There has been a growing concern around student loan debt for quite some time. The New America
Education Policy Program reported in 2012 that about 40 percent of all study loan debt was
from graduate students.
Why is this important? One in four borrowers took out more than
$100,000 in loans, according to the study, and interest rates for graduate
programs can be 50 percent higher than what their less-leveraged undergraduate
counterparts can expect.
Is there anything you can do about your federal or Direct PLUS student loan debt?
There
are three main options:
1.
Take no
action. Depending on your interest rate and financial situation, you
may be best suited to take no action at all. Refinancing or consolidating will
limit flexibility in the future for loan deferment, forbearance and
forgiveness. Since there is no prepayment penalty, you have the flexibility to
make additional payments to the principal of your loan as your income changes
without getting locked into a higher monthly payment.
2.
Consolidate.
Designed to help simplify payments on multiple loans, some borrowers decide to
consolidate their loans into one. By consolidating
your loans, a new interest rate will be applied, based on the weighted average
of the loan balances and associated interest rates. This approach is typically
not advisable as it usually costs more over the life of the loan and limits
your ability to refinance only a portion of the loan in the future. Since
automatic payments can be set up and managed easily online, there is little
need for consolidation.
3.
Refinance. The
decision to refinance student loans can save some borrowers thousands in
interest expense over the life of the loan. Similar to most credit
applications, your eligibility and rate will be determined by numerous factors,
such as your income, credit score and total outstanding debt. Strong candidates
can see a dramatic reduction in their interest rate – even a few points. It
isn't right for everyone though, and there are some very important caveats to
consider.
With only a few exceptions, it is generally advisable for all
student debt holders to at least explore a refinancing scenario. Depending on
how long you've been out of school, your annual income and credit history is likely to have improved. One of the
main factors for the interest rate you may qualify for is current market
interest rates, which are currently very low.
Why
doesn't everyone refinance?
There are a few good reasons why refinancing isn't for all
borrowers. Many of the big student loan refinancing lenders only consider
candidates with excellent credit and income profiles, sometimes even limiting
which academic institutions are accepted. Refinancing also tends to cost more
in the short term, which not all borrowers can afford. Refinancing typically
requires the borrower to enter into a shorter repayment period, often five to
15 years. Even with a reduction of one or two points on your interest rate,
shaving five to 10 years off the life of the loan may result in monthly
payments outside your current budget.
Refinancing federal student loans to a private lender also has
lesser-known implications. Federal loans have benefits such as loan deferment
and forbearance, which can help a
borrower when they're having financial struggles. Depending on which you
qualify for, you may be granted a period in which you can defer all loan
payments, or at least only pay interest. When refinancing to a private lender,
you lose these options, along with student loan forgiveness. Finally, if
someone dies with outstanding federal loans, the balance is forgiven. With
private lenders, this is not necessarily the case, especially if there is a
co-signer on the loan.
If you're financially secure and think refinancing could benefit
you, shop around a bit to find the best rate. That ultra-low variable rate may
look appealing, but for the vast majority of borrowers, the risk isn't worth
the reward, especially for those carrying high balances. If you have multiple
loans outstanding, it probably makes sense to start with the highest balance or
interest rate. Trying to tackle all your loans at once may not be feasible, but
depending on the amount of debt, you can still save thousands by choosing one.
Most refinancing lenders do not charge any fees to refinance,
and some even offer bonuses. Before signing on, be sure you're comfortable with
the terms and check if there are prepayment
penalties, as you may want to put a bonus towards your loans or refinance again
in the future. As a final consideration, ensure the new monthly payment is
within your budget and doesn't derail any other financial goals. If you're
saving up for a down payment on a home, you may not want to divert an extra
couple hundred dollars each month to your loans should your payments increase.
While interest rates remain low, consider your financial
situation and whether it could be a good opportunity to refinance student loan
debt. While the stock market cannot guarantee returns, by locking in a lower
fixed rate on your loans you can actually calculate a guaranteed rate of
savings over the original loan. As part of a diversified savings and investment
approach, capitalizing on historically low rates by refinancing existing debt
could be a good option for investors of any risk tolerance.
Source from: http://money.usnews.com/money/blogs/the-smarter-mutual-fund-investor/2015/09/02/now-could-be-the-right-time-to-refinance-your-student-loans
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