Graduating with student loan debt, no matter how much or little you owe, can be tough. After graduation day, you may get a 6 month grace period before you have to repay your student loans and, in that time, you have to find a job, a place to live and figure out your loan repayment plan.
Depending on whether you signed your promissory note with the federal government or a private lender, your loan interest rates could be anywhere from 2-8+%. Once you have a few months of paying student loan debt, you may start to look at that interest rate and dream of lowering it.
There are many good reasons to refinance your student loan debt, including the ability to pay less overall and perhaps pay off your loan faster. However, if you’re looking to refinance student loan debt only, there are also some things you have to consider that are not typical of other refinancing options, like a mortgage or car loan.
Are You a Good Candidate to Refinance Student Loans?
Many banks offering refinancing for student loans require you to meet certain criteria to get the lowest rate. These rules generally include:
- Good credit history
- A well-paying job
- Consistent repayment schedule
Slate recently profiled SoFi, a company that refinances student loan debt, as an option for graduates paying a hefty amount each month to reduce their costs. As mentioned in the article, one 31-year-old money manager refinanced his student loan debt from a 6.55 percent interest rate to 2.69%, enabling him to pay off his debt faster.
For many of us who have been out of school for a few years, even if we aren’t money managers, we’re still likely to meet these standards. Barring a very low-paying job or poor budgeting decisions made in our mid-20s, we’re good candidates for lenders like SoFi or Achieve Lending to bank on.
Things to Consider When Refinancing Student Loans
While researching this topic, I became intrigued by the idea of reducing my student loan payments. I have mostly federal loans, which I consolidated a few years ago in order to get an overall lower rate, but my interest rate is still 6.75%.
With a stable income, several years of consistent repayment, and a good credit score, I am a good candidate to refinance my student loans. Also, a 3% interest rate was luring me. However, there are some things you would want to keep in mind before committing to refinancing with a private bank:
- Fixed vs. variable interest rate. Interest rates are low right now, but it’s likely they will go up. Remember if you’re given a variable interest rate, your payments will increase as the interest rate increases. Interest rates for most federal loans are fixed, meaning that 6.75% is the highest (and lowest) I will pay.
- The ability to repay. If you’re consolidating federal loans into private loans, remember that you will have to make your repayments monthly. Federal loans have a hardship deferment if you lose your job and are unable to make your monthly student loan payments, but private lenders typically do not offer the same protections.
- Federal loan repayment options will change. One of the biggest things to keep in mind when thinking of consolidating is your federal loan repayment options. With private lenders, you don’t have options like Pay As You Earn (PAYE), Income Based Repayment (IBR), or loan forgiveness programs for teachers and other public servants.
Is It Worth It?
If you’re on the federal government’s Standard loan repayment program and are able to refinance with a private lender for a reduced interest rate, you may be able to save money on your monthly payments, or make extra payments to pay off your student loan sooner.
However, if you’re already on an income based plan or are planning to have your loans forgiven in a few years through the government’s service programs, refinancing may be a very bad deal for you.
My Standard repayment, set by the government, is over $800 a month. According to SoFi, I could have a much lower interest rate that would take my payments down to around $400 a month. Great deal, right?
Not quite. I’m part of the government’s Income Based Repayment (IBR) plan, which means I’m already paying slightly less than $400 a month on my federal student loan debt. Going with a lender like SoFi would give me roughly the same amount in payments monthly, plus I wouldn’t have the security of knowing that if something catastrophic happened to me, the government would put a hold on my loans.
Note that the government won’t erase your loans for you. As they told us in school, you either have to become incredibly, irreparably maimed or die in order to have those loans forgiven. However, you are able to request a deferment if you lose your job and are unable to pay your student loans. That’s not something you’ll be able to do with a private lender.
Ultimately, choosing to refinance your student loan debt is a choice only you can make, knowing all of the options out there. If you’re unable to qualify for income based repayment plans through the federal government, or all of your loans are private already, refinancing for a lower interest rate with a private lender may be a great opportunity.
It may not be right for someone like me, who is on an income based repayment plan and does not have the same incentive to refinance. Figuring out the best way to pay off student loans quickly while inflicting minimal damage to your wallet can be tricky, but it shouldn’t deter you from finding the best way that works for you, whether that’s by refinancing, side hustling or sticking to your current repayment schedule.
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If you graduated with student loan debt, are you still paying it off, and did you refinance your student loans? If you paid off your student loan debt already, did you double up on payments or refinance for a lower interest rate?