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When is the best time to refinance your student loans?
The truth behind that question is a really loaded answer. You did what you thought would create the most options for you by going to school and now you have student loan debt. You are debating whether to pay the minimum, use PSLF if you qualify, or maybe even refinance. What does all of this mean for your future?
For starters, my post addresses the subject of refinancing student loans. Student loan refinancing is a question that comes up time and time again, with people looking to lower their payments and find lower interest rates. But is refinancing the best option for you?
As always I aim to be transparent and I will always start by saying this – sometimes what is good for one person does not mean it is good for you, especially when it comes to refinancing student loans. For example, I haven’t refinanced our student loans because it would remove the debt to income ratio perks,
Yes we paid off $57,000 in student loans in 2017 (almost $5,000 a month), but if we were to have a kid or if something happened, we would struggle to keep paying off our loans at such a high rate. Hence, we could always fall back on the debt to income DTI repayment plan. So consider these things before you refinance:
4 Items to consider before refinancing –
- Are your student loans private or federal loans?
- Are your loans subsidized or unsubsidized/can you defer or be forgiven?
- What does the breakdown of each loan account look like?
- Does it significantly help or hinder your cash flow?
Private vs Federal Student Loans
Student loan refinancing changes the terms of your loan.
New terms and conditions often come with a better interest rate. Refinancing can either extend the length of payments or shorten, depending on where you are in the process of paying back your debt. However, when you refinance a federal loan you lose some of the federal protections.
Unlike federal student loans that come with borrower protections such as deferment, forbearance, grace periods and income-based repayment options, private loans are not required to offer any of these. Something to consider before refinancing.
Additionally, private loans sometimes require a cosigner, aka someone who will assume the payments if you default. I recently read a horror story about a co-signing mother who has her wages garnished to pay for her son’s private student loans (Why she let him get a degree in jazz guitar and take out $75,000 to do it is an entirely different question).
Subsidized, Unsubsidized, Defer, Forgive
The two most common words associated with student loans (Besides – they suck!) is subsidized and unsubsidized.
Does the loan gather interest at all times (unsubsidized) or after your graduate (subsidized)? Throw in defer and forgive and student loans become very unique case by case. For example – if your loans are unsubsidized, deferment is not a great option.
If you can defer or even get your loans forgiven (as a Special Education teacher I had a very small % forgiven) then it is important to take this into consideration before refinancing. Deferment is a huge asset when the loans are subsidized. Private loans do not defer payments, even when you pay ahead.
Read more about student loans here: 11 Secrets to Refinance
How do your student loan accounts break down?
Most student loans are not one loan (like an auto loan). Often, student loans are comprised of a bunch of little student loans, you just happen to make one payment. The bad part about this – your money is spraying and never really attacking the principal. The good part – if you pay extra you can specifically target individual loans.
By targeting individual loans, you can pay them off quicker, freeing up cash to go towards the next loan and so on, using the debt snowball method. Refinancing all of your student loans or consolidating may lower your payment, but now you are limited to as how you attack your loans. Flexibility can be lost.
(I personally do not recommend consolidating your loans – a lower interest rate on a larger principal ends up costing more in the long run)
Cash flow is vital when it comes to paying down student loans. We personally funnel as much as we can into our HELOC in order to make large principal payments on our student loans.
For starters, consider seeing where you can free up cash flow. Cutting the cable, lowering cell phone costs and quickly paying off cars are a great start. Does it make sense to pay off the loan that will free up $8 or $350 (that was a real scenario for us)?
The answer would be the loan that generates $350 in cash flow to put towards other student loans. Sometimes refinancing can lump all loans together and hurt cash flow, which is why we are waiting to refinance. To understand more about the cash flow index here is a really good read at Abandon Cubicle.
My take on student loan refinancing – it depends on your situation and goals.
Do you plan on knocking out your student loans as fast as possible? Or do you plan on just paying the minimum with some extra here and there on your student loans?
Your answers to these questions, along with the 4 questions earlier in the post, will determine whether refinancing is the best option for you.
If refinancing is the best option for you I hands down recommend LendEDU. Filling out their 90 second questionnaire will get you personalized quotes from their vetted partners like SOFI and Lendkey. The coolest thing about LendEDU – their number one priority is transparency and saving you money!
With the student loan industry, transparency is lacking. However, LendEDU is top notch when it comes to education and being transparent.
Click here to complete their 90 second questionnaire if you are ready to research refinancing and you will get a special offer from my exclusive link.
Personally, our situation is very unique. When we started paying off my wife’s student loans from graduate school alone, the total exceeded $150,000.
Refinancing was not an option because the monthly payment would not have been affordable. We would have lost her income based repayment plan. Luckily for us, with the debt acceleration program we use by optimizing our equity, we had some options.
Currently the total is over $110,000. Once we knock the balance down to approximately $60,000, we will take advantage of LendEDU and refinance (once again, every situation is unique).
Q: Is refinancing is the best option for you? Comment below!
Read more about how we were able to pay off $57,000 in 2017 alone here!