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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 January 21, 2020

How to Develop a Millionaire Mindset in 6 Simple Steps

How to Develop a Millionaire Mindset in 6 Simple Steps

We all like to dream about being financially wealthy. For most people though, it remains a dream and nothing more. Why is that?

It’s because most people don’t set their mind to achieving that goal. They might not be happy in their current situation but they’re comfortable – and comfort is one of the biggest enemies of growth.

How do you go about developing that millionaire mindset? By following these simple steps:

1. Focus On What You Want – And Take It!

So many people are too timid to admit they want something and go for it. When there is something that you want to accomplish don’t think “I could never actually do that”, think “I could do that and I WILL do that”.

Millionaires play to win, not to avoid defeat.

This doesn’t mean to have to become a selfish jerk. What it means is becoming more assertive and honest with yourself. You don’t have to grab off other people. There is a big pot of unclaimed gold in the middle of the table — why shouldn’t you be the one to claim it? You deserve it!

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2. Become Goal-Orientated

It’s almost impossible to achieve anything if you don’t set firm goals. Only lottery winners become millionaires overnight. By setting yourself attainable goals, you will get there eventually. Don’t try to get rich quickly — get rich slowly.

Let’s take the idea of making your first million dollars and expand on what kind of goals you might set to get there. Let’s also say you’re starting at a break-even position – you’re making enough to get by with a few luxuries, but nothing more.

Your goal for the first year can be having $10,000 in the bank within a year. It won’t be easy but it is doable. Next, you need to figure out the steps you need to take to achieve that goal.

Always look at ways to make growth before cutbacks. With that in mind, you might want to see if you can negotiate a pay rise with your boss, or if there’s another job out there that will pay better. You might be comfortable in your old job but remember, comfort stunts growth.

You may also have other skills outside of your workplace that you can monetize to boost your bank balance. Maybe you can design websites for people, at a fee of course, or make alterations to clothes.

If this is still not enough to make the money you need to save $10,000 in a year, then it’s time to look at cutbacks. Do you have a bunch of old junk that someone else might love? Sell it! Do you really need to spend $10 on your lunch everyday when you could make your own for a fraction of the cost?

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If you are to become a millionaire, you need to start accumulating money.

Here’re some tips to help you: How to Become Goal Oriented and Achieve More in Life

3. Don’t Spend Your Money – Invest It

The reason you need to accumulate money is for step three. Millionaires tend to be frugal people, and that’s because they know the true value of money is in investing. Being your own boss goes hand-in-hand with becoming a millionaire. You’ll want to quit your regular job at some point.

Stop working for your money and make your money work for you.

Rather than buying yourself a new iPad, that $500 could be used to invest in the stock market. Find the right shares (more on that later), and that money could easily double within a year.

There’s not just the stock market — there’s also property, and your own education.

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4. Never Stop Learning

The best thing you can invest in is yourself.

Once most people leave the education system, they think their learning days are over. Well theirs might be, but yours shouldn’t be. Successful people continually learn and adapt.

Billionaire Warren Buffet estimates that he read at least 100 books on investing before he turned twenty. Most people never read another book after they’ve left school. Who would you rather be?

Learn everything you can about how economics works, how the stocks markets work, how they trend.

Learn new skills. If you have an interest in it, learn everything you can about it. You’d be surprised at how often, seemingly useless skills, can become extremely useful in the right situation.

Start developing the habit of learning continuously: How to Create a Habit of Continuous Learning for a Better You

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5. Think Big

While I advise to start off with small goals, you absolutely should have a big goal in mind. If you have a business idea, then that is your ultimate goal – to start that business and make a success of it. If you want to invest your way to millions of dollars and do little work other than research, then that is your big goal.

There is no shame in not achieving a big goal. If you run a business and aim to make $1 million profit in a year and “only” make $200,000, then you’re still significantly ahead of most people.

Aim for the stars, if you fail you’ll still be over the moon.

6. Enjoy the Attention

To be successful, you have to be willing to promote yourself and enjoy the attention to a certain extent. Now the attention doesn’t need to be on yourself, it could be on your brand, but attention definitely attracts money.

Never be embarrassed to get your name out there. That means finding a spotlight and being brave enough to step right up underneath it.

If you run a business, try contacting the local papers. You’d be surprised at how amenable they often are to running a story about you and your business, and it’s all free publicity.

Above all, remember: You control your own destiny. Push hard enough for anything and you’ll get it.

More About Thinking Smart

Featured photo credit: Austin Distel via unsplash.com

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