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Should I Refinance My Student Loans to Lower the Interest Rate? – Jessica

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Question:

Dear Steve,

I have a total of $12,514.34 in school loans between three loans with Navient. Loan 1-03 is subsidized and has a total balance of $2072.68 left with an interest rate of 4.5%. On loan 1-02 (unsubsidized) I have a balance of $5459.83 with an interest rate of 6.8%. My last loan 1-04 I owe $4991.32 (also unsubsidized) with an interest rate of 7%.

I signed up for IBR a while ago and am still apparently on it. If I keep paying the minimum payment I will have it payed off in 2023. I am not sure if they are federal loans but I think so. I couldn’t tell by looking on my account online.

I am writing because I am highly considering considering refinancing my existing student loans. My goal is to have a lower interest rate and hopefully a lower monthly balance. I pay about $150 for the last two loans and I have paid extra on my first loan so I don’t currently owe on that.

I have worked my butt off and paid off over half the balance already. However, I have more responsibilities now (I bought my first house, have a car payment and have my first child on the way).

I do not know enough about refinancing school loans to be able to make an informed decision. What are the pros? Cons? Is it better to just chuck away and make payments? If it is better to refinance, do you recommend any company?

I really appreciate your advice, I am an avid reader of your newsletters and articles.

Thank you!

Jessica

Answer:

Dear Jessica,

Well thank you for being an avid reader. That’s awesome.

The easiest way to tell if your loans are federal or not is just to login to the National Student Loan Data System (NSLDS) and take a peek. If the loan is listed there, it’s federal.

But since you said you enrolled in the IBR, that’s only for federal loans so that might be an additional clue.

I’m not certain you’d find a much better rate than what you have with the Direct Loan for consolidation. The interest rate is dictated by law.

If you attempted to get a private loan to consolidate the federal loans you would be converting federal student loans to private student loans and lose all your forgiveness opportunity and income driven payment choices. It would be a bad move.

So the path to get everything consolidated into the lowest cost income driven repayment program is to follow this procedure as described by the Department of Education.

“You apply for a Direct Consolidation Loan through StudentLoans.gov. This process offers both electronic and paper options. You can complete the electronic application as explained below or you can download and print a paper application from StudentLoans.gov for submission by U.S. mail.

Once you sign in to StudentLoans.gov, you will be able to electronically complete the Federal Direct Consolidation Loan Application and Promissory Note. The electronic application on StudentLoans.gov consists of the following five steps:

1. Choose Loans & Servicer
2. Repayment Plan Selection
3. Terms & Conditions
4. Borrower & Reference Information
5. Review & Sign”

Now keep in mind, at the end of the 20 to 25-year IBR repayment period your loans are not paid off, but forgiven. As it stands now that forgiveness may be considered as taxable income. Additionally, if you don’t stick with the IBR or similar program you can get caught in this trap.

You ask what the best approach is and that’s a tough question. When you have competing goals there has to be some tradeoff. For example, a lower monthly payment now through an income driven repayment program would be be best if you need the room in your budget to be able to save or contribute towards your retirement.

If the goal is to payoff the loans in a reasonable period of time then the standard 10-year repayment plan is a good approach.

Your best bet is to let the math provide you a clue what makes sense for you. Consider your current income and expenses and compare that with your current and future obligations and goals.


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