With private loan interest rates so low, should you refinance a federal student loan?
As college costs continue to rise, so has the need for students and their parents to borrow money for college education. Americans now owe approximately $ 1.6 trillion of student debt, according to the Federal Reserve.
In general, there are two types of student loans: federal and private. Federal student loans are issued by the government, while private student loans can come from different non-federal lenders, such as banks, schools, or credit unions.
First: are your student loans federal or private?
During your studies, you may have taken out a lot of loans. Since your repayment strategy may depend on the type of loans you have, it is important to take an inventory of all of your loans. If you have federal loans, you can create an account at Studentaid.gov and log in to view your federal loans. To identify your private loans, you can get a free annual credit report from Equifax, TransUnion, or Experian. Because federal and private student loans appear on your credit report, all student loans that you see on the credit report that are not listed on studentaid.gov are private student loans.
What are some examples of terms you can see in private student loans?
The terms of private student loans are set by the lender and therefore can vary widely. The interest rate can be fixed or variable. Also, while most lenders realize that students cannot afford to make payments, some may require repayment anyway while you are still in school.
Generally, private loans are more expensive than federal loans and may require the borrower to have a good credit history or a co-signer. Having a co-signer can help lower your interest rate, but you need to be careful about the risks involved. For example, the promissory note may contain a provision that requires you to pay the entire balance in the event of the death of the co-signer.
Private loans are like any other type of traditional loan, such as a car loan or mortgage. You must be able to afford the monthly installments. If you recently graduated from school, you may not be able to afford the payments. Federal loans, on the other hand, can come with options to postpone or reduce your monthly payments.
Therefore, if you are considering taking out student loans, it is usually best to apply for and exhaust all federal student loan options before taking out private loans.
When might it be better to have a private student loan?
If you think you have a stable job and are confident in your ability to make the required monthly payments, a private loan with a lower interest rate may be beneficial. If you originally took out federal loans, you can refinance the loans with a private lender, and if you can refinance at a lower interest rate, you can save a lot of money. However, it is important to know that you cannot refinance your private loans to federal loans, which means that once you refinance your federal loans, you will definitely lose the advantages and options of the federal system which I will discuss in my article. next article.
Refinancing example: Sarah, doctor
Let’s look at Sarah as an example. She is a doctor earning $ 250,000 per year and has a federal student loan balance of $ 250,000 with an average interest rate of 6%. * Sarah has an excellent credit history and could take advantage of the historically low interest rates here. moment. She finds a private lender to refinance at 2.99%. After refinancing, she would pay $ 2,413 per month for 10 years, compared to $ 2,776 for the federal standard 10-year repayment plan, and save about $ 43,000 in total over 10 years.
Sarah likes the idea of saving $ 43,000. She feels comfortable with her ability to make the monthly payments of $ 2,413. This makes her a good candidate for private refinancing.
However, is it possible that a person like Sarah could benefit from keeping their loans in the federal system? In my next article, I’ll explain when and how Sarah and a resident doctor, Jimmy, could benefit from maintaining their federal loans. Spoiler: There are special protections and programs for federal borrowers!
* Note that the interest rate for some federal loans is 0% until December 31, 2020, so Sarah may want to take advantage and wait to refinance.
Associate Planner, Insight Financial Strategists
Saki Kurose is a Certified Student Loans Professional (CSLP®) and CFP® Certification Candidate. As an associate planner at Insight Financial Strategists, she enjoys helping clients overcome their financial challenges. Saki is particularly passionate about working with clients on student loans to find the best repayment strategy that matches their goals.