After years of studying you’ve finally made it, you’ve graduated. Now you have a massive debt hanging over your head with just a few short months to find a job and get your finances in order before you have to start paying back your loans. Maybe you’ve just started paying back your loans, maybe you’ve been paying them forever. Whatever your situation, student loans are a burden everyone would like to be rid of sooner rather than later.
Depending on the size of your loan and the length of it, your payments may vary wildly. Many people have multiple loans with different organizations. Different types of loans with different organizations will have different rates and repayment terms, but there are a few things you should now.
If your required monthly repayments are more than you can handle, you can apply for an income-based repayment plan to ease your budget. In the case of federal loans, you may be able to suspend payments for a short time, say if you are between jobs or on medical leave. In both cases your loans will keep accruing interest, so delaying payments may mean you end up owing more.
Refinancing your student loans
You can refinance your student loans with a new lender to improve your situation. While you might lose access to income-driven repayment plans and various federal loan forgiveness programs, you can dramatically lower the interest rates on your loans.
As a student, many people sign up for a loan without reading the fine print. Even if you did you may have noticed that the rates on a student loan are often quite high. Rates on student loans reflect the market at the time the loan was taken out, so if you took out a loan in 2007 you would be paying 6.8% interest. SoFi is currently quoting their highest rate for student loans as 6.54%, with a low of 2.615%.
Switching a 10-year loan to a private lender like SoFi could save you almost $3,500 on a $25,000, while also lowering your monthly repayments $30. Refinancing to a shorter term (e.g. 5 years) would increase your monthly payments, but save you over $7,000 on the life of the loan.
Think before you switch
While refinancing can lower your overall payments, as well as month to month payments there are risks involved. You will no longer have access to any income-driven repayment plans, meaning if you take a pay cut or are without income for a period of time, you will still have to pay your loans.
There are also programs in place such as the Public Service Loan Forgiveness Program, which will allow you to wipe the slate clean of any remaining debt after working for a qualifying public service for 10 years. Switching to a private lender removes this option.
However, if you want to pay off your loans quickly, and have no concerns about future income, switching to a private lender could be your savior. The shorter term you set, the lower the rate you can expect to be offered. Once you are free of your student loans you’ll have plenty of breathing room, and spare cash, to consider your next adventure.