Could Refinancing Help You with Your Debt?
One of the most common and despised debts in the United States is student loans. According to statistics from a 2018 Forbes article, there are more than 44 million borrowers who owe a collective $1.5 trillion. That’s hard to wrap your head around, isn’t it?
When college students first take out student loans, they assume the job they get after they graduate will pay for the loans. It rarely works out that way. Most college graduates carry an average of over $37,000 in student loan debt. Unless a student gets a six-figure salary right out of college, those debts will take years to pay off, even decades.
One way to reduce the overall debt is to refinance the loans. Since each year’s loans are actually separate from the others, you will likely have a total of at least four to eight separate loan numbers. That means you are paying on each one separately and the interest rates could vary significantly.
The best option, once you have graduated and have a job in your field, is to refinance the loans. Here we'll go over exactly how to refinance student loans.
How to Refinance School Loans
First, collect all the information about every single loan you have taken out for college – even those from family. Once you have the information, there are multiple routes you could take:
- A consolidation loan from a bank
- A consolidation loan from student loan consolidation companies
- A consolidation loan from the government
Loans from a Bank
Sometimes getting a loan from a bank can be more difficult, unless you have a long-term relationship with them. The underwriters at large banks will not just look at your income, but also your credit score, income to debt ratio, and other credit worthiness factors.
These types of loans are considered personal loans and are not underwritten by the government. The majority of student loans are underwritten by the Department of Education, leading to a lower than usual interest rate. But qualifying for rates better than that at a private lending institution would be difficult.
Loans from the Student Loan Consolidation Companies
There are multiple options for consolidation through various companies. These include SoFi, LendKey, and Splash Financial. To provide an example, let’s look at SoFi.
With no origination fee, SoFi allows students to refinance both government-backed and private student loans into one. If you have been out of school for several years and have a steady, strong income, SoFi would be a good choice for you. There is no maximum loan amount and SoFi offers additional services like career coaches, financial advisors, and more.
SoFi does require a credit score of at least 650, which is not something most new graduates can achieve. However, once you are established in your job and have a good credit history, SoFi can be a great choice to refinance. You also have the choice between a once monthly payment, or bi-weekly payments, and either fixed or variable interest rates.
Whomever you choose as your consolidation company, SoFi is a great example of what to look for in a lender.
Loans from the Government
A Direct Consolidation Loan lets you combine several federal education loans into one. This allows for a single monthly payment rather than multiple payments throughout the course of a month. You can apply for free to consolidate but beware private companies that may charge a fee for helping you apply.
By consolidating your loans, you will most likely lower your interest rate, lower your payment amount, and get up to 30 years to repay. But be aware that when you consolidate, it is not just principal – consolidation includes any outstanding interest that has accrued on your current loans, making your consolidation amount more than just what you borrowed.
Other options offered instead of consolidation are deferment or forbearance. Deferments can be used if you decide to go back to school. Under deferment, you don’t have to pay monthly bills and no interest is accrued. Forbearance is most often used when you are in financial crisis. Though you don’t have to make payments for six, nine or 12 months, the interest continues to accrue; therefore, you will owe more after the forbearance.
Low Interest Refinance Loans
Many private banks and student loan servicers offer low, competitive rates for refinancing. However, there are many loan servicers out there who will advertise an incredibly low rate while barely mentioning that it is a variable rate.
Variable rates adjust with the Federal Prime Rate. So, if the prime rate increases, so will your loan rate. Should the economy take a nasty turn, and interest rates increase significantly, you could see a jump in interest of between 3% and 5%, which will, in turn, increase your payments.
The best option is to look for a low, fixed rate. Fixed rates will never change over the life of the loan – no matter how long the repayment period is. If you can find a reputable bank or loan servicing company with excellent fixed rates, that is where you should apply first.
Consolidating and/or refinancing student loans can make a huge difference to your budget, both short and long term. With options like deferment and forbearance, you have flexibility and you get to choose which lender will be the best one to work with for your student debt.