For those of us with student loans, the repayment period can be beyond stressful. With interest rates ranging from 4% to 7% federally, and sometimes higher with private student loans, it’s no wonder, really. And for those barely making the ends meet to scrape out the minimum payments, it can be infuriating.
Does interest have that much of an effect?
Most loans come with a five to ten year repayment plan, and let’s face it, when you sit down and do the math on that, it’s not pretty. We’ve all seen the horror stories. My favorite is the image that went viral a while back of the woman holding the sign which says, “Student Loan paid faithfully for 23 years: Borrowed: $26,400. Paid back to date: $32,700. Still Owe: $45,276.63.” That’s how interest works if it’s not kept under control: it just keeps building. It’s a lesson I learned when I first started my loan repayment. I borrowed $13,000 from the Department of Education via the FAFSA application, and, thinking I was in my six-month grace period, didn’t pay a dime until I checked my account and realized that nearly $500 in interest had accrued in five months. That’s about $3.22 per day. Like I said, the math’s not pretty. That’s why it’s always good to know your options when it comes to keeping your interest manageable.
So what are my options?
There are lots of options to consider, but one of the more popular options right now is student loan refinancing. Refinancing has always been a great option for managing debt. For years people have been trading in their credit cards for cards with lower rates, rolling over their balance onto the new card while relieving some of the pressure from the interest. Others have used it to swap a 30-year mortgage for a 15-year one. Only in the last few years has refinancing become an option for student loans. You can also consolidate multiple student loans into a single new student loan.
What is it?
Refinancing basically means trading (or selling) the loan to someone else. If one place is killing you with high interest rates, you might be able to get another bank to “buy” the loan for you. They clear your debt with the original lender, and then you pay them back instead, but at a lower interest rate or shorter term. The terms of the loan change, and it becomes a “new” loan, but ideally, it’s a change for the better.
Should I do it?
If you are struggling under a high interest rate, aka: your principal isn’t going down because all the payment goes straight to the interest build up, or if you want to consolidate several loans down into one easy payment, then refinancing might be a great move for you to make. Do some research and look into your local banks’ refinancing options. Ask around about lower interest rates or shorter loan terms.
But, if you’ve been struggling to make your payments on time with your current loan provider, you might be in a bit of a rut. Banks look at this like they look at credit card applications: the higher your credit, the better your chances of being approved for a refinancing option. Or rather, the better your repayment history, the better your chances. If you’ve missed payments in the past your “score” will be lower, and they might not consider you a good candidate.
Only consider refinancing your student loan or consolidating multiple student loans if you are financially stable, and able to make consistent, on time payments. All loans come with risks, but now that this money has already been moved around a few times, if you start slipping on payments, it can affect your credit score pretty drastically. Not to mention, you lose some of the benefits that come with federal loans, like deferment and forbearance, which give you the chance to say, “I need a break while I figure out my game plan” if you aren’t financially capable of making payments.
All in all, refinancing or consolidating student loans is a great way to save yourself money in the long run, if you can find a lower interest rate or shorter term. Both carry the bonus of less interest build up. Just make sure you are financially ready for the payments before taking that step. Weigh your options, and happy refinancing!
You can find lenders that will help you refinance or consolidate your student loan in our Refinance Loan Finder.
About the author
Trinya’s passion for helping others understand student loans started when she began learning all she could to fill in what she didn’t know about her own loans. She enjoys speaking at local schools about the cost of college and assisting friends with their finances. In her free time, Trinya also enjoys reading, writing, and playing music.