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Refinancing Your Student Loan Debt

William SlusserJun 19, 2017

There is a student loan debt crisis in America. Though there are numerous factors that have contributed to its explosion, several main reasons stand out.

Over the past 50 years, many colleges and universities have lost their sources for public funding. In order to compensate for this lack of cashflow, schools have dramatically increased their prices for tuition, room and board, as well as other administrative fees. Policy changes were instituted that allowed students to borrow greater sums of money, so they could pay for the increase in costs.

At the same time, some schools—both non-profit and for-profit institutions—implemented more aggressive lending practices, encouraging students to incur debt so they could pay for their education. Unfortunately, those practices usually didn’t include any counseling about the enormous financial risks the students were undertaking.

As a result, there are currently more than 44 million student loan borrowers with an aggregate debt of $1.3 trillion dollars. Student loan debt now ranks second in the consumer debt category—behind only mortgage debt—and is higher than both credit cards and auto loans.

The average graduate in the class of 2016 left school with $37,172 in student loans. That is a staggering amount of money, especially for a young person who is just beginning their career and starting out in life.

It should therefore come as no surprise that a large number of borrowers are having difficulty meeting their obligations. According to the Centre for Research on Globalization, there are 27 million people who are unable to pay back their student loans, and are in default or in arrears in some way.

In addition, it is important to note that student loan debt cannot be discharged via bankruptcy protections. All student loans must be paid back regardless of one’s financial situation, no matter how long it takes.

Student Loan Refinancing Companies

In response to the student loan debt crisis, scores of lending companies have emerged, offering to refinance borrowers’ student loan debt. These refinancing companies are private lenders, unrelated to any state or federal agency, and they provide relief to student loan borrowers hoping to lower their high interest rates, and make their monthly payments more manageable.

By refinancing their student loans, borrowers can potentially obtain a lower interest rate, saving thousands of dollars over time. Those savings can then be utilized to make extra payments, allowing the borrower to pay their debt off faster. Additionally, borrowers may also acquire a longer term, and thereby lower their monthly payment.

Though student loan financing companies can offer genuine relief to borrowers who are saddled with high interest loans, it is important to be cautious and wary. As with any financial transaction, borrowers should carefully examine both the lender and the terms of their loan, in order to make sure that all their refinancing goals will be successfully accomplished.

Forfeiting Federal Student Loan Protections

While refinancing student loan debt through a private company can result in a major financial improvement, there is one important consideration that needs to be addressed before making the decision to refinance.

When you refinance your federal student loans with a private lender, you forfeit most of your federal student loan protections. Therefore, it is necessary to analyze your personal situation to determine if you’d like those protections to remain intact.

Here are some of the protections that are offered with a federal student loan:

  • In some cases, the federal government will subsidize, or pay the interest, on your federal student loan while you are in school.
  • Your interest rate for a federal student loan is generally fixed, not variable; most private student loans carry variable interest rates.
  • Federal student loans allow you to limit the amount you must repay each month based on your income.
  • For borrowers pursuing careers in public service, loan forgiveness on federal student loans may be available after 10 years.
  • Discharge upon a borrower’s death or upon disability (with certain limitations).

If you decide that you are willing to forego your federal student loan protections and pursue refinancing through a private lender, here are some things to ask and consider before you proceed:

What is your primary goal for refinancing your student loan?

The first thing you need to decide is what outcome you’re hoping for by refinancing your student loans. There are some great reasons to refinance student loans, including locking in a lower interest rate, reducing your monthly payments, and paying off your debt faster.

It’s important for you to know which of these benefits are most important to you. Your overall goal will dictate your refinancing decisions and help you choose the loan that best suits your needs.

What interest rates can I obtain?

If your goal is to refinance to a lower interest rate, you need to know what your current loan rate is. Interest rates on federal student loans can range from just below 4% to over 7%, depending on the type of loan. Some private student loan rates are higher, averaging around 9-12%.

So if your goal is to obtain a lower interest rate, you will have to thoroughly shop around. The best lenders for refinancing student loans offer rates as low as 2%.

What are my loan payoff amounts?

As you are investigating the current interest rate on your student loan, you should also determine the payoff amount. This is the amount that must be paid to settle your loan in full. It will be higher than your current loan balance, because it includes any interest that is still owed.

The total payoff amount for all your student loans will be the new balance of your refinanced loan.

What are the new terms gained from refinancing?

If you’re thinking of refinancing your federal student loan, it’s crucial to compare the terms of your current loan with the terms of your proposed refinanced loan. It would be wise to do a side-by-side comparison of your repayment terms to make sure that refinancing will truly benefit you in the end.

Make sure to carefully note your repayment period (how long you will be paying on your loans), your interest rate, and the amount of your monthly payments.

Refinancing your student loans can be a smart strategy. You can potentially secure a lower interest rate, reduce monthly payments, or renegotiate the terms of your debt. As in most financial matters, however, refinancing student loans should be thought out carefully, to ensure that it’s your best option.