There are currently around 44.7 million student loan borrowers in the U.S. with over 1.5 trillion dollars in student loan debt. Those numbers are HUGE and pretty unfathomable, and we all know how debilitating that debt is on a very personal level.
I had $40,000 in student loans and it was the absolute worst feeling ever. I wanted out of that debt fast, so I made a plan.
I decided not to live like the rest of my peers were– financing new cars, buying new houses, spending money on cable, and basically living above their means. My wife and I rented a room from her parents, I cut my expenses as much as possible, and I put everything I could towards paying off my loans.
I was able to pay off $40,000 in student loans in 18 months on a teacher’s salary.
My student loans were above the current national average of $32,731, and I graduated years ago. I know a lot of my readers are way over that average too, some with student loan debt in the six figures. This has led to more and more millennials to think about refinancing student loans.
If you want to pay off your loans in less time, which equals saving more money, then attacking them on your own can feel overwhelming. You have to keep track of each of your loans, the interest rates, etc. I think this is why refinancing student loans have become a popular topic these days.
I’ll admit that it isn’t something that I’ve done because I paid off my loans so quickly (although I would have considered a refi if I had to do it all over again), but I know that refinancing student loans is something that, on average, can save you thousands of dollars over the lifetime of your loan. The thing is, refinancing your student loans isn’t for every borrower… and that’s going to be really, really important for you to decide if it's right for you before jumping in. So read all the way through this before making a decision.
First, what do you mean refinancing student loans?
Student loans are similar to most types of loans, and by that I mean it’s money you borrow from a lender and pay back with interest. The thing about student loans, though, is that if you look at your statement, your entire student loan package is actually a bunch of smaller loans, each with their own interest rate.
Refinancing student loans is a process that basically bundles up your student loans and lets another lender buy them. You are then borrowing from that new lender. Rather than a bunch of small loans, they are all put together in one lump sum. Make sense?
The benefit, beyond simplifying your repayment, is that you are typically going to borrow at a lower interest rate. That’s where the savings really begin to happen.
Not all student loans are the same.
Before refinancing student loans, you need to consider the type of loan you have and what you are gaining and losing through refinancing.
Federal Student Loans- subsidized and unsubsidized
These are loans offered by the federal government through the Department of Education, and they are sometimes referred to as Stafford Loans or Direct Stafford Loans. They are some variances between the two, mainly subsidized loans are for undergrads who qualify for financial aid, while unsubsidized are for both undergraduate and graduate students who don’t necessarily qualify for financial aid.
There are other differences too, like how and when the interest capitalizes (subsidized after school, unsubsidized during school), but when it comes to refinancing student loans, both of these federal loans offer some protections you will lose if you decide to refinance, such as:
- Loan forgiveness programs: These programs are mostly for teachers and those working in the public service sector, but that doesn’t mean everyone in one of those jobs qualifies, and they only forgive a portion of your loan. To learn more, search Public Service Loan Forgiveness Program and Teacher Loan Forgiveness Program.
- Income-based repayment, income-driven repayment, graduated repayment: These programs help borrowers adjust their payments to match their income, whether you aren’t earning as much as you thought you would upon graduation or have a growing income. Depending on which of these you choose, specifically income-based repayment, you can extend your loan and the amount you pay in interest, which equals spending even more in the long run.
- Deferment or forbearance: If you are one of the many Americans struggling to make ends meet, you may have at one point relied on one of these student loan options to either temporarily postpone or to lower the monthly amount you are paying on your student loans. Interest accrues during a forbearance, but not with a deferment.
Private student loans
Private student loans are exactly what they sound like– loans held by institutions other than the government– coming from banks, the college you attended, etc. Some people really like that they aren’t tied to the U.S. government. The downside is that you aren’t going to have the same protections.
For young people, the other thing with private loans is that your lack of credit means you probably had a cosigner, and while that’s an entirely different article, that may determine how you think about refinancing student loans.
Honestly, one of the biggest downsides to private loans is that you are probably paying higher interest rates.
Who should refinance their student loans?
Alright, you’ve got the gist of student loans, and now you’re thinking about the type you have, the amount you owe, your interest rates, and you’re thinking about actually refinancing.
Refinancing student loans can save you a TON of money over the course of your repayment. But, BUT… if you have federal loans, you will lose the protections they offer when refinancing student loans. Again, that’s income-driven repayment programs, forbearance and deferment, and the very small possibility of having a portion of your loans forgiven.
Those protections are generally for lower-income earners, and ideally, you are working to improve your financial situation over time. As you start to earn more, you probably won’t be deferring, and you might be able to pay more than the minimum amount each month.
I’m going to say something that’s going to upset some people, but if you aren’t actively working to pay down your debt, you will never get ahead. The bare minimum, literally and figuratively, is barely going to get you anywhere. The amount alone you will be spending on interest can rob you of your future, from retirement, savings, etc.
There is always a little time in the day for a side hustle and even small ways to tighten up your budget to squeeze just a little extra out for your student loans. Every extra dollar you can put towards your loans is a step forward, and I know you can do it.
Okay, end rant.
So, before you proceed, here are two boxes to tick off:
1) You have a stable job.
As in, you know your job will be there in the future. Or, you know that you have marketable skills in a stable job field.
Also, if you are thinking about quitting your job to find something new, then you might want to reconsider refinancing student loans until you get a feel for the stability offered by your new job.
2) You aren’t living paycheck-to-paycheck.
Living paycheck-to-paycheck doesn’t always mean you are a lower-income earner. I know a lot of high earners who have outrageous mortgages and car payments. They also spend way too much on going out, clothes, vacations, and all of that stuff that society tells us we “need.”
Those people are living paycheck-to-paycheck too, and many of them have the means to live very financially comfortable lifestyles that could even lead to early retirement if they weren’t spending so much money.
So, if you are living paycheck-to-paycheck, for whatever reason, refinancing student loans is something you’ll want to consider only after you have your finances in better shape– a little financial cushion in the bank, and just generally living off of less than you make.
M$M tip: To really start destroying your student loan debt, then start a side hustle. My favorite is running Facebook ads for local businesses. It’s one of the ways I was able to pay off $40,000 in student loans in 18 months. Check out my Facebook Side Hustle Course to see how you can start making $1,000 a month to put towards your student loan payoff.
Interest rate considerations
With the major benefit of refinancing student loans being a reduced interest rate, your current interest rates and your ability to qualify for a lower rate is also important to think about.
Student loan rates vary for a variety of reasons– whether they were used for an undergraduate or graduate degree, private loan or not, etc. According to Credible, between 2006 and 2016, here are some average interest rates:
- 4.81% for undergraduates
- 6.38% for graduate students
- 7.44% for those with PLUS loans
With interest rates like those, you will likely save money by refinancing student loans. But, if your rates are already low, like in the low 3% range, then you might be in a good spot right now. Since it’s pretty unlikely that all of your rates will be that low on every single one of those little loans, you’ll need to do some math to see if you will actually save money.
Then, there is your ability to refinance at a lower rate in the first place, and that will depend on your creditworthiness, AKA credit score. If your score is too low right now, I recommend that you work on improving your credit score before refinancing.
One of the best ways to improve your credit score is to continue making on-time student loan payments.
One more piece of this is the current market interest rates. Interest rates have been pretty low for the past few years, but they are steadily rising. Just this month, the fed will be increasing the benchmark to 2.5%, and it is set to rise steadily until at least 2020.
Know that refinancing student loans is a smart idea? Then here’s how you do it:
If you know that refinancing is a smart decision for you, then the next step is actually refinancing! I don’t know why I threw that exclamation point in there, I’m just excited that you’re going to save money. Yaaaaaaaaas!!!!!!!!!!!!!!!!!!!
Refinancing student loans is a pretty easy process, and if you have everything together, it’s something you can do in an afternoon. I’m going to break it all down for you to make it even easier, like a baby could do it or something.
1) Start looking at lenders
Not all lenders are equal, so you’ll need to research each company, compare their rates, and look over their policies to find which one is right for you.
Most will ask about where you went to school, the degree you received, income, total student loan debt, monthly housing costs, etc. They will also run a soft credit check, which doesn’t affect your credit score, but it’s what they use to help determine the kind of interest rate they can offer you.
Here’s a short list of the student loan refinancing companies out there: SoFi, Earnest, LendKey, CommonBond, but there are plenty more. Again, research each company, read their reviews, and talk to several before deciding on one.
I highly recommend looking at Credible for refinancing student loans. For full disclosure, I am an affiliate for them, but I only went into that partnership after doing some very serious consideration. I’m really cautious with my recommendations because I only want to tell my readers about things that will actually help them, and I know Credible is a good choice to look at.
You can read my full Credible review here.
2) Find an interest rate and repayment period that works for you
When you look at lenders, they will go over different types of interest rates, variable and fixed, and loan repayment periods. Both of those are going to determine how much you save through refinancing student loans.
A fixed rate will not change for the duration of your repayment period, while a variable rate will fluctuate. The benefit of a fixed rate is that you know exactly how much you will be paying, and the benefit of variable rate is that the rates are typically lower in the beginning. But, if they change, which they very well may do, then your payments and interest may increase over time.
Your repayment period is how long you will be paying off your loans, and that will be something like 5, 10, or 15 years. A shorter repayment period is going to yield a lower interest rate with a higher monthly payment. A longer repayment period means a higher interest rate with a lower monthly payment.
A shorter repayment period will save you the most money, but you need to know that you can always make those payments. Refinancing your loans means you have lost the protections offered by federal loans, so know your financial situation before deciding on a repayment plan.
Side hustling like crazy, lowering your budget– these are the types of things that will help you find more money to put towards your student loans, and you can ALWAYS pay more than the minimum amount, even with a refi.
3) Lock down your lender
Know your lender, rate, and repayment period? Nice work, you’re almost there!
To make your refinance go through, you’re going to need to fill out some paperwork. You’ll need proof of citizenship, valid ID, proof of income, and official student loan statements.
One more reminder…
Just because you’ve accepted the refinancing package, it doesn’t mean that you can immediately stop paying your loans. It will probably take 2-3 weeks for the entire thing to go through, so if your payment is due in that time, then pay it.
You can also call your student loan refinancing company to ask about this, but don’t miss a payment because you were confused and too lazy to ask someone.