SoFi

When a person takes on debt—whether it’s a student loan, mortgage, car loan, or credit card balance—they’re likely paying interest on that debt. This is a charge paid to the lender for the opportunity to borrow money. But interest rates aren’t all created equal.

In some cases, borrowers could find themselves stuck with high-interest debt, which can add up faster than they may realize. If you happen to be stuck with high-interest debt, don’t despair. The worst thing a borrower can do is ignore the situation and fail to make payments.

A borrower may have options for lowering interest rates and getting payments under control. Depending on the type of debt, that could mean consolidating debt, or perhaps even taking out a personal loan. Here’s what a borrower could do if they’re struggling with high-interest debt:

Identifying High-Interest Debt

The first step to tackling high interest debt is figuring out if you have it. Inputting every debt currently owed into a spreadsheet might be a good start. In the first column would be the current amount owed on each debt. In the next column could be the annual percentage rate (APR) for each debt. Then, the debts can be sorted from the one with the highest interest rate to the one with the lowest interest rate.

How High-Interest Debt Can Dent Finances

High interest rates can be sneaky. A borrower may have taken out a loan without paying close attention to the fine print. They may have signed up for a credit card with a 0% introductory interest rate, only to have the rate shoot up after the introductory period. Or they may have opted for a loan with a variable interest rate, which often starts out relatively low but can increase dramatically over time.

High-interest debt can seriously hurt finances. By sucking up any extra cash and increasing debt-to-income ratio, it can potentially prevent someone from achieving certain life goals, such as buying a home, saving for retirement, or traveling. If payments become unmanageable, a borrower may risk going into default, which could set them up for a hit to their credit score or even bankruptcy and garnished wages.

Options for Handling High-Interest Rates

Depending on the type of loan, here are some options for tackling those high-interest rates:

Student Loans

Whether it’s federal or private student loans, a borrower might be able to get a better interest rate if they refinance those loans, especially if they have a good credit score and solid income (among other factors that will vary by lender). Refinancing means consolidating all student loans—both private and/or federal—into a new loan with a (hopefully lower) interest rate through a private lender.

Keep in mind that refinancing federal student loans with a private lender means they will no longer be eligible for federal loan protections and perks like deferment or forbearance and income-driven repayment plans. So student loan refinancing won’t be right for everyone.

Credit Cards

Credit cards usually have the highest interest rates of all unsecured debt types—as of March 2020, the average APR for credit cards is above 21% . Borrowers who are stuck with a high balance on a credit card plus a high rate might want to consider a personal loan to pay it off.

An excellent credit score and steady employment might help a borrower qualify for a low-rate personal loan. Choosing a lender that doesn’tabove 21%
t charge origination fees or prepayment penalties could help to avoid extra charges.

Fixed (hopefully much lower) interest rates compared to credit cards and set repayment terms typical to personal loans can be helpful when looking for relief from the high-interest credit card debt burden, too.

Mortgages

If average mortgage interest rates have fallen, it may be a good idea to look into refinancing a mortgage. If eligible for mortgage refinance, a borrower may be able to lower their interest rate or pay off a mortgage faster. Shopping around for the best rate and considering lenders with cash-out refinancing options might be a good start.

Common Debt Repayment Strategies

No matter the interest rate, it’s often in a borrower’s best interest (get it?) to pay down debts in an effort to lead a debt-free lifestyle. Of course, if multiple debts are looming, it can be an overwhelming challenge to tackle.

Instead of giving up and declaring debt unconquerable, a borrower can follow one of the common debt repayment strategies listed below.

The Avalanche Method

With the avalanche method, a borrower can review the debt spreadsheet mentioned above to identify high-interest debts. While making minimum payments on all debts as required, a borrower can funnel extra money toward the debt with the highest interest rate first until it’s paid off, and then allocate that extra money to other debts in subsequent order of interest rate until those are paid off.

The logic behind this method is that, by saving money on the high interest rates, it should be easier to pay off lower-interest debts (and meet other financial goals) more quickly, even though the highest-interest debt may not be the loan with the largest balance. And while that’s a solid strategy, there is another common method that might sound better. (Yes, it also has a snow-related metaphor.)

The Snowball Method

The debt snowball method is another popular debt repayment strategy, but this one takes a different tack than the avalanche method above. Whereas the avalanche starts with the highest-interest loan, the debt snowball starts with the loan with the lowest total balance.

For instance, if a borrower has a credit card with just a few hundred dollars on it, then they’d start with that before moving onto the bigger debts, like student loans or a mortgage.

The logic behind this method is all about internal motivation. Reaching a money-related goal might make it easier for borrowers to motivate themselves to stick to an overall debt repayment plan. Since a smaller debt is a more manageable goal in the short term, paying off the smallest debt first could be a good way to get the snowball rolling, so to speak.

It might also be a more realistic strategy if a borrower doesn’t have a lot of extra money to throw at making large payments toward the highest-interest debt (but will still make all required minimum payments, of course).

Debt Consolidation: How Does It Work?

In some ways, debt consolidation might sound counterintuitive, because it does involve taking out more debt when a borrower already has multiple existing loans.

Basically, debt consolidation is a debt repayment method in which a borrower takes out another line of credit or debt with the express purpose of paying off existing debts. For example, instead of paying separate credit card bills, a borrower could take out a personal loan that would cover the balances on all other debts and pay them in full, then the borrower would repay only the personal loan.

This could be a significant financial improvement for a number of reasons. For one thing, it’s simply easier on a logistical level: When you’re dealing with multiple debts that are all due at different times of the month, it’s all too easy to accidentally miss a payment and fall behind.

But aside from keeping stress at bay every few weeks, debt consolidation could actually save you money. Let’s take a closer look at the example we outlined above, in which three existing debts are consolidated.

One common way to go about debt consolidation is to take out an unsecured personal loan in an amount that will cover existing debts. (There are other methods, however; for instance, some people perform a balance transfer from existing high-interest credit cards to a new credit card offering a promotional 0% interest rate.)

SoFi offers personal loans with competitive rates and, unlike many other lenders, SoFi loans don’t come with a bevy of hidden fees. That said, debt consolidation isn’t the only option when it comes to finding a way to ease a debt burden. After all, an unsecured personal loan is still a debt, although ideally a debt with better rates and terms than a credit card.

Refinancing

Instead of taking out another line of credit to cover multiple existing loans, with refinancing a borrower is taking out a new loan to cover one specific debt, often a mortgage or a student loan.

The power behind this financial move is pretty simple: If a borrower’s credit score or other qualifying factors have improved since the time they took out the original loan(s), they could be eligible for a loan with a more reasonable monthly payment or a lower interest rate. That could make it easier and/or faster to go through the snowball or avalanche methods described above, or simply to save up more money for other financial goals.

SoFi offers student loan and mortgage refinancing, as well as a broad range of other financial products that could help money woes back on track.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

SoFi Student Loan Refinance
SoFi Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org). SoFi Student Loan Refinance Loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Public Service Loan Forgiveness, Income-Based Repayment, Income-Contingent Repayment, PAYE or SAVE. Additional terms and conditions apply. Lowest rates reserved for the most creditworthy borrowers. For additional product-specific legal and licensing information, see SoFi.com/legal.

BR18132

Studying medicine and working in the medical field can be highly rewarding as you assist people with illnesses and injuries and help them to live their healthiest life.

In this career, how you help others could literally be life-changing. Other benefits of a medical career might include the wide variety of opportunities in an array of specialties, from pediatrics to geriatrics, medical research, and more.

Medical school might be considered a safe investment in the future as well, with the possibility of a high salary in a chosen field. In fact, according to the United States Department of Labor’s Bureau of Labor Statistics , in 2019, nine out of the top 10 highest-paid professions are in the field of medicine.

Read on for more good news on medical careers and finances, plus some information about what it might cost to earn a medical degree.

Medical Professionals and Their Salaries

According to the Medscape Physician Compensation Report 2019 , physicians’ incomes are increasing. Primary care physicians, for example, are earning an average of $237,000 annually, a 21.5% increase over their average earnings in 2015 ($195,000). Specialists, meanwhile, earn an average salary of $341,000, a 20% increase over the 2015 average of $284,000.

When looking at specialties, orthopedics ($482,000) and plastic surgery ($471,000) top the list in 2019. The lowest physician salaries are pediatrics ($225,000) and public health and preventive medicine ($209,000).

Salaries may also vary by state, with these three having the highest overall in 2019:

•   Oklahoma: $337,000/yr
•   Alabama: $330,000
•   Nevada: $329,000

As lucrative as a medical career can be, the commitment to medical school is significant, and the educational journey can be pricey. According to the Association of American Medical Colleges (AAMC), here are the average costs of tuition, student fees, and health insurance for medical students during the 2018–2019 school year (costs include discounts from stipends, scholarships, or grants):

•   Public school, resident: $36,755
•   Private school, resident: $59,076
•   Public school, nonresident: $60,802
•   Private school, nonresident: $60,474

Medical Students and Debt

Although the costs of attending medical school are significant, the number of medical school students who are graduating with no debt continues to rise, with the AAMC noting that, in 2019, 28.7% of students completed medical school with no student loan debt. In 2018, the figure was 27.7%.

Another study of medical students and corresponding student loan debt was conducted by researchers who have inferred that more and more students entering medical schools come from wealthy backgrounds.

This implies that some students might be discouraged from pursuing medicine, based on financial considerations alone. Also, students incurring a lot of debt might feel pressured to specialize in more lucrative fields, because when they have student loan debt, cardiology (with a 2019 average salary of $430,000) might look better than endocrinology (with a 2019 average salary of $236,000) simply because cardiologists make so much more.

Medical Student Loan Debt by State

When it comes to debt, not all medical programs are equal. According to U.S. News and World Report’s “Best Grad School ,” the range can be quite significant. Out of 114 medical schools listed, the three that left its grads with the most debt in 2018 were:

•   Rocky Vista University in Parker, Colorado: $364,000
•   Nova Southeastern University Patel College of Osteopathic Medicine (Patel) in Fort Lauderdale, Florida: $272,764
•   Western University of Health Sciences in Pomona, California: $272,311

On the other end of the spectrum, the schools that graduated students with the least amount of debt in 2018 were:

•   Johns Hopkins University in Baltimore, Maryland: $104,016
•   Stanford University in Stanford, California: $104,988
•   Baylor College of Medicine in Houston, Texas: $107,469

Average Medical School Debt and Loan Options

Although the percentage of medical students who have no debt is rising, when students do have student loan debt, the amount is going up, with the 2019 average for medical students at $200,000 , a 2.7% increase over the 2018 amount of $195,000.

Note that, when it comes to borrowing for medical school, loan interest rates offered by the federal government, along with their terms and conditions, might be different from borrowing as an undergrad.

Types of federal student loans available to medical students include Direct Unsubsidized Loans, with loan limits up to $20,500 each year, and $138,500 overall. Rates for this type of loan are currently less than for the other type of federal aid available to people going to medical school—Direct PLUS loans .

There isn’t a financial need requirement for either type of loan, so many borrowers qualify for both. With Direct Unsubsidized Loans, there is no credit check, but there is a credit check for PLUS loans.

Medical students can also apply for private student loan funding, with different private lenders offering different rates, terms, and overall loan programs. Typically, you need good credit for private student loans, among other financial factors that will vary by lender.

Federal loans do come with many important student protections that private loans typically don’t, such as loan forgiveness for working in public service, income-driven repayment, and deferment programs; some medical students defer loans during their residency.

High Debt Loads—and Compound Interest

Unfortunately, debt doesn’t necessarily pause when deferred. There are some federal student loans that, when deferred, will continue to accrue interest. The problem those in medical fields can face, then, is debt accumulation during their residency, which can last anywhere from three to seven years depending on the specialty.

Here’s a very high-level, simplified example. Say, for instance, a med student defers loan payments on a $180,000 Direct PLUS Loan with an annual percentage rate (APR) of 7%. If the student defers payments for a seven-year residency, this could lead to a debt increase of around $88,200. With a 6% interest rate, debt could increase by around $75,600.

Even while making a modest income—in 2018, the average resident earned just under $60,000 —the debt would grow substantially.

Other than deferral, the federal government does offer additional income-driven payment protections for federal student loans—for example, certain
programs are offered during the years of residency, lowering payments to match current income so monthly loan payments are more manageable..

The Revised Pay As You Earn Repayment Plan (REPAYE) caps payments at 10% of discretionary income for qualifying borrowers. If you are married, the government will factor in a spouse’s income when determining monthly payments.

Options for Paying Back Medical School Loans

Once you are ready to get serious about paying back student loans, refinancing with a private lender might help save you money. Although refinancing your federal student loans does mean forgoing government protections such as loan forgiveness and income-driven repayment, some companies offer refinance interest rates that are lower than federal rates.

The bottom line: Student debt should not be the thing standing between you and your goals. Between a variety of repayment plans, loan consolidation, or refinancing, there are ways to repay your debt that are manageable.

Loan Consolidation vs Loan Refinancing

The word “consolidating” can have more than one meaning in connection with student loan financing. The federal government, for example, offers Direct Consolidation Loans, through which eligible federal student loans are combined into one, with the interest rate on the new loan being a weighted average of each of the original loans’ interest rates (rounded up to the nearest eighth of a percent).

When the word “consolidating” is used by private lenders, though, the loans are combined into one, but you get a brand new interest rate, not a
weighted average, based on personal financial factors. This means that when you “consolidate” student loans with a private lender such as SoFi, you’re also refinancing them.

If you consolidate your federal loans via a Direct Consolidation Loan with the government, and your payment goes down, that’s likely because the term has been extended from the standard 10-year repayment to 20 or even 25 years. This means that although you may be paying less each month, you’ll also be paying more in interest over the life of your loan.

If, though, you refinance your student loans with a private lender, and you get a better rate, you could choose a term that allows you to pay your loan off more quickly, which should save you in interest. Again, refinancing isn’t right for everyone—especially those who have federal student loans and may wish to take advantage of Public Service Loan Forgiveness, income-driven repayment, Direct Consolidation Loans, and other federal benefits and protections.

Medical Resident Refinance

If it’s time to refinance and you are interested in exploring a private lender, SoFi has created a student loan refinance program that’s specifically for medical residents. Potential borrowers can quickly and easily find their interest rate online and might benefit from low rates and low monthly payments during residency.

Is student debt getting in the way of pursuing a career in medicine? Check out SoFi’s medical resident student loan refinancing. By refinancing, you could save on your student loans, so paying for your M.D. is that much easier.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SoFi Private Student Loans
Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs. SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See SoFi.com/eligibility-criteria for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change.

SoFi Student Loan Refinance
SoFi Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org). SoFi Student Loan Refinance Loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Public Service Loan Forgiveness, Income-Based Repayment, Income-Contingent Repayment, PAYE or SAVE. Additional terms and conditions apply. Lowest rates reserved for the most creditworthy borrowers. For additional product-specific legal and licensing information, see SoFi.com/legal.

SLR17150

If the most exciting part of finally graduating from law school and passing the bar is getting your bar card in the mail, the least exciting part may well be making the first payment on your student loans.

Despite the fact that law school may be a sound investment—after all, the median lawyer salary in the United States was $120,910 annually in 2018, according to the Bureau of Labor Statistics —it certainly comes with a hefty price tag.

The average young lawyer now carries over $140,000 in student debt, and figuring out how to set up a loan repayment plan can be daunting. After all, a six-figure debt is nothing to take lightly.

Finishing law school already comes with a lot of responsibility: you may find yourself moving or changing cities, starting a new job, or just adjusting to the new responsibility of dishing out legal advice for a living.

On top of that, starting to pay off your student loans can feel like a challenge. Unfortunately, student debt is not an uncommon barrier to face after graduation; in fact, it’s becoming the norm. And yet, there are reasons why being a newly minted lawyer with debt could put you in a better position than graduates in other fields.

For one, the good news is that you’ve chosen a profession where even your starting salary likely puts you well above the median American household income —which was at $61,937 annually for 2018.

Not just this, there are a ton of debt repayment options available to law school graduates, including attractive student loan repayment programs and forgiveness programs that could have you saying goodbye to your debt—if you’re in the right sector.

Ultimately, once the initial sticker shock of your student loan debt wears off, you may realize that you have numerous options at your fingertips that could help you move out of the situation you’re currently in and into one that’s much more financially comfortable.

Sure, tackling student loan debt is a challenge—for anyone. But it is a challenge you can rise to, especially with the help of other lawyers who have been in your shoes.

Whether you’re a legal services attorney or a first-year associate, a good first step on your road to career fulfillment could be creating a plan to tackle your student debt.

Ahead, we take a look at some of the options that may be available to you and uncover some tips for those attorneys who are saddled with high student loan debt—plus ways to move forward.

Taking Advantage of Your Law School’s Loan Repayment Program

New graduates with large debt loads may find themselves obsessing over the amount of debt they owe, instead of focusing on available repayment options. It’s basically the same advice that driving instructors give to new drivers: If you spot a car wreck on the side of the highway, the best way to avoid it is to keep your eyes on the road—not on the accident.

So, how can you shift your thinking and develop a more solutions-based approach when you’re facing a mountain of debt? When it comes to significant student loan debt, the answer may lie in taking the time to do your research and focusing your attention on the resources you may already have at your disposal:

One option to explore is the sort(s) of loan assistance offered by your law school. Some schools may have helpful loan repayment programs, including Loan Repayment Assistance Programs (LRAPs) , which can make it easier for law school graduates to work at public interest jobs, which typically pay less than private firms, by offering income-based repayment assistance.

That said, it’s important to pay careful attention to your student loan terms. For instance, Columbia University suggests a 10-year repayment term is the best option to take advantage of their LRAP, which would likely mean bigger monthly payments, but over a shorter period of time.

Looking Into Federal Loan Forgiveness Programs

Imagine this: You find your dream fellowship, internship, or job right after graduation, and not only does it put you on a path towards gaining valuable experience in your field, but it also comes with an unexpected added perk—debt payoff assistance.

Student loan forgiveness programs aren’t altogether uncommon for those in the legal field. In fact, there are many possible scenarios in which you could find yourself getting some help paying off your debt—or having the remainder forgiven altogether.

Typically, law school loan forgiveness is reserved for lawyers working in the public sector. Many times, public service lawyers earn lower salaries than those in the private sector, and so forgiveness programs are usually geared towards lower earners who may need more help shouldering their debt.

Public Service Loan Forgiveness (PSLF), for example, is a federal loan forgiveness program that eliminates federal student loan balances for eligible borrowers who make on-time loan payments for 10 years while they’re working for a qualifying nonprofit or in a government sector.

In addition to this, some states also offer loan forgiveness for attorneys through LRAPs. LRAPs typically require that you graduate from the academic institution that awarded you LRAP initially, work around 30+ hours per week, and start paying off your loans immediately.

These aren’t the only options available. Added bonus: Typically, loan forgiveness programs can be used as long as you qualify, so you may be able to “double-dip” if you qualify for more than one. Be sure to check the criteria for each program to confirm; there are some, such as teacher loan forgiveness programs, that do not allow “double-dipping.”

One tip: Search for and fit your repayment plan to your personal circumstances and situation. For instance, if you’re going into public interest law, there are loan forgiveness, assistance, and deferral programs. And you’ll want to ensure that your job meets the requirements for those programs.

Considering Consolidating or Refinancing Your Student Loans

If you find yourself dealing with more than one student loan, a possible option may be to consolidate or refinance your loans so that you can just worry about paying off one lump sum.

Depending on your exact circumstances, student debt consolidation may provide some peace of mind and the ability to more easily manage your repayment, given that consolidation means combining existing student loans into one.

(Note: If you refinance federal loans with a private lender, you will no longer qualify for federal loan benefits, such as PSLF, discussed above, or federal income-driven repayment plans.)

If you decided to consolidate your federal student loans into one Direct Consolidation Loan, you can always consider refinancing in the future once you are in the market for a better interest rate.

One tip: instead of treating your repayment plan as if it’s set in stone, consider ways it may need to (and could) change if your financial situation changes.

Reallocating Your Debt (If Possible)

Depending on which stage you are at in your debt repayment process, there may be options available for you to reallocate your debt. Sometimes, if you come to own property, you can use this to your advantage by borrowing or reallocating existing debt against the value of the property.

However, converting unsecured debt (like a student loan) into debt on a secured lien such as your home can come with risks. For example, if you were unable to pay your mortgage and went into loan default, you could lose your home. So, as with anything, it’s important to weigh the costs and benefits.

One tip: Take the time to research and fully understand ways to tackle law school debt. And if you have the opportunity to borrow money from, for instance, home equity, you may be able to obtain more favorable terms on your mortgage while paying off your student loan at the same time. Some mortgage lenders actually offer loans specifically tailored to pay off student loan debt.

And a Favorite Tip: Throw Some Extra Money at Your Loans When You Can

If you’re looking to find tips to conquer your student loans the old-fashioned way, you can always tighten your belt and put every available dollar towards your debt. Of course, this strategy can be used in conjunction with just about any other plan, and it’s a valuable thing to consider. After all, extra money can add up quickly. And you can always make prepayments on student loans—federal or private—you have the right to pay off your student loans as fast as you want .

Debt can be an overwhelming thing to face, but by being proactive and funneling any and all extra cash into your student loan repayments—yes, that includes that unexpected bonus or inheritance money—before you know it, you may realize that your mountain of student loan debt has, over time, become a molehill.

Here are some tips to get started:

When you’re still in school, if you have leftover loan money at the end of the semester, you can pay it back into your loans to avoid compounding interest.

If you’re doing pretty well financially for a few years out of school, you might allocate some of your high salary to pay off your loan, or pay as much extra as possible. Ditto with getting a raise: although it may be tempting to upgrade your lifestyle, sticking to the same budget and using that money to pay down your law school loan debt might be a good option—potentially saving you money and worry.

SoFi Student Loan Refinance
SoFi Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org). SoFi Student Loan Refinance Loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Public Service Loan Forgiveness, Income-Based Repayment, Income-Contingent Repayment, PAYE or SAVE. Additional terms and conditions apply. Lowest rates reserved for the most creditworthy borrowers. For additional product-specific legal and licensing information, see SoFi.com/legal.

SLR17160

Applying for a personal loan can be a little scary. After all, lenders don’t hand out cash willy-nilly, even when they’re being paid interest.

When applying for a personal loan, you will normally need to show that you have a good credit score and a high enough income to ensure that you’ll be able to handle your monthly payments (among other requirements). It’s good to note that loan qualifying criteria around minimum credit score required and sufficient income may vary between lenders and even loan programs. It is recommended that you do your research to discover which loan program offers the best fit for you.

Luckily, if your credit score isn’t quite perfect or you’re still waiting on that raise, you may be able to leverage a co-borrower to help get the personal loan you want with the repayment terms you need.

Even if you haven’t heard of a loan co-borrower before, you may have already used one. If you, for example, had your Aunt Mavis sign on as a co-borrower with you for a private student loan or as a guarantor for your first post-college apartment, you have seen the power of the co-borrower to help get your loan or lease approved.

Co-borrowers can help you secure a personal loan when your credit or income doesn’t quite match a lender’s requirements. Having a co-borrower might even help you get a more favorable interest rate on your personal loan. Here’s what to know about using a co-borrower to help secure a personal loan.

What Is a Personal Loan, Anyway?

Before we dive into tips on using a co-borrower, let’s take a step back: What is a personal loan and why might you want one?

A personal loan is an installment loan that is typically an unsecured loan. With an unsecured personal loan, you borrow from a lender with the agreement to pay it back, plus interest, in a set amount of time.

Unlike mortgages and auto loans, personal loans aren’t necessarily tied to a physical asset you put down as collateral, which is what “unsecured” means. However, personal loans can be offered as secured loans, so check the details when rate shopping.

Unsecured personal loans tend to carry slightly higher interest rates than secured loans. After all, the lender doesn’t have a secured asset to seize if you default!

Even though unsecured personal loans typically carry higher interest rates than other, secured loans or credit cards, they can be a useful financial tool to help you consolidate existing debts, fund major personal projects, and more.

And when you apply with a co-applicant (who, if you’re approved, would become your co-borrower), you may significantly increase your chances of qualifying, as well as achieving a lower interest rate or more generous loan repayment period.

What Is a Co-Applicant?

A co-applicant is an additional person who applies for a loan with you in order to help you qualify. Similar terms are “co-borrower” or “co-signer” (we’ll get into the differences below) and by having one, you may be able to secure better interest rates and repayment terms.

Whether a co-borrower or co-signer, the additional person’s credit score and financial history is considered along with yours when applying for a loan. That can be a big help if your own credit history is less than perfect, or if you’re young and haven’t had very much time to build up a robust credit score quite yet.

Differences Between a Co-signer and a Co-borrower?

Both co-signers and co-borrowers are considered co-applicants at first, but they serve different purposes. Whether you need a co-signer or co-borrower usually depends on your individual circumstances. Each type of co-applicant has specific requirements and potential benefits.

A co-borrower essentially takes on the loan with you. Their name will be on the loan with yours, making them equally responsible for paying back the loan. Co-borrowers are frequently used in situations where the loan received has benefits for both of you, whether through a business arrangement or a family arrangement.

An example: You and your partner want to take out a personal loan in order to renovate the garage into a nursery for a baby on the way. You may want to apply as co-borrowers for a loan to pay for the contractor. Because both partners’ incomes and credit scores are considered in approving the loan, this may increase your chances of approval and possibly even lower the interest rates you’re offered.

A co-signer, on the other hand, is someone who helps you qualify for a loan, but isn’t your partner on the loan, as in the case of a co-borrower. A co-signer typically is only responsible for making the loan payments if you are unable to make them, but has no usage or ownership rights. However, credit for both co-borrowers and co-signers will be negatively impacted if the main borrower misses payments.

For example, private student loans are often taken out with parents or other family members as co-signers, since most recent high school graduates haven’t built up a significant credit history.

Adding in mom’s or dad’s credit history may help these students qualify for the student loans they need to get started on their college journey, but it does mean putting their parents’ credit reputation on the line if they default.

Considerations when Applying for a Personal Loan With a Co-applicant

The biggest challenge you might face in securing a co-applicant for a personal loan is finding someone willing to sign on the dotted line. After all, if you find yourself unable to repay the lender, your co-borrower will be on the hook for payment.

That’s why many people who are looking for a co-applicant start with parents, siblings, and other family members who they feel comfortable asking. Blood runs thicker than water, after all, and your close family have likely been supporting you in one way or another since birth.

It is recommended that you have a heartfelt, upfront conversation about the responsibilities that come with being a co-borrower and be ready to present your potential ally with your plan for repayment. For instance, a co-borrower is likely to see a negative impact on their credit score if they fail to make a payment. Since a co-applicant becomes a co-borrower once a loan is funded, you’re in this together, so if paying back the loan does not go according to plan, you both would be equally affected.

If you’re looking for a co-applicant, you might already know exactly who you’ll ask. If it is a loan to benefit your family, such as making home improvements, it likely makes sense for your partner or spouse to serve in the position.

As with a co-signer, make sure to talk openly and clearly about the responsibilities that come with being a co-borrower, including the responsibility for making payments.

After you’ve found your co-applicant, make sure to research which personal loans accept co-applicants. Some lenders accept co-borrowers but not co-signers, and some lenders accept both. SoFi does not accept co-signers for personal loans, but will accept co-borrowers.

When Does It Make Sense to Take Out a Personal Loan?

Given the risks that both you and your co-applicant assume in taking out a personal loan, you may wonder if this move is ever financially savvy.

After all, the conventional wisdom is to avoid debt at all costs, and unsecured personal loans tend to carry higher interest rates than loans for which you put down collateral, like a mortgage.

However, personal loans can be a sound financial tactic, for example, for the purpose of debt consolidation. That’s when you pay off multiple existing debts with one larger loan, which can simplify bill repayment and save on interest.

For instance, if you’re making payments on two or three credit cards with different interest rates and different due dates, it might be difficult to keep track of everything—let alone get ahead.

However, taking out one personal loan large enough to pay those debts off, generally means only one monthly payment and one interest rate, which could possibly save you money in the long run as well as making your life a little easier. Personal loans can also help you fund home improvements or even cover unexpected medical bills.

If you qualify to borrow money through a personal loan with SoFi, there are no prepayment penalties or origination fees. And as a SoFi member, you’ll have access to member benefits like career counseling and community events.

Plus, we make it easy to find out if you (and your co-applicant) prequalify online. You’ll fill out a bit of personal information and SoFi will run a soft credit check (which doesn’t impact your credit score1). It takes just minutes to see what you may qualify to borrow and what your interest rate could be.

Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

PL18200

If you’ve taken out student loans to invest in your education, you know that paying interest on those loans is simply part of the deal. But while “interest” can seem like an abstract notion when you first take out loans, over time it can become a force to be reckoned with—particularly for the many MBA, law, and med school grads with six figures worth of education debt to repay.

For example, using a student loan calculator to get a rough estimate, you can see that a borrower with $100K in student loan principal at a 6.8% weighted average interest rate and a 10-year term can expect to pay an estimated $38K in interest over the life of the loan. And that’s if they make every payment on time.

Paying interest on student loans may be unavoidable, but there are a few mistakes that can cause some borrowers to pay more interest than they need to. Read on for tips on how to help prevent these blunders from affecting your bottom line.

Mistake #1: Using Forbearance When It Isn’t Absolutely Necessary

Most federal loans and some private loans may allow borrowers to use forbearance to temporarily reduce or suspend loan payments in the event of qualifying financial or medical difficulties.

But in most cases interest continues to accrue while payments are on pause—which means that the longer borrowers remain in forbearance, the more they may have to pay in the long run. (See Mistake #5 below.)

So if the goal is to minimize interest expenses, forbearance is typically an option best reserved for extreme financial hardship. Resuming regular payments as quickly as possible could be another way to minimize accrued interest.

If the borrower has federal student loans, enrolling in an income-driven repayment plan might be another option to consider. The monthly payment for an income-driven repayment plan is based on the borrower’s discretionary income and family size.

In certain cases (qualifying unemployment or the inability to work because of an illness, for example) payments could be as low as $0. After the period of financial hardship has passed, the borrower re-certifies the loan using new income information. (Recertification is required every year.)

Mistake #2: Unnecessarily Extending the Repayment Period

Federal student loan consolidation with a Direct Consolidation Loan allows borrowers to combine two or more eligible federal loans into just one loan, helping to streamline their monthly bills.

When borrowers consolidate, they’re typically given the option to lower their monthly payment by extending their repayment period. (With federal loan consolidation, the new interest rate is the weighted average of the borrower’s existing loans, rounded up to the nearest one-eighth of a percent. So extending the repayment period is the only way to lower the payment.)

For those who are struggling to make payments, that may be tempting. However, those smaller monthly bills can come at a price. Extending the payment term from 10 to 30 years, for example, would mean the borrower has to pay considerably more interest over the life of the loan. (Because the borrower would be accruing 20 additional years of interest.)

Mistake #3: Not Prepaying When Possible

All education loans, whether federal or private, allow for penalty-free “prepayment,” which means borrowers can pay more than the minimum required and pay off their loan balance early, without incurring any extra fees. Even paying an extra $100 per month could go a long way.

Whether it’s increasing monthly payments after receiving a raise or putting half of a bonus toward student loans each year, every little bit helps to drive down total interest.

Student loans are amortized, which means a portion of each payment is applied to the principal each month and a portion goes toward interest.

Early on, a larger portion typically goes toward interest, so the principal balance goes down pretty slowly. Usually, it isn’t until the borrower has made years of payments that a noticeable amount starts being applied toward the principal. One way to speed up that progress—and knock down the debt faster—is to pay more than is required each month.

(Borrowers should be sure to tell their lender what they’re doing and verify that their prepayments will be applied to their loan principal.) Borrowers can use this calculator to see how prepayment could help them get out of student loan debt sooner.

Mistake #4: Starting Accelerated Repayment Efforts with the Wrong Student Loan

Borrowers who have more than one student loan may choose to make extra payments on one loan at a time. It can be tempting to start on the loan with the smallest balance, put extra payments toward it while making timely minimum payments on other loans, get the emotional boost from eliminating that bill, and then move on to the next.

This approach is sometimes referred to as the “snowball method,” and it can be useful for borrowers who need the gratification of a faster payoff to stay motivated. But it might not save the most interest.

Prioritizing the loan with the highest interest rate (the “avalanche method”) can make more sense mathematically and might be more efficient for those who have the discipline to stick with it. And borrowers still can be excited as they watch the balance on that high-interest student loan go down.

There are a few online calculators that could be used to compare the avalanche method to the snowball method . Comparing the estimated interest payments and debt free dates could help borrowers determine which method will work best for them.

Mistake #5: Underestimating the Impact of Interest Capitalization

Deferment and forbearance periods may feel like a helpful option to escape making federal student loan payments when a borrower is struggling financially. But taking a break can be tricky.

The federal government will pay the interest on subsidized loans during deferment periods, but it won’t pay the interest on unsubsidized loans during deferment or on any loans during forbearance.

Unpaid interest also may accrue if a borrower is repaying federal student loans under an income-driven repayment plan and the monthly payment is less than the amount of interest that accrues between payments.

If a borrower doesn’t pay the interest as it accrues, that interest can be capitalized, or added back onto the principal balance of the loan. And any interest payments made after that will be calculated based on this new balance.

Interest also can capitalize when a student loan enters default, or when the six-month grace period ends. So, if it’s at all possible, borrowers who choose to press pause on their loans may want to try to make interest-only payments during that time.

Mistake #6: Failing to Claim the Student Loan Interest Deduction

OK, technically, this isn’t a way to save money on interest. But it can help alleviate some pressure for borrowers with qualifying student loan debt, since this student loan interest deduction can potentially reduce the amount of income that is subject to tax. (Reminder: Taxes can be tricky, and we are not here to provide tax advice. This is just a high-level look at a potential tax deduction, and isn’t a definitive accounting of the information available. Always consult with a tax professional about tax deductions and any questions around them.)

Borrowers may be able to deduct up to $2,500 on federal and student loans on their federal return each year. That’s $2,500 per return, so those who are married and file a joint return have the same $2,500 cap even if both spouses have student debt.

The deduction begins to decrease at a certain income threshold, depending on the taxpayer’s filing status. For the 2019 tax year, the deduction starts to phase out at a modified adjusted gross income (MAGI) above $70,000 for single and head of household filers, and it’s eliminated entirely at a MAGI above $85,000.

For those who are married filing jointly, the phase-out starts at a MAGI above $140,000 MAGI and is eliminated for those with a MAGI above $170,000.

For a student loan to qualify under the IRS’s rules , it must have been obtained with the sole purpose of paying for qualified education expenses for the taxpayer, the taxpayer’s spouse, or someone who was the taxpayer’s dependent at the time he or she took out the loan.

The person for whom the loan was taken must have been enrolled at least half-time in a program that leads to a degree, certificate, or other credential. The loan can’t have been from a relative. Qualified education expenses can include things like tuition, books, supplies, equipment, and, in some cases, room and board.

Because this deduction is claimed as an adjustment to income, taxpayers don’t have to itemize to take it, but it does require proper documentation. If the loans are officially referred to as student loans—whether they’re federal or private student loans—the lender would send a Form 1098-E, Student Loan Interest Statement. Borrowers can claim the interest from some other types of loans but will have to track those amounts on their own.

Again, taxes can be tricky, so definitely consult with a licensed accountant or tax professional to get the low-down on all the details of this or any other tax deduction.

Mistake #7: Not Signing Up for Autopay

With automatic payments, student loan payments are transferred directly from a borrower’s bank account to the lender, which reduces the chances of a late payment and gives the borrower one less thing to worry about.

There’s often another important perk: Some lenders will reduce the interest rate on the student loan by a certain percentage.

For those who keep enough funds in their account to cover their bills every month, it’s another potential way to save. And if the situation changes, and a manual approach becomes necessary, a borrower should be able to stop automatic payments at any time.

Borrowers who like the idea of making extra payments could set up their autopay to make a half payment every two weeks, or 26 half payments each year. That option adds up to 13 full payments instead of 12—or one extra payment. (This can be done manually, as well—it’s just that autopay typically makes it easier.)

Mistake #8: Making Late Payments or Going into Default

Failing to make payments can have several negative repercussions, including legal consequences if the borrower defaults on the loan. Both delinquency and default can also negatively impact the borrower’s credit score.

A lower credit score may reduce a borrower’s chances of getting a competitive interest rate on a refinancing loan, or on other types of loans or credit cards in the future.

Mistake #9: Neglecting to Explore Refinancing Options

Another opportunity that could allow borrowers to stick it to student loan interest is to refinance student loans at a lower interest rate and, possibly, a shorter repayment term. And some lenders, including SoFi, offer both variable and fixed rate loans, so borrowers can choose what best suits their needs.

Refinancing can typically be an attractive option to borrowers who have a solid financial situation—for example, a comfortable debt-to-income ratio (among many other possible considerations). However, before refinancing federal student loans, borrowers should check to see if they qualify for any forgiveness programs or other federal benefits (like income-driven repayment plans) and other repayment options that are forfeited when refinancing federal student loans with a private lender.

Bottom line: Refinancing to a shorter term with a lower interest rate can help eligible borrowers take a big bite out of total interest.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SoFi Student Loan Refinance
SoFi Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org). SoFi Student Loan Refinance Loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Public Service Loan Forgiveness, Income-Based Repayment, Income-Contingent Repayment, PAYE or SAVE. Additional terms and conditions apply. Lowest rates reserved for the most creditworthy borrowers. For additional product-specific legal and licensing information, see SoFi.com/legal.

SLR14100