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Guest Post by Travis Hornsby. Travis is the founder of Student Loan Planner and the host of the Student Loan Planner podcast. To date, Student Loan Planner has consulted on over half a billion in student debt. Travis is a Chartered Financial Analyst and brings his background as a former bond trader trading billions of dollars. He brings that same intensity to analyzing the best repayment paths for graduate degree professionals with six figures of student debt. Student Loan Planner has helped over 2,600 clients save over $120 million dollars on their student loans, and he’s been featured in U.S. News, Business Insider, Forbes, Huffington Post, Rolling Stone, VICE, Fox Business, ChooseFi, Bigger Pockets Money, and more. Enjoy! ~ Jamie
Student loan debt is on the minds of millions of Americans.
Federal student loan debt is now over 1.48 trillion dollars.
Let me say that again, federal student loan debt is now over 1.48 trillion dollars.
People have amassed debt pursuing college degrees, hoping to build successful careers and promising futures. Now, as they are paying back their loans, they are faced with trying to figure out the best repayment strategy.
One available option is student loan refinancing.
I’ve had the privilege of consulting with plenty of people going through this same process, and for many of those people, refinancing their student loans made sense.
For others, federal programs were a better choice.
Let’s walk through how refinancing works and try to get a better understanding of when it makes sense and when it doesn’t.
What Does it Mean to Refinance Your Student Loans?
When you refinance your student loans, a lender pays off your existing loans and gives you a new loan with new terms and a new interest rate.
Federal student loans that are refinanced become private loans. You can also refinance private student loans.
The main reason people choose to refinance student loans is to lower their loan interest rates, which can save a ton of money.
You could pay thousands of dollars less over the life of your loan when you refinance.
But, not everyone qualifies for refinancing, and not everyone who qualifies for refinancing scores the lowest rates.
Qualifying is dependent on many factors, the main one being your credit. Borrowers with poor or no credit may need the help of a cosigner to qualify for student loan refinancing.
4 Benefits of Refinancing Your Student Loans
Like any other student loan repayment options, refinancing has its pros and cons.
The following lists may not apply to everyone, but for the most part, it’s what I’ve experienced when creating customized repayment plans for our clients.
1. A lower interest rate
The best perk to refinancing, and the reason most people pursue it to begin with, is getting a lower interest rate.
A lower your interest rate can knock thousands of dollars of interest payments off of your student loans. It’s incredible how much a one to two percent difference in your interest rate can make.
As an example, let’s say I have $100,000 in student loan debt right now, and I have a 6% interest rate right now on a 10-year standard repayment plan. Just by lowering my interest rate to 4%, I would save almost $2,000 on interest in the first year alone and $11,730 over the life of my loan.
Plus, my monthly payment would drop by nearly $100.
2. New repayment terms
Everyone with federal student loans ends up on a 10-year standard repayment plan by default. This can change if you choose to switch to another federal repayment plan, like an Income Dependent Repayment (IDR) plan or a Graduated repayment plan.
But this can still be limiting for people because ten years is the shortest option available.
When you refinance, you can choose your loan terms.
Many private lenders offer multiple repayment terms, including shorter periods like five and seven-year plans. This is great for people who want to repay their student loan debt quickly and move on with life.
You can use my free debt snowball spreadsheet to pay off your student loan debt faster. Read the article to learn how it works, or enter your email address below to download a free template.
3. Switching loan servicers
A quick search online will reveal that many people have issues and complaints about federal loan servicers.
Unfortunately, borrowers are stuck with a loan servicer they were assigned.
The only way to change your servicer is to consolidate your loans into a Direct Consolidation Loan. But if you refinance, you are in charge when it comes to choosing your lender, provided you are approved.
You’ll have to do research and find a lender that’s going to fit the best.
4. One student loan payment
Managing multiple federal student loan payments every month can become a real chore after a while. You can refinance all your loans into one loan with one monthly payment. This will simplify the repayment process.
3 Disadvantages to Refinancing Your Student Loans
Despite the handful of positive factors that can come out of refinancing your student loans, there are also negatives to keep in mind.
1. Lose access to federal programs and protections
When you refinance federal loans, they become private loans.
Once this happens, borrowers lose access to all programs and protections that are benefits of having federal student loans. Loan forgiveness is no longer an option. Neither are federal repayment plans.
If you face financial hardship, deferment and forbearance aren’t options unless your private lender offers them. If you’re in a good place financially, losing access to federal protections isn’t a big deal. Just make sure that’s the case before pursuing student loan refinancing.
2. Strict requirements to be approved for refinancing
Being approved for refinancing isn’t easy.
Your credit is the primary factor lenders look at, but not the only one. Most private lenders require a good credit score. To score the lowest rates, your credit needs to be excellent.
Recent graduates, though, usually have little to no credit yet. One way around this is to use a cosigner when you refinance.
Many private lenders allow a cosigner with established credit to vouch for you. Some lenders offer a cosigner release, but if not, your cosigner is financially responsible if you can’t pay your debt.
3. Restrictive repayment plans
Federal loans have access to several different repayment plans. When you refinance, you have one repayment plan.
You’ve probably secured a lower interest rate and chose your repayment terms, but you’re still limited unless you refinance your loan again.
The pros and cons of refinancing student loans for you will be mostly based on what you’re trying to accomplish.
When Does it Make Sense to Refinance Your Student Loans
Student loan refinancing is going to be the best choice for many people.
It’s not for everyone, though.
It’s important to understand your student loans and your current financial situation as well as future plans and goals.
Here’s my general rule when it comes to refinancing:
If you have federal student loans, work in the private sector, have a solid emergency fund, and your loan debt is less than 1.5 times your income, refinancing is a smart option.
For example, if your annual income is $50,000 and your total student loan debt is under $75,000, it’s the perfect time to explore refinancing to see what kind of rates are available.
If you have private loans and it’s been a while since you’ve shopped for interest rates, start looking now.
You can refinance more than once.
If your credit has improved since you last refinanced, you will probably get a better rate if you refinance again. You can keep doing this too.
People with higher student loan debt, like two times their salary, getting on an income-driven repayment (IDR) plan makes more sense.
If you’re on an IDR plan, after 20-25 years, your loan balance is forgiven. This isn’t tax-free, like Public Service Loan Forgiveness, though, so you’ll have to plan for a sizeable tax bomb at the end of your repayment period.
Those with student loan debt between 1.5 and 2 times their salary have a tough choice to make. This is a gray area of sorts as to which strategy makes more sense.
4 Tips to Help You Refinance Your Student Loans
If you’ve decided to at least explore student loan refinancing, there are steps you can take to improve your odds of being approved. You can also improve the process itself.
What can you do to be successful in refinancing your student loans?
1. Improve your credit before you apply
In the end, your creditworthiness determines whether you qualify for refinancing and the type of rate you can earn.
To improve your credit, pay your bills on-time and in-full. For people with credit cards, showing responsible borrowing goes a long way to raising your credit score.
If you plan to refinance soon, don’t open any new lines of credit that require a hard credit pull, which can drop your credit score slightly.
2. Use a student loan calculator
A great way to see your repayment options is through the use of a student loan calculator. Using this tool will help you calculate loan payments under various repayment plans, along with tons of other important factors to consider.
. Using this tool will help you calculate loan payments under various repayment plans, along with tons of other important factors to consider.
3. Shop around for lenders
Like any other purchase, you can find the best deal by shopping around. Take time to compare different lenders and what they offer. Often, you can prequalify with lenders through a soft credit pull, which doesn’t negatively affect your credit.
4. Take advantage of bonuses
Another way to benefit from refinancing your student loans is to take advantage of cash back bonuses.
Something unique we’ve done at Student Loan Planner is offer sizable cash bonuses to borrowers looking to refinance. Anyone using our link to refinance student loans will earn a cash back bonus. If you’re going to refinance, why not earn some cash back in the process?
Is Refinancing Your Student Loans the Right Choice for You?
Deciding to refinance isn’t always easy. Many factors contribute to whether it’s the right choice for a borrower. Take time to weigh the pros and cons.
Talk it over with people you trust, like family and friends. Look at the numbers and your future plans and make a decision.
Leave a comment and let me know what you think about refinancing student loans? Or leave any questions you still have.