Welcome back for those of you who have been following our 4-part series on Tackling Your Student Debt with a Plan. For those who are just beginning this journey with us, please read the first article about Budgeting and the second article about Increasing Your Income. There’s a lot of valuable information about those two topics and how they relate to helping you pay down your student loans faster. Please check them out if you haven’t already. Today, we’ll be focusing on refinancing.

Part 3: Refinancing Your Student Loans (Macro-level)

Refinancing your student loans can be a one of the best ways to save by reducing the overall amount of interest you’ll be paying.  When you refinance, a new loan at a new (and often lower) interest rate is taken out while your old loans are paid off. Achieving a more favorable rate will depend on your income and credit health. The terms of the new loan changes including the repayment period as well as your monthly payment amount.  

Deciding on Your Repayment Terms

For some refinancing options, you can have the flexibility to either shorten or lengthen the repayment terms, thereby increasing or decreasing your monthly payment amount.  If you need more wiggle room with cash during the month, it may be more suitable for you to lower your monthly student loan payments and opt for the longer payment term.  If, however, you are in a financial position to pay a bit higher each month, you’ll be able to really shorten the payoff timeline while saving potentially thousands of dollars (for some, even tens of thousands of dollars) in interest.  Look below to see how changing the repayment terms may be more suitable for your financial situation.

Effects for Shortening Repayment Term

• Less (many cases, much less) interest paid over life of the loan
• Larger monthly payments
• Ability to pay down principal more quickly
• Great option for those with smaller loan amounts

Effects for Lengthening Repayment Term

• Smaller monthly payments
• Pay more interest in the long run
• Free up monthly cash if finances are tight
• May be feasible for those with larger loans to better manage monthly budget

Fixed-Rate or Variable-Rate Loans?

There are two types of loans related to the interest rate that’s charged to the loans.  A fixed-rate loan is one where the loan’s interest rate will not change.  A variable-rate loan is one where the interest rate does change depending on interest rate market factors like the LIBOR rate.  Below are things to consider when choosing between either option.

Reasons for Fixed-Rate Loans

• No surprises regarding increases in monthly loan payments
• Better choice if your repayment terms are longer. Won’t have to worry about interest rates increasing over a longer time period
• Overall, less risky to your monthly budget due to payment amount stability

Reasons for Variable-Rate Loans

• The interest rate options tend to be lower than fixed-rate options, often significantly lower
• Better choice if interest rates are moving lower or holding steady
• Savings may be greater if you intend to pay your loan off early due to a lower initial interest rate

If you are going to go with a variable-rate loan, find out how often the rate changes.  Some loans will change monthly while others will change every quarter.  It just depends on the refinancing lender.  There may also be caps on how high the variable-rate can go.  Please do your due diligence in figuring out which is best for you.

* Easy saving tip: Additional 0.25% interest deduction *

In the conversations I’ve had regarding student loans, I’m surprised how many people don’t know or don’t take advantage of this benefit to save money. Many loan providers will deduct 0.25% off your interest rate if you set up automatic deductions for your monthly payments. This simple and easy change will instantly shave the amount you’ll have to pay in overall interest while never having to forget a payment.

Yellow light: Caution for some

A word of caution if you are considering refinancing: It may not be for everyone! Again, getting approved depends on your credit and income. If you are worried about your income stability, please read the second article of our series on Increasing Your Income. A new loan provider may not allow the flexibility to allow forbearance or payment deferment options, especially when compared to federal loan providers. Therefore, your focus may need to be more on how you can stabilize your income. Also, if you plan on seeking loan forgiveness options, refinancing your federal loans to a private lender won’t be possible as they do not offer those forgiveness options.

----

AlumSum is on a mission to be the best student loan management tool you need to stay on top of all your student loans and save you time and money on paying them down.  Please join our email list here to become one of our first users.  When you sign up you will also get a link to a sample Google Sheet Budget that’s based on my own personal monthly budget.  You can copy and save the sample, then change the categories of expenses to better suit your situation.  If you’ve never budgeted before, it’s a great first step on seeing where your money is going.

Thanks for reading and stay tuned,

James Y Kim

Founder of AlumSum