Loans Loan Repayment 5 — Questions and Answers
Question 1: What does it mean to refinance a loan?
- Adding a co-borrower to an existing loan
- Taking out a new loan to pay off an existing one, ideally at better terms (Correct answer)
- Requesting a temporary payment pause from your lender
- Transferring loan servicing to a new company
Correct answer: Taking out a new loan to pay off an existing one, ideally at better terms
Refinancing replaces your current loan with a new one, often to secure a lower interest rate, lower monthly payment, or different loan term.
Question 2: What is a loan servicer?
- The original lender who funded the loan
- The company that manages billing, collects payments, and handles customer service on behalf of the loan owner (Correct answer)
- A government agency that insures the loan
- A third-party auditor who reviews loan terms
Correct answer: The company that manages billing, collects payments, and handles customer service on behalf of the loan owner
A loan servicer handles the day-to-day administration of a loan including collecting payments and managing accounts, often separately from the original lender.
Question 3: What is the effect of making a lump-sum payment toward a loan's principal mid-term?
- It reduces future monthly payment amounts automatically
- It shortens the loan term and reduces total interest paid if the payment schedule stays the same (Correct answer)
- It triggers a prepayment fee in all loan types
- It resets the amortization schedule to extend the loan
Correct answer: It shortens the loan term and reduces total interest paid if the payment schedule stays the same
A principal lump-sum payment reduces the outstanding balance, which lowers total interest and can shorten the payoff date if payments remain unchanged.
Question 4: Under an extended federal student loan repayment plan, borrowers must typically have at least how much in outstanding federal loan debt to qualify?
- $5,000
- $15,000
- $30,000 (Correct answer)
- $50,000
Correct answer: $30,000
The Extended Repayment Plan requires at least $30,000 in outstanding Direct Loans and allows repayment over up to 25 years.
Question 5: What is a loan modification?
- A formal change to the original loan terms — such as interest rate or term length — agreed upon by borrower and lender to make payments manageable (Correct answer)
- Paying off the loan in a single balloon payment
- Transferring the loan to another borrower
- Refinancing with a competing lender
Correct answer: A formal change to the original loan terms — such as interest rate or term length — agreed upon by borrower and lender to make payments manageable
Loan modification permanently alters original loan terms to help a struggling borrower avoid default, often lowering the rate or extending the term.
Question 6: Which statement about automatic payment (autopay) discounts on student loans is correct?
- Autopay discounts are mandated by law at 1% for all federal loans
- Many lenders offer a small interest rate reduction (typically 0.25%) for enrolling in autopay (Correct answer)
- Autopay eliminates the need for any further borrower action on the loan
- Autopay discounts apply only to private student loans
Correct answer: Many lenders offer a small interest rate reduction (typically 0.25%) for enrolling in autopay
Both federal and private student loan servicers commonly offer a 0.25 percentage point rate reduction as an incentive for enrolling in automatic payments.
Question 7: What happens to federal student loans when the borrower dies?
- The debt transfers to the borrower's spouse or next of kin
- The loans are discharged and the estate owes nothing (Correct answer)
- The co-signer becomes solely responsible for full repayment
- The balance is converted to a grant for the deceased's family
Correct answer: The loans are discharged and the estate owes nothing
Federal student loans are discharged upon the borrower's death upon proof; unlike private loans, they do not transfer to heirs or the estate.
Loans Loan Repayment 5
What does it mean to refinance a loan?