Everything You Ever Wanted To Know About Refinancing Student Loans - Smart Money Seed


Everything You Ever Wanted To Know About Refinancing Student Loans

This post is from Tom at FIREd Up Millennial – a blog about his relentless pursuit of Financial Independence so he can Retire Early. You can stay updated with his latest articles and random thoughts by following him on Twitter.

Student loan debt is a huge issue in the United States. Right now, it is a $1.5 trillion crisis and that number probably won’t get smaller with so many careers college degrees nowadays.

Unfortunately, many students graduate with loads of debt along with their degrees, then can’t find well-paying jobs, leaving them unable to save up for many of life’s major milestones. These things include purchasing cars and homes, getting married, and even saving for retirement.

The student debt becomes too overwhelming because the payments are too high.

Many times, what happens is graduates request forbearance or deferment because their financial situations coming straight out of college isn’t conducive to being able to afford the minimum payment. If a student has private student loans, the chances of getting help with the payments are slim.

Even when a student can have the loans placed in forbearance or deferment, this simply lengthens the amount of time that the debt exists. The interest also accrues on the loans if they are unsubsidized loans. The exception is when a Subsidized Stafford Loan is deferred because the federal government will pay the interest until the loan is out of deferment.

Although the federal government paying interest on a loan during a deferment period sounds nice, not everyone is able to enjoy this benefit. There’s also the fact that a student loan weighs on your debt-to-income ratio even if it is not having to be paid at the time. This can still make buying a house or car difficult.

I once struggled with my student loan debt but have since taken steps to pay a large portion of it down and save some money along the way. What’s the best move I made regarding my student loans, you ask? Well…

I Refinanced My Student Loans Saving Me Thousands in Interest

To get rid of the debt as soon as possible, you will want to look at student loan refinancing. Both private and federal loans can be refinanced, but only with a private lender or bank. Though federal student loans can be refinanced, these borrowers will lose some of the benefits that come along with federal loans, like access to income-based repayment plans and student loan forgiveness.

When deciding on a company to refinance with, you will need to compare the interest rates, repayment terms, and amount of the monthly payments. In addition, you’ll find that there are eligibility requirements that can often be quite strict. These requirements are the biggest obstacle for some applicants.

If your credit isn’t in tip-top condition, a co-signer will be needed. Many student loan refinancing companies allow you to obtain a preapproval on their websites, so you can compare rates between companies. The idea behind refinancing is to reduce the overall loan amount that you owe by paying a lower interest rate. However, the eligibility requirements that must be met aside from credit rating include:
  • Minimum Income 
  • Citizenship
  • Loan Amount
Other companies might require an existing bank account with the financial institution that backs them. If an account doesn’t currently exist, one will have to be opened. This is common when a credit union backs the private lender.

Alex here. . . Ty and I both paid off our loans relatively quickly, so we were much more focused on squeezing extra cash out of our budgets to get rid of the loans rather than the interest rates. However, if early payoff isn't realistic for you or it's not your goal, we highly recommend looking into refinancing!

My Experience with Refinancing My Student Loan Debt

In the past year, I refinanced around $30,000 of private and federal student loan debt. I went through the process of obtaining preapprovals from multiple lenders to see what kind of estimated rate I would be offered from each.

I ended up settling on SoFi because the company offered me the lowest fixed interest rate. Yes, I could have received a lower rate if I had opted for the variable rate, but I didn’t want to risk having to pay a higher interest rate in the future. I wanted a fixed rate because I don’t want any surprises.

Though I don’t remember the exact average interest rate on my student loans before refinancing, I think it was around 6.5 percent between my federal and private loans. When I refinanced, my new interest was around 3.5 percent – a pretty considerable difference!

I also liked SoFi’s benefits. There are no origination or prepayment fees, there’s unemployment protection in case I lose my job, they’ll help me in my job search and give me career support, and I have access to wealth advisors so that I can make sense of my financial situation.

All I had to do to get started was complete the online preapproval to see my expected rate. Because I liked what I saw, I compared plans and selected a loan, and I electronically signed my documents to seal the deal.

I estimate that refinancing my student loans through SoFi will save me around $10,000 at the end of the day.

How to Decide if You Should Refi

If saving money sounds good to you, make sure you consider the loss of forbearance and deferment protections, income-driven repayment plans, student loan forgiveness, and the other benefits you receive with federal student loans before you refinance.

If you know that you won’t need any of the aforementioned protections or the repayment plans and you have a good credit score, you may be able to save thousands through refinancing.

To get started, all you have to do is review the amount you owe on your loans, obtain preapprovals from student loan refinancing companies so you can compare them, and then choose a company. Many make it easy to apply if you meet the requirements. If you do, then you are on the road to saving a lot of money on your student loans.


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