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Is Right Now the Time to Refinance Those Student Loans?

America has a real debt problem. With the national student loan debt now sitting somewhere around $1.6 trillion, it’s very clear that you need to seize any opportunity you can to diminish your contribution to the statistic. 

Low-interest rates make the present an incredible time for you to refinance your student loans. Indeed, it is only through refinancing that you will be able to take advantage of these low rates anyway. In this article, we explain how interest rates and refinancing work to help you better understand the unique position borrowers are currently in.

How are student loan interest rates determined?

Federal student loan rates are set annually. The determination happens in May and is a response to the 10-year treasury. This means that the low rates we are seeing right now will have no bearing on what you pay for your own loans—with one exception.

Borrowers that refinance into the private loan sector will be able to immediately take advantage of the new rates. Loans in this sector tend to be more flexible and can be either fixed or variable. Terms may also be more tailored to your situation.

For instance, private loans may be informed by variables such as your credit score, your terms of employment, your income, and possibly even your education. Private loans often move in fluctuation with the 1-month LIBOR (London Interbank Offered Rate). 

In response to Covid-19 and its impact on the market, the Fed has cut rates substantially—an opportunity that puts borrowers in a unique position. However, going in with a strategy is key to ensuring that you experience all possible benefits.

Student Loan Refinancing Strategies

You can’t go into refinancing blind and expect to see good results. The situation is no different than any other financial determination: without a strategy, it’s probably not going to go very well.

Shop Around

Don’t assume that all lenders are the same. For one thing, rates may vary from place to place. Terms can also vary from place to place. For example, some lenders may tailor their policies to specifically suit a certain type of person. Said customers then receive favorable terms. 

Consequently, you will find it to your advantage to seek programs that are the most specific to your situation. It is in doing so that you will get the best possible rates. 

Consolidate or Refinance?

There is more than one option as you reconsider your borrowing situation. When you refinance, your loan is taken to a new entity. This lending company pays off your previous loan and then sets the entirety of your debt into a new loan, complete with a different interest rate, and possibly, unique terms. 

Consolidating is a little bit different. When you consolidate your loans, all student debt is lumped together in a single entity and fixed into a new rate that accounts for the average of your loans. 

Consolidation does not see all of the potential benefits that can be derived from refinancing but does win out in a single key category—simplicity. You lose out on flexibility but benefit from the straightforwardness of the maneuver. 

Timing is Everything

You can address your loan situation in a piecemeal sort of way if that is most suitable to your situation. For example, if money is a little bit tight, you may find it most sensible to go after loans with higher interest rates first, and then work from there. 

Bear in mind that lifestyle factors may also determine whether or not now is the time to refinance. Refinancing can have a temporary impact on your credit score, and may also tighten your cash to debt ratio in the short term.

Consequently, it may not be optimal to refinance if you are in the middle of a major purchase (a house, a business, etc.). You can, however, still benefit from tackling loans with the highest interest rates. 

You Should Try to Do Everything at Once (But You Don’t Have to)

That said, the faster you refinance for better rates, the sooner you enjoy long term savings. If your finances permit it, locking into the most advantageous rates possible will make the most sense for your financial health. 

However, monthly expenditure does typically go up when you go from a federal loan to a private one. The reason for this is simple: shorter loan periods. For example, if you go from a 30-year federal loan to a 15-year private loan, your monthly payments may go up significantly. 

You save in the long run, but you also put yourself in a potentially precarious situation. If something in your finances changes, or if you encounter a sudden emergency, your new loan situation could quickly become burdensome. 

Account for these variables as you consider your situation. If you can tackle all of your loans at once, great. However, you should still note that you can reap benefits just by targeting one or two high-interest loans.

The Best Rate That Works for Your Finances

It all comes down to finding the best rate for your finances.  This could even mean prepaying loans, and/or combining a repaying approach with a refinancing option. 

When you prepay loans, you aren’t changing your rates, but you are saving money on interest in the long run. This is particularly advantageous if you want to keep your monthly finances a little bit more flexible. 

What You Need to Know Before Refinancing Your Student Loans

Understand that by refinancing, you may lose out on special opportunities (deferments, etc.) that are only available on the federal level. Once you refinance privately, you will remain in that situation for the life of your loan. 

Refinancing may not be right for people who aren’t prepared to repay their loans relatively quickly. Consider your personal finances as they relate to your loans before making any decisions.

Short Answer:

The majority of you should refinance.

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2019 U.S. Student Loan Debt Statistics | BYE Student Loan Debt

2019 U.S. Student Loan Debt Statistics

Student Loan Statistics: Overview

Total Student Loan Debt: $1.56 trillion

Total U.S. Borrowers With Student Loan Debt: 44.7 million

Student Loan Delinquency Or Default Rate: 11.4% (90+ days delinquent)

Direct Loans – Cumulative in Default (360+ days delinquent): $101.4 billion (5.1 million borrowers)

Direct Loan In Forbearance: $111.1 billion (2.6 million borrowers)

(Source: As of 4Q 2018, Federal Reserve & New York Federal Reserve)

Across numerous forums of American public life, we hear over and over again how extreme and out-of-control the current crisis in the student loan system is. Although, few people besides the experts take the time to delve into the statistical specifics; understandably so, as the numbers are often very dense and boring, and someone else’s emotion-packed description of ‘what’s going on’ with the loan system usually does the job of cuing our partial-attentions just fine. But if more people would familiarize themselves with the specifics and statistics of the student loan crisis, then perhaps the issue would become that much easier to address, due to there then being more-informed participants on every front of the workings of the student loan system. Because, make no mistake, you are, in some large or small sense, a participant in the workings of the student loan system.

As of 2017, 65% of graduates with bachelor’s degrees took student loans, and, on average, left college with $28,650 of student debt. Students who pursue professional degrees take on much, much more. For the class of 2018, the average medical school graduate has $196,520 in student loan debt; the average graduate of dental school leaves with $285,184; and those that attend pharmacy school, on average, accumulate $166,528 in student loans. Combined, 2019 borrowers of both federal and private student loans in the United States collectively owe 1.56 trillion dollars.

Coasting above the data with an eagle-eye perspective, the first thing one notices about the current standings of the loan system is that 92% of all outstanding student loans are federal loans, owned by the Department of Education. That percentage is an A in a college course. 43 million Americans collectively owe $1.4 trillion in federal student loans – the remaining 7.63% of outstanding student loans are privately owned and represent a total of $119.31 billion. Of these 43 million borrowers with federal loans, 18.6 million are in repayment, 2.7 million are in forbearance (a period up to a year in which monthly bills on federal loans are halted, but interest continues to accrue at the regular rate), 3.4 million are in deferment (a period of variable duration in which monthly bills on federal loans are halted and also cease accruing interest), and 5.2 million borrowers have defaulted on their federal student loans. Of the borrowers with outstanding private student loans, 18.01% are in deferment, 2.39% are in forbearance, and 1.75% are in repayment but are 90+ days past due on their bills – presumably, the remaining percentage of private student loan borrowers are currently in accordance with the terms of their repayment

Some other somewhat perplexing statistics that exemplify the personal mismanagement and broader misconceptions of the loan system have to do with the needless abandonment of monies meant to pay the high costs of college, and not the necessary borrowings of them. The Free Application for Federal Student Aid (FAFSA) is the online document offered by the federal government that entitles the persons that fill it out access to federal student loans, and free grants, scholarships, and work-studies for which they prove eligible. There is not really a good reason for a prospective college attendee  to complete this document. Yet, over a third of the high school students in the graduating class of 2018 did not fill out the FAFSA. Each of these graduates that did not fill out the FAFSA, and was eligible to receive a Pell Grant, left on average $3,908 dollars of federal funding on the table – funds that they would not have had to repay. The total amount of federal funds left on the table by those in the high school graduating class of 2018 who failed to complete the FAFSA totaled 2.6 billion dollars. 

These astonishing statistics begin to shed some light on the many smaller issues that comprise the current crisis of the student loan system. 

How Much You Really Pay for That Student Loan: Breaking Down the Numbers

 Today, those that graduate college with student loans owe, on average, close to $30,000 and, over the coming years, they’ll likely repay more than that amount because of the rising rates of interest (the interest rate of the 2019-20 undergraduate class was 4.53%). The growing crisis surrounding the student loan system – the increasing rates of unpaid student debts and defaults on these loans – is likely due in no small part to the general confusion around the various repayment plans offered in the federal loan system, and the somewhat convoluted terms and nuanced differences between these repayment options. An analysis based on the interest rate of the most recent undergraduate class and that 30k average debt at graduation brings to light the details of the differences between the federal repayment plans, and provides more clarity about which plan would be best for you.

            The Standard Repayment Plan is the plan that all borrowers of federal student loans automatically start under, unless and until they opt to change to another repayment plan. A borrower with thirty-thousand dollars of student loan debt (with a 4.53% interest rate) would pay a monthly bill of $311 for 120 months (ten years) before their student loan balance was settled, and during that period they would pay a total of $37,311 after accounting for the added cost of the interest. Under the parameters of this plan, given the conditions of the example, more than seven thousand dollars would be added to the total of the loan.

            The next repayment plan offered by the federal student loan system is the Graduated Repayment Plan, in which monthly payments start low and then increase every two years until the full balance of the loan is settled. Taking the same input example of financial conditions, the Graduated repayment plan costs $39,161 – $1,850 more than the Standard plan due to additional interest costs, although the duration of the repayment periods are both 10-years. The Graduated Repayment Plan is a good option for those borrowers who expect their earnings to increase in the future, but due to the added interest costs of this plan, experts suggest trying to make the standard repayment plan work, if possible. 

            The Extended Repayment Plan lasts for 25-years, more than double the typical 10-year duration. In this plan, a borrower’s payment scheme can be either fixed or graduated. Paying off a loan balance of thirty-thousand dollars with this plan adds more than twenty thousand dollars in interest to the total: monthly payments of $167 for 300 hundred months (plus the accrued-interest) means borrowers that opt for this plan will pay $50,027. To even be given access to the Extended Repayment option, a borrower must owe thirty-thousand or more in student loan debt. Due to the extensive duration of the repayment period, and the monstrous amount of interest added to the total bill of the loan, the Extended Repayment plan is not the best option for most people.

            The final class of federal repayment options is the Income-based Repayment Plans, of which there are four. These plans base a borrower’s expected monthly payments on their discretionary income and the size of their family, and these factors are recertified and updated every year of the repayment period. Taking the same figures of student debt and interest rate, and assuming an income of $50,004 (and a 5% salary increase per year) with a family size of zero, a borrower will pay a total of $37,356 over a 110-month repayment-period. As you can see, under these specific circumstances the income-driven repayment plan costs about as much as the Standard plan. However, the income-driven repayment plans are typically used as a safeguard for borrowers that cannot afford their loans due to low income or astronomical loans, and in those conditions, monthly payments can be as little as zero. Furthermore, after twenty or twenty-five years of regular payments on the income-based repayment plan, the borrowers’ remaining balances are forgiven. Income-based repayment may reduce the monthly bills, but because you are paying off the student loans for a longer period of time, as in the Extended repayment plan, you will end up paying more in accrued-interest costs.

Income-based Repayment Plans:

  • Revised Pay As You Earn Repayment Plan (REPAYE Plan)
  • Pay As You Earn Repayment Plan (PAYE Plan)
  • Income-Based Repayment Plan (IBR Plan)
  • Income-Contingent Repayment Plan (ICR Plan)

            No matter the repayment plan you choose, there are some proactive ways to save money while repaying a student debt. One is to make payments during the grace period, the six-month window after graduation in which the federal government abstains from sending any bills to the borrower. Another method is to set up automatic payments to be taken directly from your bank account, which can cut down on the long-run costs of interest. If affordable, you can always pay twice in a month, chopping away at the length of the repayment period.  Finally, it would be wise to purchase the book BYE Student Loan Debt by Daniel J. Mendelson in which you can learn more ways to effectively manage and eliminate student loan debt, empowering yourself in the process.

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Forbearance, Deferment and Income-Based Repayment Programs for Student Loans

Today, approximately 70% of college graduates leave institutions of higher learning with significant amounts of student loan debts; over 44 million Americans collectively owe almost $1.5 trillion – that averages out to 1 in 4 American adults with student loan debts, with each having over $35,000 to pay off. With these record rates of exorbitant student loan debts, it is no surprise that many professionals – especially the younger, less experienced ones – are having a tough time keeping up with the payment plans to which they previously agreed.

When someone is struggling terribly to pay off their staggering student debts, they have a few logical courses of action to ease, if temporarily, this financial stress. The most common, and perhaps most treacherous, is called forbearance. This arrangement is quick and easy to set up, often requiring only one phone call to alter the status of your student loans to this state. But beware: while opting for a period forbearance will halt the barrage of monthly student loan payments for up to a year, these loans keep accruing interest at the regular rates. After the forbearance period ends, those compiled interest charges can hike monthly payments – making it more difficult than before to pay monthly student loan bills, especially if your overall financial situation has not improved during the forbearance period.

Another payment option, which has most of the benefits of forbearance, but less of its pitfalls, is deferment. Unsurprisingly, deferment is more difficult to set up than forbearance; you have to apply and qualify for this status, and eligibility is dependent on filing the necessary paperwork with a loan officer and reasonable need, including unemployment or continued enrollment in school at least half time. During a period of deferment (which is also more variable in duration than forbearance) subsidized federal student loans and Perkins loans do not accrue interest. Furthermore, if qualified for deferment, you retain the option to opt for forbearance at a later date if the need for further financial relief arises later.

An additional payment plan is the income-based Revised-Pay-As-You-Earn plan (REPAYE), which does not have any income requirements and can be accessed by those with very low or no income. In this plan, eligible borrowers will generally pay bills equaling ten-percent of their discretionary income (with a required recertification of income and family size every year), and, after twenty or twenty-five years of payments, the remaining student loan balance is forgiven. If – due to low income or abnormally high amounts of student loan debts – borrowers’ payments are not large enough to cover their interest costs, all or part of the interest accrued in this payment period will be paid for by the government.

Before defaulting on student loans, consider taking advantage of one or all of these repayment options.


If I Could Turn Back Time (on My Student Loans)

Today is Daylight Savings Time and despite your feelings on the matter, most of us turn our clocks back one hour.

The concept of turning back time has always fascinated people in modern times. It was popularized by H. G. Wells in 1895 with his novel The Time Machine and came to full-scale popularity in the current age with the likes of Back to the Future, The Terminator and yes, even in Cher’s 1989 hit “If I Could Turn Back Time.”

The reason why these stories are so entertaining to us as a society pertains to one thing – a sense of if you knew what you know now back then, you’d be better off.

We all have had those thoughts. If I only knew the lottery numbers. If I only found Jeff Bezos in 1997 and invested $5,000. If I could go back and stop Hitler (I understand why this is so popular, but I don’t know how people intend to do that when almost the entire world at the time was on the same page with you). If I could take back what I said to a loved one. I could keep going, but I think you understand the point.

The funny thing is that your college experience was probably not that different. I wish I hadn’t said this to that person. I wish I wouldn’t have worn that on Halloween. I wish I picked a different major. I wish I wouldn’t have taken a class called “Walk/Jog” and instead took Computer Programming. I wish, I wish, I wish.

Student loans are much like that too. I wish I would’ve started with the lowest introductory rate. I wish I would’ve consolidated as I went along. I wish I had someone to co-sign for my loans to bring the interest rate down. I wish I had someone that paid for my loans. I wish I went back in time and hit the lottery so I could pay this all off at once….

Statistics tell us that you most likely didn’t win the lottery and that you most likely still hold student loans. There are $1.5 Trillion in student loans with 44 million students carrying an average of $34,090 in student loan debt. Basically, there is a good chance you had, do have or will have student loan debt.

It’s easy to think about how to turn back time and change your current situation, but it’s hard to think about how to actually make that change. The truth is that it is fairly easy, you just need to get started and know where to start. Admitting that you have a problem is half of the battle.

After you are able to admit that you could be in a better place on your student loans, it’s important to take these next steps:
  1. Assess your situation – get your entire snapshot of where you currently stand
  2. Create a budget – create a budget with paying beyond the minimum for student loans as a bill
  3. Set a goal – we all falter here and life gets in the way, so it’s important to adjust as you go along
  4. Restructure & Refinance – there are many small tricks that can save you thousands of dollars in interest by the structure of your loans
  5. Eliminate – eliminate your loans in some order (descending from the highest interest rate, closest to being paid off, etc.)

There are many more little details that go into student loans, but at its base, if you follow these steps, you’ll be on the right track to eliminating your student loans.

Just think about what your future self would tell yourself now.

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Student Loans: How Do They Work?

Ever wonder how student loans actually work? Most of us have them, but there’s more than meets the eye.

Secondary education has become increasingly important for young professionals and increasingly expensive over the last couple of decades. As a result, it has become imperative that students understand the student loan process which seemingly becomes more complicated with time.

In short, there are federal loans and private loans. Federal loans are provided by the US Department of Education through federal funding in the form of Direct Subsidized/Unsubsidized loans, Perkins loans, PLUS loans, or Consolidation loans. Students apply for these federal loans by filling out a FAFSA form for student aid application, which allows you access to scholarships, grants, work-study programs, and other financial assistance along with federal loans if needed. Federal student loans provide a fixed interest rate (varies based on the type and when it is granted) and depending on the type of loan you receive the government might pay interest that accrues until you graduate. All of these federal loans generally include a 6 month grace period to allow students to get on their feet after graduating before making loan payments.

If you have a federal government loan, there are various service providers that manage your loan account and act on behalf of the government to collect payments after graduation. With federal government loans, there are numerous repayment options based on an individual’s financial situation, but the standard plan defaults to a 10-year repayment plan in equal monthly installments. The federal government also has numerous options to forgive, cancel, forego or delay student loan payments based on a number of programs. For example, by enrolling in the Student Loan Forgiveness program as a ten-year employee of qualified, not for profit organizations, you can apply to have your loans completely forgiven. Additionally, the federal government usually reduces your interest rate by 0.25% by consolidating all your loans and setting up automatic payments through your service provider.

If you are unable to qualify for student loans or need additional funds that the government will not provide, additional private loans are your only option through a private loan application (but should be used as a last resort). A number of private companies and banks provide loans to students similar to a car loan or mortgage. In general, these loans have higher interest rates compared to federal loans and they can have either fixed or variable interest rates. It is generally a good idea to try and get a cosigner (backer of your loan) for these types of loans in order to reduce your interest rates. Usually, these loans are higher interest and can be variable with lesser terms compared to federal government loans, as private companies see college students with no income as highly risky borrowers. Additionally, private loans rarely have flexible repayment options, forgiveness options, grace periods, or interest rate payment forgiveness.

Understanding the student loan process is the first step in saying BYE to your student loan problems and hello to your financial freedom!