Are you dealing with thousands of dollars in student loan debt? You are not alone. According to studentloanhero.com, the average graduate from the Class of 2016 owes $37,172 in educational debt. While student debt can be daunting, it's important to take the advice of Millennial Money Expert Stefanie O'Connell: "The best thing you can do about tackling your student loan debt is to be proactive."
If you have a decent job lined up and a superior credit rating, you have an extra tool in your proactive repayment arsenal – refinancing. According to Adam Carroll, Founder and Chief Education Officer of National Financial Educators, "The student loan refinance business has absolutely boomed over the last five or six years."
The reason for the boom, according to Carroll, is that student loan interest rates are relatively high – up to 9% in some cases. Refinancing becomes a reasonable option for those who can qualify for lower rates based on new income and a relatively clean credit history. You can check your credit score and read your credit report for free within minutes using Credit Manager by MoneyTips.
According to SoFi, student loan borrowers can save an average of over $22,300. In one case, you can even earn frequent flier miles through refinancing your student loan. Loan refinance group SoFi has partnered with JetBlue to offer one TrueBlue rewards point for every $2 refinanced, up to 50,000 points.
However, you must do your homework before refinancing. Carroll suggests, "If you have a significant number of loans and you're just looking to refinance, but you're not doing the math or you're not fully educated in your options... take a step back. There's plenty of information out there online about all the products and programs that are offered."
First, it's important to understand your existing student loan terms and the protections that you have. If your student loans are private, it's simply a matter of comparing interest rates and loan terms with your current and expected income – doing the math, as Carroll says. However, Federal Student Loans come with repayment options and protections such as forgiveness, cancellation, and forbearance. Be sure that your income is secure enough that you will not need these options – because once you refinance through a private lender, those options are gone.
Debts from medical school and law school are prime targets for refinancing, because both debt loads and post-graduation incomes are usually quite high. However, you can save considerable money regardless of the amount you owe or make, as long as your credit score warrants a lower rate with more favorable terms than your existing loan and those terms result in monthly payments that you can afford.
Shop around for vendors and compare your options. At current rates, you may be able to qualify for variable-rate loans below 2.7% and fixed rate loans below 3.4% – but make sure that you include closing costs and fees in your comparison calculations.
If you are interested in refinancing but don't have a sufficient credit score to make refinancing viable, make an action plan to bring your score up to a suitable level. Make sure that you are paying all bills on time. Use a budgetto control your spending and avoid credit-score killers like high credit utilization and credit balances that are increasing faster than income. Seek counseling from a financial professional if you can't seem to make any progress.
Refinancing a student loan is not for everyone – but don't dismiss it out of hand just because you don't make a six-figure salary. It all depends on your financial stability and whether you qualify for a better rate based on current conditions. At lower salary levels, it's even more important to save as much money as you possibly can.