I graduated from a high price-tag university with a master’s degree that left me with both private and public loans….a lot of them. While I can say with certainty that I do not regret my higher education experience in the slightest, the loans I accrued left me a bit shell-shocked.
Subsidized vs. Unsubsidized Loans
At first, it was all I could do to digest the sheer amount of interest I had wracked up during my college years. I learned that the majority of federal student loans for graduate degrees are unsubsidized. This means interest is accrued from the minute you take out your loan. In contrast, a subsidized loan typically won’t collect interest while you’re still in school, or during deferment periods.
Subsidized loans are obviously the winner here, but they are not always available, especially as you go further up the education chain. So make sure you do your homework to ensure you’ve taken advantage of any money-saving opportunities before signing up for a student loan.
From the moment I graduated, I had a grace period of exactly six-months on my public loan before I had to start hacking away at the massive sum I had collected.
Thus, I went immediately about devising a payment plan.
Handling Private versus Public Loans
I noted earlier that I took out two types of loans for my graduate degree, private and public. My private loan was much more significant than my federal loan. It was a person to person loan (P2P loan), which didn’t come from a traditional lender like a finance company or a bank.
These types of loans often have lower rates than the majority of other borrowing options and don’t require any overhead costs that come with working with banks or creditors. This was the case with my P2P loan rate. It had an interest rate of less than three percent, nearly half of my federal loan rate.
Thus, I agreed with my P2P lender on a low, fixed, monthly payback rate that I knew I could commit to, rain or shine. Then I focused on paying off the loan with a higher interest rate as quickly as possible.
Take advantage of any money-saving opportunities
My federal loans were being handled by nelnet.com, and I immediately chose to enroll in the Auto Debit Program, which shaved 0.025 percent off my interest rate (this is another money-saving opportunity that is offered by nearly every major loan company). Still, I was looking at an interest rate of just under six percent for more than $30,000 of borrowed money, to be paid back over a 10 year period.
While six percent may not seem like a like a lot, remember that I had already been accruing interest over four semesters in school, as well as every month until my loans are paid off. After 2.5 years of continuous monthly payments post-graduation, I was contributing more than the minimum requirement to my loan payment, but still, 30 percent of each month’s payment was automatically being put toward paying off the interest.
That didn’t sit right with me. Refinancing loans was always a process that had intimidated me. However, watching one-third of my payments disappear into interest payments motivated me to learn more about what refinancing could offer me.
To Refinance or Not Refinance, That is the Question
Following a bit of research, I learned that I was a good candidate for refinancing for the following reasons:
I was already paying more than the minimum monthly loan payments
Having the capital to do this meant that through refinancing, I could switch my plan to a shorter length, all while enjoying a lower interest rate. Faster payoff + lower interest rate = more money saved. This was not a necessary qualification, it just enhanced my refinancing option.
I have a steady income
When I say steady I don’t mean large, just consistent. One of the biggest reasons to hold off on refinancing is if you aren’t sure you can continue to steadily make monthly payments. What federal loans lack in super low-interest rates, they make up for in flexibility.
Refinancing my loans meant I would give up the option for income-based loans payments, which I had with my federal lender.
I had no plans to go into public service
Those that work for a public organization and make 120 qualifying payments on direct loans over a ten year period can have their remaining balance forgiven, tax-free. If this sounds anything like you, I’d hold off on refinancing to take advantage of this rare occasion.
I planned to pay off my loans in less than 20 years
Anyone not working in public service, but with large loans they are paying off with small consistent sums, 20 to 25 years of monthly income driven payments can qualify you for loan forgiveness. This option usually works best for people will a high debt to income ratio, i.e., 2:1.
I found a lower interest rate than my current loan offered. Refinancing means that I pay off my current loan with a new one. Being offered a lower interest rate is the biggest reason to switch. If you can’t find a lower interest rate than the one you currently have, stay where you are. You may already have the best option on the market.
A few Tips for Making Refinancing as Painless as Possible
I’ve already covered the major reasons why refinancing may or may not be right for your particular situation. However, there are a few minor details that are also important to note before you take the plunge.
While refinancing your loan won’t cause your credit score to take a big hit, the process could cause your score to fluctuate slightly.
When you’re searching for the best deal out there, you’ll be getting a lot of quick estimates on what lenders can offer you in terms of interest rates. These are all known as soft inquiries on your credit score. A hard inquiry happens when you officially apply for a refinancing loan and creditors run your credit report. Hard inquiries can knock your credit score by a few points, but nothing major.
Tip: If you plan to formally apply to more than one company, submit all your applications within 45 days of one another to reduce the impact on your score.
Consider a guarantor when you apply for loan refinancing. When I was shopping around, I found a decent 4.2 percent interest rate that looked good compared to my current six percent. However, when I added a family member with a steady income as my guarantor, the interest rate plummeted to 2.8 percent. This was just a soft inquiry, so the figures are rough. But adding another person to your application, who can guarantee your payment, will make your loan more attractive to banks.
Caution: While this may be a win for you, it could end up lowering the credit score of your guarantor by becoming directly responsible for a large loan. Make sure to ask him/her to inquire about the potential credit impacts of their support of your loan.
Is student loans refinancing right for you?
Whatever you choose, know that despite being stuck with debt, you are not stuck in your current payment plan. Paying off your loans will never be quick or painless (at least for the majority of us). It can be done efficiently and save you money. Study up and find the right repayment plan tailored to you.