intentionally and in this order: 

    1. Scholarships and grants. If it is free money, take it.
    2. Work-study. Any earned money should come second.
    3. Federal student loans, followed by private student loans. Borrowed money should always come last.

    Because scholarships and grants are practically free money, you should always try to use those first before looking at other options. One thing to note is that many scholarships and grants have conditions you must meet to either be eligible for or to continue receiving the funds over the course of your education. Thus, although there may not be financial terms like a loan, it is imperative that you understand the criteria for this financial aid option. 

    A work-study program is quite simple. You work for the money, so you don’t pay it back. This means you will have to spend time both working and studying. While it may be a bit more to juggle, there have been studies that show students who have a part-time job and study are better at managing their time.

    Federal student loans and even private student loans should come last. With loans, you will have to pay the money back, plus interest. Depending on the type of student loans, you may receive a subsidized loan meaning interest won’t start accumulating until you leave school. So, if you have the option, choose a subsidized loan before an unsubsidized loan. 

    >> MORE: Find the best student loan rates

    The latest rates from Sparrow’s partners

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    Know When to Decline Certain Financial Aid

    With the basics of financial aid covered, let’s look at specific instances where it is favorable to decline certain financial aid.

    You Are Paying Out of Pocket

    If you intend to pay out of pocket for school, you don’t actually need to accept the loans in your financial aid package. Instead, you should look for more “free money” options, like scholarships and grants.

    You Can Find Aid With More Favorable Terms Elsewhere

    If you do decide to borrow a loan, you should look for the best lender that is offering the most favorable terms. For example, Parent PLUS Loans often have higher interest rates. Therefore, you may actually be able to find lower interest rates with private loan lenders. In this case, you may want to consider all your options before accepting the PLUS loan. 

    >> MORE: Parent PLUS loans: Everything you need to know

    Is It Okay to Accept All of It?

    Now that we’ve gone over when to decline certain financial aid and how to sort through all the different options, let’s go back to the original question. Do you have to accept all financial aid?

    No, you don’t have to accept all of the financial aid offered to you. However, it is still very important to note that it is okay to accept all of it. If you believe the financial aid options are favorable to your circumstances, then it is totally fine to accept it. Just make sure you do your research and have all your questions answered before rushing into something.

    >> MORE: What is the best type of financial aid?

    Final Words

    Knowing when to accept and decline financial aid is very tricky. However, with the right guidance and due diligence, you can optimize your decisions and make the most out of your financial situation.

    Don’t be afraid to say no to financial aid, and remember that although some aid may seem like free money, you should always research the terms of everything offered to you. Take your time to find the best options that will put you in a better position, both financially and mentally.

    Sparrow aims to give you the tools and confidence you need to improve your finances. Many or all of the products featured here are from our partners who compensate us. This may influence which products we write about and where and how the product appears on a page. However, this does not influence our evaluations. Our opinions are our own. While we make an effort to include the best deals available to the general public, we make no warranty that such information represents all available products.

  • Student Loan Discharge: Top Programs and How to Apply

    Student Loan Discharge: Top Programs and How to Apply

    If you’re studying in California, where 20% of discharge applications come from, student loan discharge programs may be familiar to you. However, the majority of borrowers haven’t heard of them.

    While student loan forgiveness programs are more well-known, student loan discharge programs are another great way to have your student debt wiped from existence.

    So, while student loan discharge programs are fairly unknown, shining a light on them is important as they could save you thousands of dollars. Let’s take a look at what student loan discharge programs are and the top programs you may qualify for.

    What is Student Loan Discharge?

    Student loan discharge programs remove your obligation to repay your debt. While similar to student loan forgiveness programs, discharge is typically only granted under extenuating circumstances. Forgiveness programs, on the other hand, are often granted based on your career or service to a particular industry.

    For example, you may have your student loan debt forgiven after working in public service for a certain number of years, while your debt would be discharged for something like death or a disability.

    Additionally, forgiveness programs are for federal student loans only, while both federal and private student loans are eligible for discharge (pending that you meet the eligibility criteria).

    Top Student Loan Discharge Programs You May Qualify For

    Closed School Discharge

    As the name suggests, closed school discharge is aimed to remove the obligation for students whose school closed while they were still enrolled. To be eligible for a 100 percent discharge, you must meet the following criteria:

    1. You must have been enrolled in the school when it closed, or you were approved for a leave of absence when your school closed;
    2. If your loans were disbursed before July 1, 2020, then your school must have closed within 120 days after you withdrew; or
    3. If your loans were disbursed on or after July 1, 2020, then your school must have closed within 180 days after you withdrew.

    If you find yourself in similar circumstances to these criteria, you could be eligible for the Closed School Discharge. In the case that you are eligible, the Secretary will automatically send you an application you can submit to your loan servicer. Or, you can contact your loan servicer directly about the application process.

    Borrower Defense to Repayment Discharge

    This program is provided to students who have attended schools that have either misled them, or participated in activities that violated certain state laws. For an application to be accepted, you must be able to demonstrate that the school violated state law related to your loan or to the educational services provided. If you believe this criteria meets your situation, you can fill out an application here. 

    Total and Permanent Disability Discharge

    The Total and Permanent Disability Discharge program (TPD) is for anyone who has become totally and permanently disabled. It relieves you from having to repay any federal loans. In order to qualify, you must provide documentation from one of the following sources:

    1. The U.S. Department of Veterans Affairs;
    2. The Social Security Administration; or
    3. A Physician

    Many private lenders also offer this discharge, but make sure to contact your lender directly to verify. If you are unable to complete the application on your own, you are able to have a representative apply on your behalf and help throughout the TPD discharge process. 

    Discharge Due to Death

    If a student loan borrower dies during the duration of their student loans, it will be discharged. Likewise, a parent’s PLUS loan will be discharged if your parent dies. 

    FAQ About Student Loan Discharge

    What happens if your student loans are discharged?

    According to the Department of Education, a discharge of federal student loans implies that:

    1. You will no longer be obligated to repay the loan,
    2. You will receive a reimbursement for any payments made either voluntarily or through forced collection, and
    3. The discharge will be reported to credit bureaus to delete any adverse credit history associated with the loan.

    Essentially, your existing student loan gets deleted from your student loan account.

    What is the difference between student loan forgiveness and discharge? 

    Both student loan forgiveness and discharge programs have similar end results, however they are quite different in the technicalities. Loan discharge programs immediately stop the borrower from having to repay the student loans, whereas a student loan forgiveness program implies that the borrower must repay the debt until their application is approved or until the borrower meets the necessary criteria. Additionally, certain discharges entitle borrowers to receive a refund of previously made payments on the loan.

    Are discharged loans removed from your credit report?

    Yes. When your loans are successfully discharged, it will be reported to the appropriate credit bureaus to delete any student loan related credit history.

    Final Thoughts from the Nest

    Now, with this knowledge of discharge programs, you can be confident that you know the general landscape for any relief programs. If you do not qualify for any discharge programs, check your eligibility for student loan forgiveness programs.

  • Student Loan Servicers: Everything You Need to Know

    Student Loan Servicers: Everything You Need to Know

    If you’re a student loan borrower, you’ve probably heard the term “student loan servicer” before. But what exactly is a student loan servicer, and why does it matter?

    In this blog post, we’ll dive deeper into everything you need to know about student loan servicers, including how to find out who your servicer is, what services they offer, and how to navigate the sometimes-complicated world of loan repayment. Whether you’re a recent grad or a seasoned borrower, understanding your student loan servicer is a key step toward financial freedom.

    What is a Student Loan Servicer?

    In short, a student loan servicer is the middleman between you and the lender that you borrowed from. Servicers collect your loan payments, keep track of your account, and offer support for a range of repayment options, including loan forgiveness and payment postponement.

    Over 92.7% of all student debt is originated by the federal government, making the US government the largest student loan lender. Regardless of the type of loan, all federal student loans are serviced by loan servicers. Loan servicers are also responsible for publicizing and ensuring all borrowers know of the possible programs and services they are eligible for. This includes items like different repayment plans, forbearance and deferment, or even forgiveness completely.  

    Although lenders do have the duty to make sure you are aware of the potential programs that could save you thousands of dollars, they do not have power to alter your payment structure nor your terms. As intermediaries, they act on your behalf to convey and prove your case to the lender in hopes of qualifying for certain relief programs.

    How to Find Your Student Loan Servicer

    Before finding who your student loan servicer is, you will need to find out if you have a federal or private student loan. Once you figure that out, you can use certain databases like the National Student Loan Data System (NSLDS) and log in with your FSA ID. This system searches for federal student loan servicers. Once you’re in, you’ll see a comprehensive summary of all your federal student loans, including the types of loans you have, the amounts and outstanding balances of each loan, your interest rates, and who your loan servicer is.

    Although, there have been some changes in the private student loan servicing industry, meaning your existing servicer may be transferred. For example, if your previous loan servicer was Navient, they are now transferring all loans to Aidvantage, a new servicer that is part of Maximus.

    If you have private student loans, you can take a look at your credit reports or loan statements to find your loan servicer.

    How to Contact Your Student Loan Servicer

    There are many different loan servicers, some of which only deal with private and/or federal loans. In most cases your loan servicer will be one of the following:

    PhoneWebsite
    EdFinancial Services (HESC)1 (855) 337-6884www.edfinancial.com 
    FedLoan Servicing (PHEAA)1 (800) 699-2908https://myfedloan.org/ 
    Great Lakes Educational Loan Services Inc.1 (800) 236-4300www.mygreatlakes.org 
    MOHELA1 (888) 866-4352www.mohela.com
    Nelnet1 (888) 486-4722www.nelnet.com
    OSLA Servicing1 (866) 264-9762https://public.osla.org/
    Aidvantage1 (800) 722-1300https://aidvantage.com/ 
    ECSI1 (888) 549-3274https://heartland.ecsi.net/ 
    Default Resolution Group1 (800) 621-3115https://myeddebt.ed.gov/ 

    Can I Choose My Federal Loan Servicer? 

    Most of the time, federal loan servicers can’t be changed, and if they are changed, it’s not because of a request but rather something to do with the loan itself. However, there are a couple ways you could have your loan servicer changed. The most common way this is done is through refinancing your existing loans. To learn more about refinancing, what it is, and if you should potentially refinance, read our in-depth explanation of student loan refinancing. 

    What Should I Do if My Student Loan Servicer Isn’t Helping? 

    Unfortunately, there have been many legal battles where loan servicers have been found guilty of purposely being detrimental to students. Navient, in this specific case, was found guilty of purposely not recommending or even making certain income-driven repayment plans known to borrowers, but rather advising them into forbearance. Fortunately, after this huge legal battle, Navient was forced to settle over $1.7 Billion in student loans. This lawsuit forced other servicers, mostly private, to change their guidelines and actually ensure that they were working for the borrowers, in their best interest. 

    If, for some reason, you still believe that your student loan servicer isn’t helping, you can file a complaint with the Consumer Financial Protection Bureau (CFPB) or contact the Federal Student Aid Ombudsman Group.

    Next Steps 

    To summarize, student loan servicing is a completely different entity than student loan lenders. Operating as a middleman between the lender and the borrower, they manage and perform administrative duties surrounding the loan. Depending on your loan status, whether it is private or federally originated, you will find different servicers that are there to help you.

  • Should I Refinance My Student Loans?

    Should I Refinance My Student Loans?

    Choosing to refinance your student loan can be a difficult decision. You must consider your loan type, interest rate, and income. The decision is not easy, so here’s what you need to know before moving forward with it:

    What is Student Loan Refinancing?

    When you refinance your student loans, you’re allowing the lender pay off your current loans. You’ll then get a new private loan to pay your new lender back. This new loan often comes with better terms than your first loan (such as a lower interest rate or monthly payment).

    Reasons to Refinance Your Student Loans

    • Lower monthly payments: Refinancing lets you alter your payment plan. Accordingly, you can choose to extend the repayment term and lower monthly payment.

    • Pay off loans faster: If you’re in a better financial position and now want to pay off your loans faster, refinancing can let you shorten the payment period. Although this may result in higher monthly payments, it can save you a significant amount in the long run

    • Lower interest rates: If you believe you now qualify for a lower interest rate than before, refinancing can help you save thousands of dollars over the loan’s lifetime. Factors such as improved credit score, more stable income, or better macroeconomic conditions can help you secure better rates for your new loan.

    • Simplified payments: Refinancing lets you group all payments into one (instead of owing multiple monthly payments to various different lenders).

    Reasons NOT to Refinance Your Student Loans

    Refinancing may not be the best choice in certain situations:

    • Loss of Federal Loan Benefits: Federal student loans provide benefits and protections not available with private loans. These include student loan forgiveness, income-driven repayment plans, and the suspension of payments and interest accrual. Refinancing results in the loss of these benefits. If you plan to utilize these benefits, it’s best to hold off on refinancing.

    • Bad Loan Timing: If you are near the end of repaying an existing loan, refinancing may be a bad decision. Doing so would subject you to new terms and longer repayment periods.

    How to Find the Best Student Loan Refinance Option

    Finding the right refinancing option should be a simple. Use Sparrow to find the best student loan refinance option for you. Sparrow shows you the most important information and simplifies the entire process.

    The latest rates from Sparrow’s partners

    See a rate you like? Click Apply and we’ll take you to the right place to get started with the lender of your choosing.

    Compare your personalized, pre-qualified rates from these lenders in minutes.

    Find my rate

  • What is a Federal Stafford Loan?

    What is a Federal Stafford Loan?

    As students, exploring student loan options can be tricky. Understanding and knowing all the types of loans, both federal and private, can be overwhelming. That’s before knowing the intricacies of each loan type, eligibility requirement, and even loan structure. 

    Let’s look at one of the most popular types of student loan, the Federal Stafford Loan. 

    What is a Federal Stafford Loan?

    Stafford Loans are a subset of federal student loans that can either be subsidized or unsubsidized. Rather than borrowing from a private for-profit institution, students borrow directly from the U.S. Department of Education. 

    These loans are also more commonly referred to as Direct Loans as they come directly from the government and are a common way to help pay for college. Approximately 30% of undergraduate students borrow from the federal government, however, the total amount of debt borrowed in federal student loans represents over 90% of the total U.S. student debt. Of that 90%, over 50% of student loan debt is in Stafford Loans. This further breaks down as 18.6% in subsidized Stafford loans and 34.2% in unsubsidized Stafford Loans. 

    Before moving further, let’s quickly discuss the difference between subsidized and unsubsidized Stafford Loans. 

    Subsidized vs. Unsubsidized

    Subsidized Stafford Loans are offered to undergraduate students that demonstrate financial need. For this type of loan, the federal government is responsible for paying any interest while you are in school or during a period in which you aren’t required to make payments.

    On the other hand, unsubsidized Stafford Loans are offered to both undergraduate and graduate students and don’t have any requirement to demonstrate financial need. With this type of loan, students are responsible for paying any and all interest while it accrues.

    While this is a quick summary, a more detailed article explaining the difference between them can be found here.

    Who is Eligible for a Federal Stafford Loan?

    As Stafford Loans are administered by the U.S. Department of Education, they are among the most accessible to obtain. This is because Stafford loans don’t have an eligibility requirement that assesses your creditworthiness or ability to repay them.

    With that being said, it is very easy to become unaware of the amount of money you borrow, and ultimately end up repaying with significantly more interest. Be sure to borrow only what you need to cover your tuition costs and not any other discretionary spending.

    Although Federal Stafford Loans don’t have the same eligibility requirements like those that come from a private lender, there are certain criteria that a student must meet to qualify for the Direct Loan. These are:

    • Citizenship Status: Be a U.S. citizen or an eligible non-citizen
    • Enrollment Status: Be enrolled at least half-time in an eligible degree or certificate program
    • Have a valid Social Security Number, with certain exceptions
    • Show you are qualified to obtain a college or career school education. This can be shown through:
      • Having a high school diploma or equivalent
      • Enrolling in an eligible career pathway program
    • Not in default on any existing federal student loans (You must file the Free Application for Federal Student Aid (FAFSA®) form)
    • Meet general eligibility requirements for federal student aid

    What Are the Interest Rates on Federal Stafford Loans?

    The current federal Stafford Loan interest rate is based on the borrower type and loan type. Currently, for undergraduate students that borrow through either a subsidized or unsubsidized Stafford Loan, they will receive a 4.99% interest rate. As graduate and professional students don’t have access to subsidized loans, the unsubsidized loans are accompanied by a 6.54% interest rate. 

    Note that all federal loans have a fixed interest rate. These figures are representative of any loans that are first disbursed on or after July 1, 2022, and before July 1, 2023. 

    How Much Can I Borrow with Federal Stafford Loans?

    Although Stafford Loans are provided by the U.S. Department of Education, the amount of money you are given through this program is determined by your school. They also decide if you are eligible for a subsidized loan or unsubsidized loan. 

    In addition, Federal Stafford Loans have a “ceiling” on the amount of loan that can be provided. This amount varies based on what year of schooling you are in and whether you are a dependent or independent student. The following chart shows the exact amounts based on your specific situation.

    Source: StudentAid.gov 

    Can Federal Stafford Loans be Forgiven?

    Federal Stafford Loans can be forgiven through certain forgiveness programs. These programs are often dependent on your profession or loan type. Generally, professions that serve the wider community are eligible for student loan forgiveness programs. Examples of these professions include teachers, nurses, and any members of the military.  

    What’s Next

    Now, with the understanding of what a Federal Stafford Loan is, you can make a comprehensive, educated decision about the student loan you apply for. While applying and searching for student loans may still appear to be complex, using Sparrow will make your search much easier. Sparrow consolidates personalized loan offers from several lenders and displays all the required information that you need to make an informed decision.

  • Does Refinancing Student Loans Hurt Your Credit?

    Does Refinancing Student Loans Hurt Your Credit?

    Refinancing your student loan can be an excellent way to save money and improve your finances. By refinancing, you can take advantage of your improved credit score, higher income, and other positive financial changes to secure a better interest rate or more favorable terms.

    However, it’s important to note that refinancing your student loans can also have a temporary negative impact on your credit score. We’ll explore why this happens, whether the benefits of refinancing outweigh the costs, and what you can do to minimize the impact on your credit score.

    How Student Loan Refinancing Works

    Student loan refinancing is the process of swapping your current student loan(s) for one with a lower interest rate or better terms, like a shorter repayment term or better monthly payments. Refinancing can occur with both federal and private student loans whereas the federal loan consolidation program only considers federal loans. 

    Does Refinancing Hurt Your Credit?

    When you apply for a student loan refinance, you will have to go through a process which involves a hard credit inquiry. Generally, credit inquiries occur when there is a legally permitted request to see your credit report from either a company or person. This check could adversely affect your overall credit score, as the more checks that happen, the higher probability a credit bureau would think that you may be “over-extending.” 

    The key difference with credit inquiries are the version of check they are. A credit inquiry can either be a hard or soft credit check. Soft inquiries don’t impact your credit score, are done by creditors to provide “pre-approved” offers, and can be done without your consent. Contrary to that, hard inquiries do impact your score, are done by creditors and lenders when you apply for a credit or loan, and require written consent.

    Although the impact varies drastically for everyone, rarely is it significant.

    To further understand how refinancing your student loans will impact your credit, it’s important to understand how your credit score is determined in the first place. Here are the factors that contribute to your credit rating:

    • Payment history
    • Amounts owed
    • Credit history length
    • Credit mix
    • New credit

    Let’s examine the 3 most influential factors in regards to a FICO credit score.

    Payment History

    According to FICO, your credit score consists of 35% payment history, ranking this as the most important factor in the score. This means that even while refinancing, you should ensure that your income can support any payments that need to be made so you don’t end up with an inconsistent payment history which would affect your credit score. 

    If, for any reason, there is an outstanding unpaid balance for more than 30 days, it will get dinged in your credit report and will stay on the report for several years. Fundamentally however, paying your loans or credit cards on time is a strict practice that should be adhered to whenever possible. This will improve your credit score and will allow you to better manage your financial situation.

    Amount Owed

    This element refers to the total amount of money owed and is the second largest component of a credit score, exactly 30%. One thing many borrowers get confused about is that when refinancing, your total amount of money owed does not change.

    Credit History

    Your credit history is about 15% of your FICO score, and it speaks to how long you have been using credit as well as the average age of all your credit accounts. This is why it is important to start using credit early, to build a solid foundation. Also, some key things to remember are that whenever you open a new line of credit, that counts as a “0” age, which reduces your overall average age for existing credit. 

    How to Minimize the Credit Impact of Refinancing

    Despite the fact that student loan refinancing will impact your credit score, there are ways to minimize the impact.

    First, pay close attention to the application quantity and timing. When you are looking around for loan options, many lenders will allow you to see what you qualify for without incurring a hard credit check, which would impact your credit rating. This means that you should only send off formal applications to lenders where you believe there is a great chance that you will end up using their product. At the end of the day, the more formal applications you submit, the more hard credit checks occur, and the more your credit can degrade

    Additionally, you should be aware of the different timing rules with FICO and Vantage credit scores. While applying to loans, if done in a certain time period, multiple applications may not harm your score. For FICO, this period is 30 days, and for Vantage, it is 2 weeks. 

    The next two tips are quite straightforward. Continue making payments on your existing student loans before the refinance, and make payments for your refinance loan on time. Many students often forget to pay their student loan payments on time as they are in the process of having it refinanced. Even during this process, it is vital you stick with your schedule and pay off the loan, otherwise you will have an impact on your credit history. The same applies for the refinanced loan. Be sure you know the exact terms of the loan and adhere to the schedule for the payments, ensuring never to miss a payment. 

    Using Sparrow

    Finally, you could use Sparrow! When using Sparrow to compare student loan refinancing offers, your credit score won’t be impacted. Sparrow aggregates all the available options in one centralized location where you will be able to see the details of each loan. Then, you can decide which one to submit a formal application with. This reduces the number of applications necessary and thus protects your credit score!

    Is Refinancing a Student Loan Worth It?

    Knowing when to refinance is tricky. Additionally, many borrowers can’t, or shouldn’t, refinance their student loans. Passing the credit check and showing stable income are generally known criteria that are used to determine eligibility. Without them, you may need a cosigner to qualify. If you are already halfway through repaying your loans, refinancing may only prolong the duration of the term, albeit with lower monthly payments.

    A checklist that you could use to figure out if refinancing is worth it can be found here. Essentially, you should refinance your student loans if you are in a better financial position now than when you originally got the student loans or if you have a private student loan. Also, if the current economic conditions are favorable — this happens when the Federal Reserve cuts interest rates — then it may be beneficial to refinance to obtain a student loan with a lower interest rate.

    Final Thoughts from the Nest

    After understanding the complexities of student loan refinancing and if it is worth the potential impact on your credit rating, it’s important to know that everyone will be in a different situation. Contextualize and understand if your personal landscape will benefit from a refinance. And lastly, be sure to know the best rates that are out there and compare from several lenders. Using tools like Sparrow will speed up this process and make it much easier to navigate.

  • How Long Does it Take to Pay Off Student Loans?

    How Long Does it Take to Pay Off Student Loans?

    Late last year, the Department of Education released findings that highlighted the growing trend in which loans are prolonging. In fact, the average time it takes for a student to repay their student loans is now 20 years. 

    As a student, you should be aware of the current circumstances and understand what the averages are to avoid any long-term difficulties. Although this finding did showcase the ever-increasing trend, there are some key points to note before making a quick judgment call.

    Firstly, loan repayment can differ widely, and I mean immensely. Many conditions must be taken into account like the principal amount borrowed, interest rates, what type of degree you plan on pursuing and most importantly, what type of loan you end up choosing (federal or private). 

    How Long It Takes to Pay Off Student Loans

    By Degree Type

    As mentioned, the different degree types will affect your loan repayment timeline, but with a concrete plan and the knowledge, you will be able to pay your debts in a timely manner.

    Associate’s Degree

    On average, associate’s degrees take the shortest amount of time to repay, ranging from just over 4 years to just over 7 years depending on the loan type. Federal loans take the shortest amount of time to repay, and private student loans take the longest. 

    Moreover, associate’s degree graduates have an average annual salary of $46,100, and more than 90% of students pursuing this type of degree take out student loans.

    Bachelor’s Degree

    Next, looking at a bachelor’s degree, it takes, on average, 5 years and 7 months to repay student loans if attending a public institution. If the student is attending a private non-profit institution, it would take just under 7 years, and with a private for-profit institution, it would take just over 9 years.

    Additionally, compared to the $46,100 average annual salary for associate’s degree holders, a bachelor’s degree holder will take home nearly $65,000. 

    Graduate Degree

    Students and professionals pursuing graduate-level degrees, on average, borrow more than undergraduate students. On average, a master’s degree will take 9 years to repay if you were to attend a public institution versus 13 years from a private non-profit and 18 years from a private for-profit college. This vast discrepancy between the timelines in loan repayment showcases the importance of choosing where and how your loan is formed.

    Despite the higher debt, master degree holders earn typically about $78,000 annually, and it only goes up from there.

    Post-Graduate Degree

    For the post-graduate student, this type of education and degree is mostly about furthering themselves in a very niche, specific concentration, and with that comes a significantly increased repayment time on average. 

    For example, a student pursuing their doctoral degree will take roughly 13 and a half years to repay their student debt from both a public and private non-profit college, whereas a private for-profit institution loan on average takes over 38 years to complete.

    Finally, let’s take a look at more specialized degrees, those being medical and law school repayment timelines.

    Law Degree

    A recent study showed that the average law school debt is over 4 times the average bachelor’s degree holder’s debt. Totaling $160,000 and with an average starting salary of $55,200, law degrees are tremendously expensive due to the intensive nature of the education as well as how niche they are.

    Repayment for law degrees drastically vary based on the domain a lawyer chooses to pursue — public or private. On average, a lawyer working in the public sector will take 26 years to repay their loans if they use 20% of their income. For lawyers in the private sector, it will take just over 16 years if they were to use 20% of their income.

    One caveat for this is that the U.S. Consumer Finance Protection Bureau (CFPB) reports that the ideal amount to spend on student loan repayment is 10% of your income. If a lawyer working in the public field were to follow this, it would not be possible for them to repay their loans, and for a lawyer in the private field, it would take 50 years!

    Medical Degree

    For students pursuing a medical degree, the average student loan debt is even higher than law school at over $240,000. Depending on your lifestyle choices and frugality, you may be able to pay off a medical degree in 5 years or less if you were to live well below your means. Another popular option is to apply for Public Service Loan Forgiveness. This program, run by the US Department of Education allows participants to reduce the total cost of their education, but forces them to make payments for 10 years before the remaining debt is forgiven. 

    By Loan Type

    As mentioned above, repayment of student loans varies drastically depending on certain factors, one of them being the type of loan it is. This could be either a federal loan or a private student loan.

    Federal Student Loans

    Breaking this down further, federal loans can include standard repayment plans, graduated repayment plans and extended repayment plans. 

    Standard repayment plans are typically fixed monthly payments for a set number of years. Graduated plans are structured in a fashion where payments are on the lower end of the scale, and increase over time. For fast-progression degrees like graduate degrees, this is most common. Extended repayment plans are essentially fixed or graduated payments with the only caveat being that it is a 25-year term.

    Aside from these loan structures, there are also five different types of income-driven repayment plans. The monthly payment amount for these plans are based upon your income. Payments are generated based upon a percentage decided and with that, payments are made. 

    Private Student Loans

    Despite the vast amount of federal loans available, private loans still serve a demographic, and understanding private loan structures is critical as it can shave off years of repayment and debt.

    Private student loans originate from either non-profit institutions, generally academic, or for-profit institutions like banks or other financial institutions. As private loans are, well private, they can vary immensely from loan to loan and depending on your personal circumstances.

    For example, as of August 2022, Sparrow’s lending partners offered interest rates as low as 1.13%, although rates that low are typically reserved for those with the best credit score rating. The estimated average is roughly 6%-7%.

    How Long It Will Take You to Pay Off Your Student Loans

    Repayment timelines are highly dependent on your exact loan terms and conditions. While understanding the average debt payoff timeline is helpful, your individual timeline may differ based on your repayment period and monthly payments. One quick tip is to use a student loan calculator that can calculate your payoff date based on your loan balance, interest rate, and repayment term.

    What’s Next

    As with anything this impactful, student loans must take time and thoughtful consideration before diving into the deep-end and making a mistake. Using Sparrow as a loan comparison tool that aggregates loans from different lenders will let you know the intricacies of the loan, and with that, you can figure out more details regarding repayment structures. 

    Regardless, loan repayment varies for everyone. For someone pursuing their doctoral degree, it may not be of tremendous concern to repay the loan immediately or take on higher payments. But, as everyone is in different circumstances, the conditions of your repayment will be unique. Ultimately, know that after analyzing the data, you can make an informed decision about choosing your student loan! 


    *Data sourced from EducationData.