How much money do you owe in student loans? According to the site studentloanhero.com, the class of 2016 graduated owing an average of $37,172. The Economist has reported that U.S. student loan debt now totals more than $1.2 trillion.
You’ve probably read that homeowners are saving hundreds of dollars a month by refinancing their mortgages to get lower interest rates. You may not have thought of this, but student loan refinancing also save big bucks on their interest rates.
A clearinghouse for information
The market for refinancing student loans has grown so big, there’s now a site, LendEDU, where people can compare the offers from 12 different student loan lenders. The site brags that it saves borrowers an average of $13,948, and that qualified applicants can find loans with interest rates as low as 2.13%.
What’s your interest rate?
More than 44 million people are currently repaying their student loan debts. LendEDU estimates that of them are paying loans with interest rates above 7%, and that only 2% of all student loan borrowers refinanced their loans last year. In fact, Nate Matherson, the founder of LendEDU, believes that most graduates don’t even know they could get lower-interest debt consolidation loans to refinance their student debt.
What’s good credit?
Lenders generally look at credit scores in ranges as follows:
- Excellent Credit: 781-850
- Good Credit: 661-780
- Fair Credit: 601-660
- Poor Credit: 501-600
- Bad Credit: below 500
As you can see, even if you have poor credit, you might still be able to refinance your student loans to get a better interest rate.
If you haven’t seen your credit score recently – or ever – you can now get it free from a variety of sources. Discover Card gives credit scores free even if you’re not a cardholder. Many sites will also give you your score free.
What’s the interest rate on your student loans? The interest rate on federal student loans obtained in the years 2006 through 2013 was 6.8%. If you have a parent with a PLUS loan, the interest rate was probably several points higher. If you have a private student loan, your interest rate could be as high as 12%.
Five things to know about student loan refinancing
If you could refinance $50,000 of student loan debt down from 6.8% to 4.82% (which is the average) you could save nearly $6000 over 10 years. But before you rush over to LendEDU to see about refinancing your loans, here are five things you should know.
- Your chance of refinancing will improve if you have a cosigner, whether that’s a spouse, a parent, a relative or a sibling. This will not only improve the odds you’ll be accepted, but you’ll get a lower interest rate.
- If your parents have PLUS loans, they can refinance them as part of a total student loan refinancing. However, your parent will probably have to cosign on the new loan. This is actually the only way that your parent can get out of a PLUS loan.
- Carefully consider the term of the loan. If you decide to refinance with a loan that has a longer-term, you’ll have lower payments, but if you choose to refinance with a shorter term you will save the amount of interest you owe. LendEDU’s most popular term for a refinancing loan is five years.
- You’ll be giving up some special benefits. Federal student loans include important benefits such as forbearance and income-driven repayment plans for student loan financing. For example, with REPAYE (Revised Pay As You Earn Plan), your monthly payments are maxed at 10% of your income, and any remaining balance is forgiven after 20 years of payments. If you work in a public service job, your loans will be forgiven after just 10 years through Public Service Loan Forgiveness,
If you’d like more information on the federal government’s income-based repayment plans for student loan financing, and why they can be like making the minimum payments on a credit card debt, watch the following video.
5. The federal government also offers Direct Consolidation Loans for student loan financing, which could be a good choice as you would then have one payment a month versus the multiple payments you’re making now. Federal loans, whether subsidized or unsubsidized, are eligible for all income-driven repayment plans such PAYE and REPAYE. This means repaying a Direct Consolidation Loan might be easier and cheaper than paying off your current loans.
The interest rate on a federal Direct Consolidation Loan is the weighted-average of the interest rates of the loans being consolidated rounded up to the nearest eighth of a percent. If you do the math, you might find the interest rate on a Direct Consolidation Loan would be higher than if you were to refinance through a private lender.
How long have you been out of school? Even if it’s been a number of years, it could be worth student loan refinancing to save money. Look to see what interest rates you’re currently paying, then check out the options you have for refinancing the loans. You just might be amazed at how much you could save.