Should You Refinance Student Loans?

I was one of the lucky ones who managed to graduate with little debt as a result of going to an in-state school and waiting tables 20+ hours a week to pay for tuition.

If you aren’t yet in college, I have to 100% recommend avoiding debt if at all possible. The debt isn’t tied to any physical assets, so you’ll be paying it off after college without gaining assets. This is contrary to house debt where you pay off the debt and gain equity in your house as a result.

I have a lot of friends who are burdened by their student loans. This post will not fix that burden, just help to strategize whether or not you should consolidate and refinance your student loans. But again, if you can work or go to a cheaper university, that’ll help you get a head start in life out of college.

But I completely understand if you manage to rack up some debt. 69% of students graduate from college with student loan debt, those that graduated with debt had an average of $28,950 in student loan debt alone according to The Institute for College Access & Success.

You can track most student loans on Personal Capital so the first thing I’d recommend is attach all of your student loan accounts and bank accounts you have to see a full picture of your financial situation. It may look ugly at first because you have no assets but you do have student loan debt. Just make sure to focus on getting a great career out of college that blows the debt out of the water.

Student Loan Subsidies

Before you refinance student loans, take advantage of all Federal Subsidies that mathematically make sense. The subsidy just means the government pays for your interest for you. Typically this lasts until you are 6 months graduated, after that the loan is a normal loan. So make sure you take advantage of that no interest rate period before refinancing.

So the first thing you should do is list out your student loans and find out which ones are subsidized vs unsubsidized. Unsubsidized loans should be paid first until the subsidy runs out on the others.

Make a Student Loan Payment Plan

Figure out how much you owe in student loans, and at least make minimum payments on all of them. It may be somewhat complex if you have a bunch of different loans.

But no matter what, figure out how much you owe on student loans in total. Also determine what your salary is and figure out what expenses you’ll need to limit in order to pay extra on that student loan.

When to Refinance Student Loans

There are three reasons you might refinance and consolidate.

  1. You have a lot of different loans, and payments are complex and hard to keep up with. It is better to just pay one source than all sources.
  2. You have a variable rate loan, meaning the rates may change when interest rates rise, in which case you should lock yourself into a low rate now.
  3. Your interest is higher than what you qualify for.

I would check Sofi for what you qualify for.  You may get a pretty good rate. If you don’t current get a pretty good rate, keep paying off your student loans and within a few months your credit should improve and you’ll get a better rate. Sofi gives you a $100 bonus when you refinance with them, so take advantage of that deal.

They claim on their website that the average person who refinances their student loans with them saves $288 a month, which is a lot of money for someone freshly out of college.

When Not to Refinance Student Loans

If you have a single loan with a great interest rate I would not recommend refinancing. Clearly it will be difficult to get a better deal than you have, so just keep paying off that debt.

If you don’t have much in overall interest, and you think you can pay off all of your student loans in a year or less, interest rate is not important. By that I mean the amount of money you’ll save by refinancing would not be worth the time it takes to fill out the refinance application. Make sure it mathematically makes sense for you, and that includes the time factor.

Great, Now What?

So you’ve got your student loans in the best place they can be, and you perhaps saves an interest point on that debt, but you didn’t actually make progress. Your net worth is exactly the same as yesterday, maybe even less if you refinanced with someone with closing costs.

So now you need a mission plan to actually pay off the student loan. That involves getting your financial situation in check. Focus on the metrics that matter like cash flow. Remember that every time you pay extra on your student loan, it decreases your principal and therefore your mandatory payment, so your cash flow improves.

With an improved cash flow, you can then allocate more of your paycheck to paying off student loans earlier.  I fully recommend getting rid of those student loans as fast as possible, because you’ll need that room in your budget as life and family starts to build up around you.

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