Is your student loan payment a stubbornly significant monthly expense? If so, you’re not alone. More and more people are graduating with education debt each year, with recent data suggesting that a whopping 70% of college grads in 2014 have student loans — up from less than 50% just 20 years ago. The average amount of debt for undergrads is now over $33,000, while borrowers with graduate and professional degrees have debt loads closer to the six-figure range.
If these numbers ring true for you, it’s crucial to stay on top of the latest student loan information — otherwise, you could spend more than is necessary when paying back your loans. Unfortunately, there are a lot of misconceptions out there that confuse the loan landscape and cause borrowers to miss money-saving opportunities. In this post, we’ll clear up a few of the biggest myths so that you can make better decisions about your loan repayment strategy.
Myth #1: It’s not worth revisiting your student loan repayment plan.
Remember choosing your federal loan repayment plan after graduation (or after your grace period ended)? There were a variety of options, from the standard 10-year plan to the “extended” and “graduated” repayment plans, which allow borrowers to make lower monthly payments in exchange for lengthening term or increasing payments as time goes on. If you were already employed and making good money, you might’ve chosen the standard plan. But if, like many people, your finances were still in the “needs improvement” category, you might have chosen one of the lower payment options.
Fast forward a few years (or perhaps even months), and if your finances have improved, it may be time to take a second look at your repayment situation. Why? Because anything other than the standard repayment plan could cost you more in interest over the life of your loan. Luckily, your student loan servicer can provide you with a side-by-side comparison of how much you’ll spend on interest with each option — all you have to do is heed the signs that you’re ready for a more aggressive plan.
And if you really want to save some money, this may be a good time to look into refinancing your student loans at a lower interest rate, which brings us to our next myth. . .
Myth #2: Federal loans can’t be refinanced.
With all the recent news about federal student loan refinancing legislation, it’s no surprise that many borrowers think they can’t refinance federal loans unless a law is passed that will allow them to do so. While it’s true that the government won’t refinance federal loans, and most private lenders will only refinance private loans, SoFi and a few other lenders have been refinancing federal and private loans for a while now. In fact, the majority of SoFi’s refinanced loans were originally federal loans.
Myth #3: Federal loans are always cheaper than private loans.
For undergrads, this is usually true. But for borrowers taking out Direct PLUS loans to cover the cost of graduate or other professional degree programs, this is not always the case.
For one thing, every PLUS loan borrower gets the same interest rate — and that rate just went up from 6.41% to 7.21% for loans disbursed after July 1st. Private lenders, on the other hand, will look at your credit history, score and other pertinent financial information, then assign you a rate based on a combination of financial factors. If you’re a mature borrower (as many grad students are), you may qualify for a lower rate with a private lender.
It’s also important to consider the impact of loan origination fees. Grad PLUS loans have a hefty 4.292% fee for loans disbursed after October 1st of this year. If you can qualify for a lower rate and low (or no) origination fee with a private lender, then that could be a less expensive option.
Myth #4: You shouldn’t refinance federal loans with a private lender because of the benefits you’ll lose.
The truth is that it depends on whether these benefits will ever apply to you.
For example, some federal loan borrowers are eligible for income-driven repayment plans, such as Pay As You Earn (PAYE), which offer low monthly payments and potential forgiveness of remaining loan principal after 20 to 25 years. But if your income is already solid and you expect it to get better, there’s a good chance you’ll never benefit from one of these plans. Now, if you qualify for the Public Service or Teacher Forgiveness Programs, you’ll probably want to keep your federal loans so that you can take advantage of loan forgiveness. But if your career path is solidly in the private sector, these benefits mean nothing to you.
If you’re concerned about what would happen if you suffered an unforeseen financial hardship (such as getting laid off from your job), you can always check with the private lender before refinancing to see if they offer forbearance options. For example, SoFi offers “Unemployment Protection”, which means we not only allow borrowers in this position to temporarily suspend or make lower payments, but we also actively work with them to help them find a new job.
Myth #5: Lowering your interest rate through refinancing doesn’t make that much of a difference.
Let’s let the numbers do the talking. If you’ve got $100,000 in student loans at an average interest rate of 6.8% (the Grad PLUS rate from 2006-2013), you’ll end up paying more than $38K in interest under a standard 10-year repayment plan.
If you qualify to refinance those loans at a lower interest rate, that number has nowhere to go but down. For example, if you qualify for a SoFi refinance loan at a fixed interest rate of 4.74% (our lowest fixed interest rate on a 10-year term loan), then that same $100,000 loan would cost $12K less over 10 years of repayment.
Bottom line? Don’t be a victim of student loan misinformation. If you arm yourself with the facts, you’ll better understand all of the loan options and opportunities available to you. And in the end, your bank account will thank you for it.
This article is designed to provide useful information about student loans, but it is not intended to provide legal or tax advice.
Dan Macklin is a member of the DailyWorth Connect program. Read more about the program here.