When you take out a federal student loan, the government requires you to receive both entrance and exit counseling to make sure you understand your responsibilities as a borrower.
However, federal student loan exit counseling may not give you all of the information you need for successful repayment of your loans. Here is what you can expect from student loan exit counseling — and the three things your exit counselor is unlikely to tell you.
What is student loan exit counseling?
The federal government requires that every student who receives federal loans go through exit counseling when they leave school. Leaving school includes graduating, changing attendance to less than half-time, withdrawing from school, transferring to another school, or taking more than a 180-day leave of absence.
Depending on your school, your exit counseling may be conducted one-on-one, through an audio-visual presentation, or online through interactive tools. No matter what form your counseling takes, it will cover the following topics:
- Consequences of student loan default
- Terms and conditions of your loans, including the interest rates, grace period, and your first payment due date
- Repayment options
- Prepayment options
- Debt management strategies
- Federal student loan consolidation options
- Loan forgiveness options
- Tax benefits available to borrowers in repayment
- Resources for contacting lenders
This list of information may seem comprehensive, but there are several important aspects of your student loan repayment journey that are not necessarily covered by this counseling.
Gaps in student loan exit counseling
James Dennin, a writer who graduated from Kenyon College in 2013 and who is now living in New York, found that his student loan exit counseling seemed to be most focused on the responsibilities of the borrower.
“Kenyon’s exit counseling was very involved, but the script I got was much more heavily focused on the consequences of not paying,” Dennin said.
Dennin’s experience is a common one; the true aim of student loan exit counseling is to prevent as many defaults as possible. While the information you receive from your exit counseling session is both important and helpful, there are some information gaps that can catch borrowers off guard.
1. Your student loan may be sold
In September 2009, the U.S. Department of Education announced that it would begin allowing not-for-profit loan servicers to start taking over the administration of federal loans. These loan servicers began taking over federal loans in 2011.
As with the sale of any loan, when your student loan is sold, the new owner must honor the terms you signed on for. However, borrowers are often taken by surprise when their loans are transferred to a new servicer. Many have found the transition to a new lender is not exactly seamless.
For instance, Dennin noted that “about two years after graduating, my loan provider sold some of my debt to another provider, and I had to start making payments to two agencies instead of one.”
2. You can refinance your student loans
Student loan exit counseling must inform you of your options for federal student loan consolidation. If you decide to do this, you can potentially consolidate multiple federal student loans into a single loan with a single interest rate and repayment schedule.
However, federal consolidation generally does not save borrowers money because they are charged a weighted average interest rate of all the combined loans. In fact, consolidation can end up costing more in the long run. Even if your monthly payments are lowered by a longer repayment term, you’ll pay more interest over time.
What your exit counselor will not tell you is that there are private options for refinancing student loans. Through refinancing, you apply for a new loan that you use to pay off your existing federal student loans, often at a lower interest rate. This allows you to consolidate your loans into one, with a single monthly payment, while potentially saving thousands of dollars in interest charges.
Refinancing with a private lender has its downsides, though. You lose the federal benefits of your loans, such as forbearance options, income-driven repayment plans, deferral options, and Public Service Loan Forgiveness.
3. How to prioritize repayment versus retirement savings
The budgeting overview provided by student loan exit counseling is very basic. Your counseling may not be comprehensive enough to help you understand how to manage your finances with student loans.
That means many borrowers are unsure whether they should prioritize student loans or retirement savings.
In some ways, this is the biggest omission from student loan exit counseling, considering how few graduates understand the importance of saving for retirement.
Don’t get caught off guard
Federal student loan exit counseling is an important part of educating borrowers on their responsibilities. But since the counseling is geared toward making sure you don’t default, it can skip over important aspects of being a student loan borrower.
Don’t assume you’re fully educated about your rights and options just because you’ve attended exit counseling.
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