Once a student graduates from undergraduate or graduate school, there are endless paths to take. Some land a job right away and begin to establish both credit and income as well as earning potential. Others have trouble finding quality employment and the worries mount. How will student loans be paid off after the grace period is over?
Student loan debt, which has astonishingly topped $1 trillion, is so important of an issue to Americans today that it’s become a hotly debated topic for most Millennials. But why is that $1 trillion number important? The economic implications for a generation of young people struggling to repay debt means that fewer people are buying houses or cars, and Millennials aren’t saving money for investment and retirement. In an economy driven by consumer demand, that’s bad news.
How Much You Owe and To Who?
When determining how to tackle your student debt, start with knowledge about who you owe and how much. While every borrower should keep very close tabs on owed money, it’s easy to sign along the dotted line in excited moments. Going to college or graduate school is more thrilling than paying the loans back, after all. To learn what you owe the federal government, check out the NSLDS website.
Refinance vs Consolidation
What can you do about your student debt? One key option is to refinance your student loans.
First, a breakdown: student loans are unlike other loans. Generally, you get what you signed up for until it’s paid off in its entirety. In contrast, credit cards can be consolidated pretty easily, and house and car loans can be refinanced fairly painlessly.
Refinancing is different than consolidation because consolidation means that your loans are combined and the average becomes your new interest rate. The goal of refinancing is to get the borrower a better rate, and it involves the repayment of old debt through a new loan with new terms. That last bit is why refinancing is attractive; because you can receive a lower interest rate or other attractive terms and actually save money in the process.
While student loan refinancing options had been minimal five years ago, more are cropping up, thanks to credit unions, banks, and even crowd-funding sources.
Federal vs Private Loans
There are pros and cons to all types of loans – federal and private. If you chose federal loans when taking on student debt, while the terms may be more rigid, federal programs offer students and parents more protection.
In these cases, it’s a good idea to read the fine print and be sure that you aren’t forfeiting favorable terms when converting federal loans into private loans. Federal loans offer forbearance and deferment for students that fall on hard times. Private loans are not as flexible.
Benefits of Refinancing
There are several reasons to refinance. Yes, a lower interest rate is one of them, but a borrower might just want to simplify the terms of repayment. Maybe a borrower wants to remove a cosigner, which is possible during the refinancing process (though, rates could be better with a cosigner, so keep that in mind). Or maybe the customer service experience with a current lender is atrocious, and a borrower is seeking a less insanity-inducing lending experience.
If a borrower decides to refinance his or her student loans, like anything related to money, it’s important to do the homework (this isn’t the time to be half-hearted about it, or wait for a parent to do it, either). It’s a good idea to check refinancing options with the current lender. Sometimes, terms will be especially favorable if the borrower stays in-house. And close attention needs to be paid to both repayment and deferment options.
Fixed versus variable rates are particularly important to consider. Fixed rates are typically lower risk, but involve higher interest rates. With variable rates, a borrower could start out with a stellar low rate, only to see it jump with the ebb and flow of the economy. At the very least, do research into how high a variable rate could go and what benchmark it is tied to.
If a borrower isn’t careful, shopping for a lower refinancing rate can, over time, negatively affect credit. Nevertheless, a borrower can do some serious shopping within a 30-day period and apply to as many student loans as possible in order to compare rates.
Most lenders understand that recent graduates might not have established credit and income; so, some might look into spending history to see what kind of financial habits a borrower has developed. Others might take a look at the type of degree earned. An engineering degree might fare differently than a philosophy degree.
As is the case with many kinds of loans, the better your credit, the better rate you’ll receive. If you are currently paying off your student loans, then you are an excellent candidate for any lender. However, if you are far behind on your loan repayment schedule, you might not qualify for student loan refinancing.
Try to get back on track with Income Based Repayment – meaning, 10% of your income goes toward student loans. For example, whether you make $30,000 or $50,000 per year, your loan payments each month reflect 10% of your income. Although you can always try to learn how to make money fast and pay off your debts quicker.
Finally, if you are working toward the Public Service Loan Repayment plan, it’s a good idea to stick with that. After 10 years, your loans are completely forgiven. There isn’t a better deal out there.
Other Considerations and Options
While researching refinancing options, check out whether an employer offers loan reimbursement. While less than 5% of employers offer this awesome perk, it’s worth a shot.
More options are being added to the pool every day. With the Student Loan Genius’s 401(k) Contribution Student Loan Benefit, a handful of employers are collaborating with finance companies and private lenders to give employees other options with regard to refinancing.
Finally, keep an eye out for scams related to student loans. There are so many hustlers out there that it’s easier than you think to fall prey to someone who looks to capitalize on a vulnerable population. Just remember, if it seems too good to be true, it probably is.
Should You Refinance Your Student Debt?
Whether you should refinance, consolidate, or keep your current debt terms depends on a combination of factors that are unique to each borrower. How much does the borrower owe and how much have you already paid off? How good is your credit? What is the borrower’s current and projected income? These are all important considerations during the refinancing process. Explore your refinance and consolidation options to see what is best for you.