Refinancing private student loans at a lower interest rate through a private lender usually makes sense. Refinancing federal student loans is a potential misstep, as you would lose all the benefits that come with federal loans. We’ll discuss refinancing in detail in step two. It may or may not make sense for your situation.
State Student Loans
Some states offer student loans to state residents who are attending an eligible school.
I went to college in my home state, Minnesota, and was able to take advantage of their SELF loan program, which is administered by the Minnesota Office of Higher Education. These loans bear a lower interest rate than federal loans.
Besides sometimes having a lower interest rate, state student loans typically are not on par with federal student loans. For example, here are some details of the Minnesota SELF loan, per their website:11
•You need to pay interest every three months while you are in school, starting within ninety days from when you receive the money.
•You must start repaying certain SELF V loans no later than nine years from when you received the money.
•There are no grace periods or deferment options.
•SELF loans cannot be included in a federal loan consolidation.
And here are the two SELF loan repayment options for when you finish your studies (unless you are already in a required repayment period):
•The Standard Plan requires monthly payment of principal and interest starting thirteen months after you leave school or start attending less than half-time.
•The Extended Interest Plan allows you to continue with two more years of monthly interest payments before starting to repay the amount (principal) you borrowed.
These loans are better than private student loans, but they do have their disadvantages, such as not having interest deferment or a forbearance option.
I shared details of this program with you because you may have some loans from a state program yourself. If you do, be sure to read all the documentation available online. If you still have questions or are unclear on anything, reach out to the loan servicer or administrator of the program. It’s important to know what rights you have, what the terms are, and what happens to the loans if you enter grad school.
Key Takeaways
•People often have loans spread across different loan servicers and may have a mix of federal, private, and state student loans. Create a student loan snapshot by putting the details of your student loans into a spreadsheet.
•Federal student loans are the best type of student loans because of the benefits that come with them such as deferment, forbearance, income-driven repayment options, and loan forgiveness opportunities.
•Subsidized loans are better than unsubsidized loans because interest does not accrue during times of deferment.
•In most cases, accrued interest eventually gets added to the principal of your loan through the process of capitalization.
•Consolidating your student loans can be beneficial but should be done with caution and only when you feel you fully understand the implications of consolidation.
Step 2:
The Possibilities—Understand Your Options
“How am I going to pay back all these loans?”
“I could be paying this the rest of my life!”
“I can’t afford these monthly payments.”
“Why me? Why couldn’t my parents have paid my tuition?”
Have you ever had one of these thoughts? Many people feel distraught or even hopeless when they see how much they owe in student loans, especially when they see what their loans translate to for a monthly minimum payment.
While there is no magic pill to make your loans go away overnight (unless you win the lottery), I’ve found that many borrowers lack knowledge about their repayment options. This lack of knowledge causes people to feel like they have no control over their situation and is a driver behind the large number of borrowers who default on their loans. After all, if you can’t afford the minimum payment, how can you be expected to make it month after month?
In this step, I will lay out your repayment options and how they relate to the types of loans you have. My goal is for you to have the key facts, pros and cons, and implications of each type of repayment plan. Additionally, we will go over things like refinance, forbearance, and deferment, and the implications of taking advantage of them.
Private Student Loan Repayment Options
While my wife was in grad school, we received what seemed like monthly mailers from a couple of banks that tried to get us to take out private student loans to supplement her federal loans. While we did not need to take advantage of these private loans, we did have private student loans from our undergrad years.
Having private student loans is becoming more common, whereas, not too long ago, banks had little on their balance sheets in terms of student loans. Now it seems like every bank wants to get in on them. And why not? Tuition continues to rise, and the amount of outstanding debt has rapidly increased over the past decade.
There is big money to be made in student loan refinancing. Banks are able to pick and choose which borrowers they refinance, and typically those with a solid credit history are the ones who get approved.
There’s a lot happening in this space, so let’s start by talking through private student loans that you either took out while in school or obtained through refinancing. Then we’ll discuss why refinancing is popular and how it may benefit you.
Repaying Private Student Loans
If you have private student loans, you either received them while you were in school or obtained them through refinancing. Either way, this debt differs from federal student loans in a variety of ways.
•Repayment Terms: Repayment varies by lender. More likely than not, the standard ten-year repayment plan will be used, but it is possible to get extended repayment (as with everything, depending on the terms the lender offers).
Another reason why refinance is popular is that you can pick and choose your repayment terms, as well as choose a fixed or variable interest rate. Some may even argue it’s easier to refinance (assuming you have the credit history that makes you eligible) than to work with your current lender.
•Interest Rate: Interest rates are typically variable on private loans, while federal loans are fixed. It’s not uncommon for a private student loan to have interest rates in the double digits (this is why refinancing at a lower interest rate is becoming more common).
•Forbearance and Deferment: Federal student loans offer forbearance and deferment options; private student loans will vary in their offerings. Some lenders may offer neither, while others may offer some variation.
•Hardship: If you are unable to make the monthly minimum payment on your private student loans, how the situation is dealt with will vary by lender. Some may offer “interest only” payments for a certain amount of time. Others may offer temporary forbearance.
•Forgiveness: It’s safe to assume there are no forgiveness options for private student loans. If your payment is too high, it may make sense to focus on staying current on your payments, build a good credit history, and refinance for a longer period of time. One way or another, the lender is going to pursue repayment.
When we walk through the federal repayment options, you’ll see that, despite the complexity and variety of repayment options, the rules are uniform. With private lenders, the rules are not uniform and can vary from lender to lender.
Whether