Student loans are something that many people have and struggle with. In fact, a recent article from Student Loan Hero highlights the average student loan debt for Class of 2017 graduates was $39,400*, up six percent from the previous year. For some folks who have been out of school for a while, having student loan debt can be a major weight on your shoulders and prohibitive to living the life you want to lead. Having a clean slate can be empowering, and understanding the tools you have at your disposal to help with student debt is important. Below I will go through my journey with student debt, and some of the tips and tricks that I have learned along the way.
My Introduction to Student Debt
My parents came from modest means. My dad was a career military man (Air Force) and my mother worked at the local elementary school. They didn't have the schooling or knowledge about managing money, so when it was time for college, we all had to figure out how to pay. A mix of scholarships and grants helped, but a good majority was paid for with student loans. As an 18 year old, I didn't really get the concept of what was going on - I just knew that somehow tuition was paid and both my parents and I had figured it out. The biggest punch in the face, however, was junior year of college when I got a first hand taste of how student loans worked. A little backstory, which would can read in this article can give some context. Long story short, my parents were working two jobs, and I could see the physical toll it was taking on them. I asked them "if I can pay for my senior year myself, will you quit one of the jobs?" They reluctantly answered yes, so I went about researching about how to get loans to pay for college.
Securing Student Loans for College
I frantically was googling any and every search term I could to find student loans. As a 20 something college kid, I didn't have a lot of credit available, and while I did have some income history from internships, I was still in college. Back in 2005, there was a lot of private lenders that were willing to lend to me.
Federal loans usually are your best option. Subsidized loans offer lower interest rates, better deferment and forbearance options to delay payments or interest and options for cancelling the entire debt. Overall, the gov’t is a lot more lenient with you.
Private loans, on the other hand, can vary significantly in their prices and repayment options. Typically, if you have good credit you can get very low-interest rates, but they can also be significantly higher than the fixed federal rates. I was basically maxed out on my federal loans, so had to go with the private option. I remember the interest rate I had to carry on the $25K loan - 11.25%. You are reading that right. I had to take out the loan, though, so that I could take the burden off my parents. Fast forward to graduation, and I was the proud holder of a BA from college and $72K in student loans.
Figuring Out Repayment
Thankfully, I had a decent job coming out of college and made a good income. As a fresh face out of college, I didn't know about the options for loans. At first, I was dutifully paying my monthly installment (around $775/month). This was on a 30-year fixed rate, and most of that amount was on interest. This was eating up a sizeable portion of my take-home pay (~25%) and had to figure out something. Not to mention I was paying four different lenders because I was paying both federal and private loans and each had different servicers. I found out about refinancing through word of mouth and also through good old Google.
What is Refinancing?
Refinancing is the process of replacing an existing loan with a new loan.
The new loan pays off the current debt, so that debt is not eliminated when you refinance. However, the new loan should have better terms or features that improve your finances. The details depend on the type of loan and your lender. There are number of reasons why you would want to refinance - many of the reasons below applied to me at the time and may also to you.
Save money
You can save money on interest costs primarily. Let's say you have an 11.25% loan like me and refinance into a 5% loan. You are immediately paying less interest over the life of that loan and can result in significant long term interest savings.
Lower Monthly Payments
This can help improve your cash flow (my payment went from $725 to $301/month). This helps to budget for other expenses and you can always pay more if you have a little extra cash left over. Payments can also lower by extending the life of the loan - for example going from a 5 year loan to a 10 year loan allows you more time to repay and can have a lower payment.
Shorten the loan term
If you want to pay off your loan faster, ou can refinance into a shorter (vs. longer) loan. This can make sense if you want to get rid of debt quickly and make large payments. You can also just make larger payments as I referenced above without financing and accomplish the same goal.
Debt Consolidation
Remember the four loan payments I was making? Having multiple loans is a pain, and putting them all into one can simplify your payments and have some of the benefits mentioned above. It's like if you owe $10 to Jill and Jack, and Jack owes your $10 to Jill. Instead of paying $10 to both Jack and Jill, refinancing is like paying only $20 to Jill. It is also easier to keep track of payments and loans.
There are other reasons including changing loan type (fixed to variable or vice versa), but won't get into those here.
Where I am today with Student Loans
Going through the learning process of how to manage student loan debt has left me empowering. While I still have $32K remaining, I have a plan in place to pay down these loans (which have all been refinanced)! One of the best options I have found in today's environment is a refinancer named SoFi (short for Social Finance). I actually used this company in 2013 to refinance some student loans and had a great experience. They offer competitive rates for refinancing and also a lot of other products too.
While I still have debt remaining, the interest rate is low enough (under 4%) that I am not overly concerned with the amount. I do, however, have a lot of information about the process that (hopefully) is helpful to you for your own student loan journey. Feel free to leave comments if you've found this helpful!