Student loan refinancing could simplify your student loan repayment plan in the short-term and save you tons of money in the long run. But what is loan refinancing and is it right for you? And are there other steps you can take to improve your post-graduate financial outlook even as you work to pay back your student loan debt? Of course there are! Read on and we’ll tell you all about it.
It’s the moment you’ve been waiting for. Congratulations college graduate! We’re so proud of you. Now, here’s a big fat student loan for you to repay. You’ve earned it!
Seriously. It’s kind of crazy how quickly you’ll go from padding around campus in PJs and sleeping until noon on Fridays to working your butt off just to swing that monthly student loan payment. It’s probably the most jarring part of the transition from college to the real world, as they call it out here.
Unfortunately, most of the accredited colleges we rank — while excellent — don’t offer classes on adulting. It’s kind of something you have to figure out by yourself. Well, not totally by yourself. You’ve got us, of course.
And we’ve got tips. I mean, that’s kind of our thing.
From loan refinancing and building a budget you can live on to finding creative ways of living within your means, we’ve got great advice on ways that you can actually become a functioning adult…financially speaking anyway. If you eat Cheetos for dinner while watching Spongebob, that’s on you.
But for the money stuff, we’re here to help. After all, we’ve been exactly where you are at this very moment, right down to the Cheetos and Spongebob. So take it from us.
First things first:
Understand Your Student Loan Repayment Terms
Before you even get into the idea of loan refinancing, you should understand your loan repayment terms. Student financial aid comes in many forms, from the Stafford Loans and Pell Grants awarded by the Federal government to private loans from lenders large and small. Some forms of financial aid must be repaid upon graduation — including Stafford and Private Loans — whereas Pell Grants, Scholarships and certain other need-based grants do not have to be repaid. Obviously, this is one of the first things you’ll want to figure out. If you’re not obligated to repay anything, you can pretty much skip halfway down this article.
For those of you who are still with us up here, now’s the time to carefully review the details of your loan. Are you obligated to start paying it right away upon graduating? Do you have a grace period of a few months? It’s a good idea to prepare both mentally and practically for the reality that you will have to repay this loan, so figure out exactly when that is scheduled to happen. Understand the nature of your loan, what it will mean for your wallet once you graduate, and how soon you must begin making that monthly payment.
If you foresee any difficulty meeting your responsibility, reach out to your lender. Most loans will offer ways of deferring payment for finanical hardship. You’ll still accrue interest while you defer payments, which means that the amount you owe is going up rather than down. Still, this is a whole lot better than risking your credit rating by being late, or defaulting on payments. Avoid lateness and defaulting at all costs!
There are a few other things you should know right up front:
- The total amount of your loan, also called the principal amount
- Your monthly installment payment amount, including any scheduled increases in that amount
- The terms and rate of interest on that principal amount, including any scheduled increases in interest rates
- The resulting sum of interest you’ll ultimately be paying if you repay your loan minimum each month
If you’re just at the start of the process, or you’re looking for a quick rundown of student loan types, check out Applying for Student Loans: Everything You Need to Know and Do.
Evaluate your Repayment Plan
Now, you should have a pretty clear sense of what your commitment looks like, which is probably all at once liberating — because knowledge is power — and terrifying — because, holy crap, that is a ton of money and the schedule says you’ll still be repaying it when your first kid starts shopping for colleges.
So here’s another bit of advice that will be really annoying if you’re just getting started and living on entry-level pennies. Eventually, you may be in a position to pay more than your monthly minimum. If you can, do it! Sorry for yelling, but the faster you do it, the smaller that total sum of interest gets, and the shorter your commitment gets, and the more money you’ll save in the long run.
For more tips and pointers on getting that loan monkey off your back, check out How to Repay Student Loans.
Do Loan Refinancing Right
First things first. What is loan refinancing, and is it right for you?
Loan refinancing is when you take out a new loan with a private lender in order to pay your existing loan(s). This could be beneficial in a number of ways. First, if you have multiple loans, you may be able to consolidate them into a single loan. If you have multiple checks to pay a month, consolidation through refinancing could simplify the process by bringing it down to a single monthly payment. This would also likely reduce the amount you have to pay overall each month.
The even bigger benefit of loan refinancing has to do with your interest rates. Remember above when I told you to be familiar with your interest rates and how much you were likely to pay in total interest over the life of the loan? That information is really relevant here.
If you have a chance to lower your interest rate by refinancing your loan through a trusted lender, it could mean hundreds or thousands of dollars in long-term savings over the life of your loan.
If you have high-interest rates, onerous repayment terms, or there are other features of your student loan that are causing you immediate anxiety or long-term stress, loan refinancing may be the cure. If this sounds like your situation, check out these 10 Student Loan Refinance Programs.
Be Aware of Loan Refinancing Risks
Loan refinancing could be beneficial, but it isn’t right for every situation. With refinancing, you’ll be trading in your federal loan(s) for a private loan. This means that you’ll lose access to some of the protections and programs designed specifically for federal loans. For instance, your loan repayment terms may be based on your income. According to Forbes, there are four different income-driven repayment plans for federal loans. Each plan caps your monthly payment at a different level, somewhere between 10 and 20% of your monthly income.
You would lose access to this cap. If you make a steady and stable income, your monthly payment under refinancing would likely be lower regardless of this cap. However, if you are working at entry-level income, still seeking a steady job, or are struggling financially, the income-driven federal repayment plan may actually be your best bet. Loan refinancing is probably not for you just yet.
You may want to revisit the idea of loan refinancing when your income — and consequently, your monthly repayment rate — are both higher.
You would also lose access to any student loan forgiveness programs that exist under federal jurisdiction. For instance, teachers who agree to work in troubled school districts may be eligible for forgiveness of up to $17,500 in federal loans after five years of commitment. Loan refinancing would eliminate access to this forgiveness program. If you stand to benefit from any such programs, refinancing probably isn’t for you.
Finally, be sure that refinancing really would lower your interest rate. Beware of any origination fees that come with loan refinancing. If the interest rate reduction between your original loan and your refinanced loan is insignificant, there is a chance these basic fees would erase or even eclipse any money you might save on lower interest rates. Today, interest rates are at an all-time low. You may already enjoy relatively favorable interest rates. In this case, loan refinancing might not bring dramatic change to your repayment process.
That said, a significant reduction of your interest rate — usually greater than 1% — could result in very real and meaningful savings over the long run. Find out how with a Student Loan Calculator like the one offered by Bankrate.
Getting Approved for Loan Refinancing
One of the biggest challenges, especially if you are still working to establish yourself financially, is getting approved for loan refinancing. A couple of factors will figure into your approval, including your credit score, income, level of employment, the existence of other debts, and your debt-to-income ratio. These factors will determine whether or not you are eligible for loan refinancing.
You can also improve your chances of getting approved by making inquiries to multiple lenders. There are no rules against applying for other loan refinancing opportunities if you aren’t initially approved. And in general, it’s best to shop around for opportunities. You should be on the lookout for highly reputable lenders offering lower interest rates, transparent borrowing terms, and favorable repayment options.
Start by checking out our look at the 10 Student Loan Refinance Program.
What to Do If You Can’t Get Approved for Loan Refinancing
If you don’t get approved at first, all hope is not lost. You still have the option of refinancing with the help of a parent, guardian, spouse or another family member who would be willing to co-sign on your loan. Be aware that this is a big commitment to ask of somebody, so it should be a person with whom you share a close personal relationship. And it also means that your ability to repay your loans on time and maintain your commitment will have an impact not just on your financial outlook, but on that of your co-signer as well. Late payments and defaults would hurt your co-signer’s credit rating as well as yours, so be sure you’re up to the challenge before seeking help.
Make the Most of Your Savings
If you are approved for loan refinancing, you could be in store for some great long-term savings. We presume that you aren’t swimming in money if you’ve recently graduated, but it’s never too soon to make sound financial decisions. As long as you’re making big adult decisions like loan refinancing, there are a few more responsbile adult-type things we’d advise.
Start a Budget
Obviously, your student loan isn’t your only commitment. You’ve got rent, and bills, and your favorite taco joint, and they all cost money. Know what you spend monthly on necessities, what you make each month to cover those expenses, and what you can afford to give yourself for playtime on the weekends. And while you’re at it…
Pay Off Your Loan Faster
If your budgetary calculations reveal a little breathing room thanks to the loan refinancing, you could consider paying off larger monthly sums on your loan regardless. The larger the number, the faster you’ll pay off your loans. Once again, this could mean hundreds or thousands in savings on interest.
Live Within Your Means
Use your Budget to make smart purchasing decisions. Find a sensible living situation. Shop responsibly. Recognize your purchasing power based on your actual income, not simply based on what you want. Maybe you really want HBO, but are you sure it’s something you can afford right now? Living within your means today could result in having far greater means in the future.
Find a Side Hustle
Either way, it’s good to diversify, especially while you’re young. Whatever your main gig, if you have the flexibility and the interest, find a backup situation. Drive an Uber, do some part-time dog-walking, or work for a weekend moving company. If you have a marketable talent, consider leveraging that. Sell your photography online, write restaurant reviews for a local paper, or do some freelance dog grooming. Between the things you like to do and the things you’re willing to do, there is a side-gig that could help diversify your income and even open up exciting professional opportunities.
Take Some Career Risks While You Can
While you’re at it, maybe try something a little unconventional. Look, if you’re feeling lukewarm about running the customer service line for a phonebook company now, how do you think you’ll feel about it 20 years from now? Of course, by then, you might have a house, some kids, a time-share and all kinds of other commitments that depend on your customer service income. Now’s the time to try doing something you actually love. Take a risk while you’re untethered enough to get away with it.
Ultimately, finding a career that makes you happy will pay its own dividends. Now that you’re saving a little bit on your monthly student loans, perhaps you can afford to take a left turn in your career and start something new.
If you are considering it, you’re in good company. To find out who else is doing it and why, check out 9 Tips for Making a Mid-Career Change.
Learn New Skills
As your career advances, grow not just as a professional, but as a person. You are most valuable to yourself and others when you continue to accumulate and refine skills. Find ways to keep your mind limber and your qualifications evolving. Whether you’re taking certification programs or classes, or joining social groups or recreational clubs, the more skills you learn and enhance, the greater professional freedom and earning power you’ll have in life.
To learn more, check out Great Online Degrees for Lifelong Learners.
So we warned you things were going to get pretty adult around here. Managing your money can be serious stuff. Now that we’re done, you have our permission to go back to your Cheetos and Spongebob. But just in case you still have more questions or concerns, check out these helpful adulting resources:
- How to Repay Student Loans
- 10 Student Loan Refinance Programs to Consider
- Paying for College: Financial Aid, Scholarships, and More
- Financial Aid for Online College: Everything You Need to Know and Do