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When Is A Good Time To Refinance Your Student Loans?

When Is A Good Time To Refinance Your Student Loans?

Student loan debt. Those three words are more important to people in their 20’s and 30’s today than any prior generation. The cost of education has continued to rise alongside a growing expectation that most individuals seeking decent salaries should go well-beyond a high school diploma.

It’s increasingly common now to hear presidential candidates address student loans, and eventually one president will propose a comprehensive solution, especially as recent undergraduates and post-graduates begin their careers, start families, and, above all, become the primary voting bloc.

Federal Refinancing Isn’t An Option…Yet

One solution that has been proposed is a federal refinancing option. If you are unfamiliar with the term, refinancing essentially means getting a new interest rate and new repayment terms. Unfortunately, that doesn’t exist for federal student loans now, and may not for a while.

There are, however, many for-profit companies that offer refinancing for those with private loans, and for those with federal loans who are willing to go with a private company to get a lower interest rate.

Should I Refinance My Student Loans?

You may be one of those graduates wondering if now is the best time to refinance your student loans. The answer is both short and long: it depends. Refinancing could be a smart move, particularly for students who have private loans with high interest rates. Federal student loans can’t be refinanced with the government and therefore require you to go private.

Nevertheless, although you may successful lower your monthly payments, no private company offers the generous terms the government offered when you took out the loan. Remember, the federal government is a non-profit entity, whereas private lenders are for-profit.

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How To Determine If Refinancing Makes Sense

Figuring out whether refinancing makes sense at first requires a bit of math, but there are many sites out there that can help you see the different ways you can approach repayment.

If you think about your student loan as one large payment (with principal and interest included) instead of many monthly payments, it’s easier to understand why refinancing may be useful for some borrowers.

To put it simply – each month, interest on the loan is calculated and added to the principal. When you make a payment, you pay off the accrued interest plus a small portion of the principal. Sometimes, those with a particularly high interest rate can feel like they are paying and paying and their balance never seems to budge.

When that interest number goes down, the amount you owe is reduced a little as well. At the most basic level, the benefit of a lower interest rate is that, over the life of the loan, the total sum of all your payments will be smaller, thus saving you money.

Factors To Consider Before Refinancing

Once you know what your rate options are, how do you determine if now is the right time to refinance your student loans?

Employment

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First, you should take honest stock of your current employment status and your future earning potential. These are important factors, because refinancing and exchanging a federal loan for a private one can remove some flexibility in your payment schedule. Stability in a current position as well as the likelihood of a promotion with salary increases work in your favor when refinancing because they allow you to plan with confidence.

Terms and Conditions of the New Loan

If you feel like you could be laid off or terminated in the near future, or if you are seeking a career change, it might not be a great time to refinance. One way that a new set of terms could be less forgiving than your previous ones is that you might not have the forbearance or deferment option. Forbearance allows you to temporarily postpone or reduce your student loan payments.

Another factor may be that the lender requires a loan to be paid off in 10 years instead of 20. Even if you get a lower interest rate, the accelerated payments will result in a higher monthly expense.

Your Credit Score

When considering the option of refinancing your student debt, it is important to research your credit score. If you’re in a good credit score range, you will be eligible for the lender’s lowest interest rates and most generous terms. On the other hand, a bad credit score might force you to hold off until your credit is better.

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Fixed vs Variable Rates

Also, take some time to mull over your fixed versus variable rate options. Fixed rates are great if you lock in a low one, meanwhile variable rates are adjustable. Given that we are in a rising interest rate environment, your variable rate is likely to increase significantly over time, so it is best to focus on refinancing for the lowest rate possible.

Read The Fine Print

If you have federal loans, and refinancing them into private loans seems to make sense after the aforementioned considerations, be careful and read the small print. There are a number of programs and perks that came with your federal loans that don’t apply to private loans. These include income-based repayment and loan forgiveness.

For example, if you are employed by a non-profit and you are working toward complete loan forgiveness in 10 years, remember that once you refinance your federal students loans to become private, you will lose that opportunity. In fact, your current employer may even have a program to help pay off your student loans that you aren’t even using yet.

Long-Term Financial Goals

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After you do research and know your options, think about your 5 and 10 year plan, both personally and professionally. If you are in a place in your life where you anticipate some bigger purchases, such as a house, car, or business, you should factor those potential buying decisions into the equation. And don’t forget – it’s always best to start saving for retirement early, even if you have to invest with little money.

Similarly, marriage and children maybe critical elements of your future financial planning. The extra few hundred dollars a month that you might be putting toward student loan repayment might be better spent on a down payment for a home or toward saving for costs associated with a growing family.

Final Word

If refinancing makes financial sense for you, do it sooner rather than later. Each month that you pay your old, higher interest rate is another month that money could have been allocated to something else other than an inflated interest expense. If, after researching your options, you decide that refinancing your student loans might not be a smart move right now, there are still things you can do to make good financial decisions.

If you can afford it, pay more than your monthly payment. The more you can put toward prepayment, the more your principal will be reduced each month and the less you will pay in the long-term.

The choice of if or when to refinance student debt is a personal one. This decision is best made by weighing the pros and cons of all options. You can control some things in life, but not everything, like interest rates. With dedication to smart research and a bit of good timing, you could be on your way to a lower monthly payment that could save you thousands in student loan interest.

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Gary Dekmezian

Entrepreneur

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Last Updated on June 6, 2019

The Average Retirement Savings and How to Save Wisely

The Average Retirement Savings and How to Save Wisely

Are you on track for retirement?

If not, don’t worry, I’m not sure either. I save each month and hope for the best.

Fortunately, I’m at an age where most people don’t save so I’m ahead of the curve.

But, what if you aren’t in your 20s? What if you’re near retirement and are looking to gauge where you stand?

If so, keep reading. Here’s how to prepare for retirement and save wisely during the process.

What Does the Average American Have Saved for Retirement?

Saving for retirement is tricky.

Tell someone straight out of college to save $10k a year for retirement and it’ll be next to impossible.

Make the same request to someone decades older and they’d be more likely to be able to save this amount. But, a 20-year old college student can be “financially ahead” of someone saving more than them. Why?

Age matters in your financial journey. The younger you are, the more time you have to save and put compound interest to work. As you get older and have more saving power, you’d have less time to put compound interest to work.

Here are the average savings Americans hold by age bracket:

20’s – $16,000

During this stage, most people are paying loans and moving up the corporate ladder. Your best bet during this stage is to focus on eliminating debt and increasing your income. Don’t focus only on getting a high-paying job neither.

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Instead, focus on learning via Podcasts, reading books, and taking specialized courses. Doing this will make you more valuable and give you more career options.

30’s – $45,000

At this stage, you’ve hopefully escaped your entry-level salary and work at a career you enjoy. Your earning power has increased but you now have more obligations. For example, marriage, kids, and a mortgage.

Set a plan to pay off all your debt and focus on eliminating unnecessary expenses. Leverage financial tools like Personal Capital to ensure you’re on track for retirement.

40’s – $63,000

This is the stage where you’re at the prime of your career. Top financial institutions recommend you have at least 2 to 4 times your salary saved up. If you’re falling behind, start maxing out your 401K and Roth IRA accounts.

50’s – $115,000

During your fifties, you’re close to retirement but still, have time to save. You may be helping your kids pay college tuition and other expenses. Since you’re at the peak of your earning power, max out all your retirement accounts.

60’s – $172,000

By this point, you should have about eight times your salary saved up. If not, you’ll depend primarily on social security benefits averaging $1400 per month. Max out all your retirement options as much as possible before retiring.

Ways to Save Money on a Tight Budget

The sad reality is that most Americans aren’t saving enough for retirement.

Even high-earning power isn’t enough to secure one’s financial future. You need to have the discipline to save for retirement while time is in your favor. Don’t wait for you to have a high salary to save, start with having a small budget.

First, get a clear picture of where you stand. Write down a list of “needs” and “wants.” For example, Netflix and Amazon Prime are “wants” and a “cell-phone” is a need.

Use tools like Personal Capital to analyze your spending patterns. Personal Capital allows you to add all your financial data in one place–making it a powerful option to gauge where you stand.

Once you know all your expenses, organize them from highest to lowest expense. When you can’t cut more expenses, call your service providers to negotiate a lower price. If you’re not good at negotiating, use services like Trimm to lower your monthly expenses.

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How to Save Money Each Month

By this point, you know the average amount of money you should have saved for retirement based on your age.

But, breaking this down into monthly goals can be challenging. Here are some rule of thumbs to follow:

Aim to contribute 10%–15% of your salary each paycheck. Review your progress each week.

Why so often? The reality is that life gets in our way and you will have many financial setbacks. Your goal isn’t to be perfect but to get back on track instead.

Reviewing your finances weekly lets you know where you stand with your retirement. This doesn’t have to be a long process either. All it takes is login in Personal Capital to view your net worth and check how much you have saved for retirement.

Turn saving into a game and aim to save more each month. It will get challenging but you’ll get creative and find more ways to save.

Top Money Saving Challenge Tips

To prepare for your financial future and not be another statistic you need to be different.

How?

By adopting new habits that’ll help you become a saving machine. Here are some ways you can save more:

Automatically Contribute Towards Retirement

If you’re working for a company, you can automatically contribute towards your 401k. If you’re not currently contributing more than 10%, make this your goal. Contribute 1% more today and automatically increase this amount a year from now.

Odds are that you’re not going to be negatively affected by contributing 1% more. Many times we spend our money on things we don’t need. Contributing more towards retirement is a great way to secure your financial future.

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Use the Right Tools to Know Where You Stand

Once you’re contributing more towards your retirement accounts, gauge your progress. Make use of finance tracking apps to help you view the big picture of your retirement.

When I’d first signed up for the app Personal Capital, I didn’t know I had a negative net worth. Despite saving thousands of dollars, my debt brought my net worth to the negative. Knowing this motivated me to save more and spend less.

Now, I have a positive net worth. But, it was because I was able to view the big picture using the app. Find out what your net worth is using a finance tracking app and you may surprise yourself.

Bring in Experts to View Your Blind Spots

If you have too little or too much money saved, you should consider hiring financial experts.

Why?

You may need someone to hold you accountable to help you reach your financial goals. Or, you may need help managing your money as effective as possible.

Regardless of the reason, getting help may help improve your financial situation.

Before you hire an expert, find out which areas you need help the most. For example, if you’re constantly overspending, find a debt counselor. If you’re struggling with choosing the best investment options, hire a financial advisor.

Speed up Your Retirement Contribution

After learning how to manage your money well, the next best thing is to earn a higher income.

You’re capped at how much you can save but not much you can earn. Even if your employer isn’t giving you a promotion, you can still take charge of your financial future. How?

By starting a side-business.

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This will be something you’d work on after you’ve finished your day job. Once you start earning income from your side-business, you’ll be financially better off.

The best part is the more work you put into your side-business,[1] the more potential it has to earn more money.

So start a side-business in an area you’re familiar with. For example, if you enjoy writing, do freelance writing for small e-commerce businesses.

Once you’re earning a higher income, you can contribute more towards your retirement. Don’t wait for the right opportunity to secure your financial future, create one.

Reach Financial Freedom with Confidence

What if you were able to retire tomorrow with no problem, all because you’d have enough money saved up and little to no debt left to pay off? How would you feel?

My guess is that you’d feel happy and relieved.

Most Americans are falling behind their retirement goals for many reasons. They’re not prepared, they carry bad money-habits and are thinking short-term.

For you to retire successfully, you need to work backward and adopt better habits. Contribute more towards your 401K and focus on growing your income.

If you do, you’ll save money and pay debt faster.

Don’t beat yourself up if you’re behind your retirement goals. Take the first step today towards a brighter financial future. Isn’t retirement worth the hard work and sacrifice to be at peace?

Featured photo credit: Huy Phan via unsplash.com

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