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Vanessa and I both had student loans after graduating, and we fought hard to pay those loans off. We didn’t refinance or consolidate our student loans, because we put 100% of our available income toward repayment. This allowed us to knock out nearly $30,000 in student loan debt within our first year of marriage.
Our personal plan won’t work for everyone, and it can take years to eliminate debt if you are prioritizing other financial goals. If you anticipate making loan payments for many years, refinancing or consolidating might be your best available option.
As I discussed in my last post, consolidation is the process of exchanging one or more federal loans for a new federal loan (at the same interest rate). This can be advantageous if you want to qualify for income-driven repayment plans (and loan forgiveness), but it does not save you money on interest.
Alternatively, you can refinance your student loans. Refinancing is similar to consolidating – you exchange one or more existing loans for a new loan. The difference is that refinancing can include both federal and private loans, and is done through a private lender.
The primary reason to refinance your student loans is to obtain a lower interest rate and reduce the amount of interest paid over the life of the loan.
How to Obtain the Best Interest Rate When Refinancing
When refinancing, your interest rate will depend on your creditworthiness. Refinancing is best for people whose financial position (employment, cash flow, and credit) has improved since they graduated from school. Many of the private lenders consider the following information when determining the interest rate on a new loan:
- FICO score
- Monthly gross income
- Monthly debt-to-income ratio
- College degree and career outlook
To qualify for the best rates, you need to show great credit, stable monthly income, and low levels of existing debt.
Should You Refinance Your Student Loans?
It’s possible to refinance both private and federal student loans. For either type, the decision involves two primary considerations:
- Does it save you money?
- Does it offer better terms and conditions?
The first consideration is very simple. Compare your existing loan rates to the rate offered by the new refinanced loan. A lower interest rate saves you money over the life of the loan.
After comparing rates, compare any other benefits are you receiving. If one offers significantly better terms, you should consider that in your decision. Many of the larger companies in the refinancing space (LendKey) have started offering more favorable terms and conditions than many of the private lenders who originate student loans. However, federal loans carry several special borrower protections that you need to consider before refinancing.
Special Considerations for Federal Loans
1) Income-driven repayment plans
If you refinance your federal loan(s) through a private lender, you lose the ability to qualify for the repayment plans offered by the Government.
2) Loan Forgiveness
Many of the repayment plans mentioned above also provide loan forgiveness after 20 or 25 years of continuous payments.
Even better, the Public Service Loan Forgiveness (PSLF) program forgives the remaining balance on your Federal Loans after you have made 120 qualifying monthly payments under a qualifying repayment plan (all income-driven repayment plans qualify) while working full-time for a qualifying employer (Government organizations at any level and non-profit organizations).
The most incredible part is that after 120 monthly payments (10 years), your remaining loan balance is forgiven tax-free. You don’t owe any tax on the forgiven portion.
3) Borrower Protection
Federal student loans offer protections like deferment and forbearance that allow you to postpone payments if you have financial difficulties. If you have subsidized federal student loans, you can defer your loan payments interest-free. Some of the best companies in the refinancing space now allow temporary unemployment protection, among other borrower perks. Even then, private loans are generally less flexible and less forgiving than federal loans.
4) Parent PLUS Loans
Parent PLUS loans are the oddball of federal loans. As I outlined in my previous article, they do not qualify for the best income-driven repayment plans. Many parents also want to shift the responsibility of these loans to their children. As such, you never want to consolidate these loans with other federal loans.
One great option is to refinance these loans through a private lender. It’s possible to obtain a lower interest rate, and parents can shift the responsibility of the loan to a child.
Who Should Refinance Their Student Loans?
Because refinancing can take a little bit of time and effort, it doesn’t make sense for everyone. To determine if refinancing is the best solution, consider your debt repayment schedule and compare with the categories listed below.
Demolish your debt within 2 years
This category includes individuals with low levels of debt, and individuals whose number one priority is getting out of debt FAST.
If this category describes you, consider doing nothing except making payments on your loans. Your primary focus should be getting out of debt quickly.
Vanessa and I were part of this category. We made it our mission to become debt-free in our first year of marriage. We didn’t mess with consolidating or refinancing our loans. Instead, we focused on making money and cutting expenses, so that we could pay down the debt quicker.
You could refinance through a private lender for free, but that does take some time and effort to realize modest interest savings.
Debt-free in 2-10 years
Individuals in this category might have modest levels of debt, and other important life goals that are competing for dollars. Most borrowers fall within this category, and refinancing can be an excellent option here.
If you have subsidized federal loans, you might be able to obtain a slightly lower interest rate through refinancing. If you have private student loans and/or unsubsidized federal loans, refinancing can save you a lot of money over time.
The income-driven repayment plans and loan forgiveness offered on federal loans are much less important here, because those programs require 10, 20, or 25 years of continuous payments. If you want to be debt-free in less than 10 years, you won’t be eligible for those programs.
What’s much more important is obtaining the lowest interest rate possible on your loans. Refinancing is likely the easiest way to lower the rate on your loans and reduce the amount of interest paid.
Debt-free in 10+ years
This category includes many professionals, saddled with years of student loan debt.
Some of the income-driven repayment plans and loan forgiveness options should be considered before refinancing. If you want to make the minimum monthly payments (under the income-driven repayment plans) and/or qualify for loan forgiveness, you need to avoid refinancing your federal loans.
If you aren’t interested in the federal repayment programs, or if you have private student loans, you should consider refinancing. Government programs aside, you can likely obtain a lower overall interest rate through refinancing because interest rates are historically low.
How to Refinance Your Student Loans
Hopefully by now, you have given thought to your available options. If you are leaning towards refinancing, I have some suggestions on where to begin.
LendKey – LendKey matches borrowers with more than 300 possible community banks and credit unions. This is unique among online lenders, and results in Lendkey offering the lowest possible interest rates with increased flexibility throughout the process. The network of not-for-profit lenders also results in a higher likelihood of approval, with many of the lenders willing to work with non-traditional borrowers, or those without perfect credit.
LendKey is offering a $100 cash bonus for Cash Cow Couple readers if you refinance a student loan using our link.
- Unemployment protection – up to 18 months of paused loan payments while in-between jobs
- Check real refinancing rates in 2 minutes with one form (and no impact on your credit score)
- LendKey charges no origination fees or penalties for making extra or early payments
- Available for undergraduate/graduate and private/federal student loans
- Cosigner release – available after 12 on-time payments
- Variable rates from 2.52% APR (with autopay)
- Fixed rates from 3.25% APR (with autopay)
- 5, 7, 10, 15, or 20 year repayment terms
- Minimum balance to refinance: $7,500
You can continue chasing quotes from other online lenders, but I doubt you will find better rates. In my personal experience, LendKey consistently offers great rates through community lenders, and I haven’t seen any other companies offering lower rates than LendKey.
Please leave a comment below if you have experience refinancing, or if you have additional feedback that might help other readers.