2721: When You Should & Shouldn’t Refinance Your Student Loans by Travis Hornsby with JackieBeck.com

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[00:01:24] When You Should and Shouldn't Refinance Your Student Loans by Travis Hornsby with

[00:01:29] JackieBeck.com. And I'm your host and personal finance enthusiast, Diana Merriam.

[00:01:35] Now let's get right to today's post and start optimizing your life.

[00:01:43] When You Should and Shouldn't Refinance Your Student Loans by Travis Hornsby with JackieBeck.com.

[00:01:51] Did you know there's currently $1.44 trillion in student loan debt in America?

[00:01:57] That's an astronomical amount of money. So if you have student loan debt, you aren't alone.

[00:02:03] Student loans were meant to help students and they have. But they've also created a huge

[00:02:09] source of heartache and stress for millions of people. For most borrowers, student loan debt

[00:02:15] lingers for years. It starts to affect future plans like buying a home and even starting a family.

[00:02:22] What can you do about it? Of course, you can add them to your debt snowball or debt avalanche.

[00:02:29] But one way that borrowers have tackled their student loan debt is through student loan

[00:02:33] refinancing. We're going to go into detail on that here. If you're up to your elbows in debt and want

[00:02:40] some relief, refinancing your student loans might save you money, but it's not for everyone.

[00:02:46] Here's what you should know about student loan refinancing, reasons people choose to do it,

[00:02:52] and whether it might be right for you. What is student loan refinancing? Student loan refinancing

[00:02:59] is simply getting a new private student loan at a new interest rate that will replace the old one.

[00:03:06] Your old student loans are paid off with the new one that's created.

[00:03:10] You can refinance federal and private student loans through online lenders,

[00:03:15] banks, and credit unions. Your new student loan will have different repayment terms

[00:03:20] and a new interest rate based on several factors, including your credit.

[00:03:25] Refinancing your student loans is different than loan consolidation.

[00:03:29] Student loan consolidation combines all of your federal student loans into one loan.

[00:03:35] Private loans aren't eligible for consolidation through any federal programs.

[00:03:41] Refinancing can combine multiple loans into one as well. The difference is that refinancing

[00:03:46] generally has an interest savings you don't see with consolidation.

[00:03:51] When is student loan refinancing your best option? Refinancing your student loans could cut

[00:03:58] thousands, if not tens of thousands of dollars off your student loan debt. You may be surprised

[00:04:04] how much you can save if you can secure a good interest rate. With that said, there are times

[00:04:10] when you should and shouldn't turn to refinancing. So when could it be a good idea to refinance your

[00:04:16] student loans? Number one, when your student loan interest rate is above 5%. If your student

[00:04:24] loan interest rate is above 5%, explore what's available through refinancing. Depending on your

[00:04:30] credit, it's very possible you could get an interest rate of 3% right now. Look at your student

[00:04:36] loan debt, then use a student loan refinance calculator and see what kind of difference a 2%

[00:04:42] swing in your interest rate would make. Number two, when you work in the private sector.

[00:04:49] Why does where you work matter? Because of public service loan forgiveness or PSLF.

[00:04:57] A requirement of PSLF is working for a qualifying employer in the public sector,

[00:05:02] like a government agency position or nonprofit. Not-for-profit 501c3 organizations all qualify

[00:05:10] for PSLF. But if you work in the private sector and have no desire to work elsewhere,

[00:05:17] then you won't be missing out on the huge payoff available with PSLF. And number three, when you

[00:05:24] already have private student loans. If you already have private loans, why not refinance them? You

[00:05:31] can get a lower rate and you won't be losing out on any federal protections because you don't have

[00:05:37] any to lose. You can refinance your student loans more than once, which can improve your credit,

[00:05:43] and then refinance again and score even better terms and a potentially lower rate.

[00:05:48] If one or more of these scenarios applies to you, consider looking into refinancing options

[00:05:54] to see if it's the right choice. And when shouldn't you refinance your student loans?

[00:06:00] As many reasons as there are to refinance your student loans, there are also times when it's not

[00:06:05] a good option. If these reasons apply to you, it's better to look at other repayment strategies that

[00:06:12] make more sense. Number one, when you don't have three months worth of expenses saved.

[00:06:18] Most financial experts agree that people should have somewhere between three and six months worth

[00:06:23] of expenses saved as an emergency fund. Why does this affect refinancing? When you refinance, your

[00:06:30] federal student loans become private loans and you lose access to federal protections like deferment

[00:06:36] and forbearance. Should you run into financial trouble, programs like these come in handy.

[00:06:42] You need to be sure you can cover all of your expenses before choosing to refinance.

[00:06:48] Number two, when you have credit card debt. Credit cards usually have extremely high interest rates

[00:06:54] and the debt can grow quickly if you're only making minimum payments. It also affects your

[00:06:59] credit rating which is one of the main factors in landing a good refinancing interest rate.

[00:07:05] Having credit card debt can keep you from taking full advantage of a good interest rate.

[00:07:10] That's the main draw of student loan refinancing. Without a lower interest rate, it's usually not

[00:07:15] worth it. The one caveat to this rule is if your student loan payment is preventing you from paying

[00:07:21] down your credit card debt. Number three, when you want to be eligible for income-driven repayment

[00:07:28] plans. Only federal student loans are eligible for income-driven repayment plans or IDR plans.

[00:07:36] IDR plans base your student loan payment on your income. This is especially helpful if you're in a

[00:07:42] career field with lower salaries or are in an entry-level job. Number four, when there's even a

[00:07:49] chance you might qualify for PSLF. If you have a shot at PSLF or may down the road, you shouldn't

[00:07:57] refinance your student loans. At a minimum, you should explore your PSLF options first. PSLF can

[00:08:04] be such a great program for borrowers especially if you have over 50 grand in student loan debt.

[00:08:10] PSLF does have many requirements and you need to keep a paper trail to ensure you qualify.

[00:08:16] If you can qualify for PSLF though, it will all be worth it. And number five, when you're paying

[00:08:23] off your loans soon. If you're close to paying off your loans, it doesn't make sense to refinance.

[00:08:29] You might save some money through an interest rate deduction but it could also add time to

[00:08:34] your repayment terms. Unless there's a significant drop in your rate, just continue your current

[00:08:40] repayment plan and get rid of your debt. Is refinancing your student loans the right choice

[00:08:45] for you? Student loan refinancing is a great way to slash your student loan debt and pay it off

[00:08:51] quicker but it isn't the best choice for everyone. You could be giving up a lot of perks offered

[00:08:57] with federal loans. Sometimes the best thing to do is to spend your time and energy cutting expenses

[00:09:03] so you can crush your loan debt as quickly as possible. You just listen to the post titled,

[00:09:12] When You Should and Shouldn't Refinance Your Student Loans by Travis Hornsby with jackiebeck.com

[00:09:19] and I'll be right back with my commentary. Looking to part ways with complicated, expensive,

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[00:11:10] Travis, who wrote this article, actually founded a company called the Student Loan Planner to help

[00:11:16] people navigate the complex world of student loan debt. He's convinced me that there are really

[00:11:21] only two approaches to student loan debt. Number one, pay them off as quickly as possible. This

[00:11:28] is where refinancing may make sense. Or number two, pay as little as possible and use every

[00:11:34] trick in the book to maximize the amount of forgiveness you can receive.

[00:11:38] And this really boils down to how large the debt is. I recently met a new friend in the

[00:11:43] FIRE community who has $500,000 of student loan debt. No matter how aggressive he is on payments,

[00:11:51] the interest simply keeps his balance growing every month. So it makes the most sense for him

[00:11:56] to keep his federal loans and participate in an income-driven repayment plan. There are income

[00:12:03] driven repayment plans for federal student loans where your payments are cashed out.

[00:12:07] Your payments are capped at 10 to 15% of your discretionary income and then forgiven after 20

[00:12:14] to 25 years of payments. Note that depending on the program you enroll in, this could come with

[00:12:20] a big tax bill as your forgiven debt is seen as income. So you'll need to prepare for this.

[00:12:26] But even with the tax bomb, this option can make a lot more sense than standard repayment.

[00:12:33] If I had a mountain of student loan debt, I would definitely consult with an expert on

[00:12:37] the best repayment options as I find this topic incredibly complex. That'll do it for today. Thank

[00:12:44] you for listening. Have a great rest of your day and I'll see you on tomorrow's show where

[00:12:48] your optimal life awaits.