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Three Student Loan Refinancing Strategies Used by Thousands of Actual Graduates

Stephen Dash, Contributor, Forbes

December 28, 2016

three student loan refinancing strategies

Even though an estimated eight million Americans could refinance their student loans at lower interest rates, not everyone who could benefit is even aware that the opportunity exists.

Fewer still understand that there’s more than one way to approach student loan refinancing, or that the approach graduates take depends on their goals.

Recent graduates, for example, may find their monthly payments are a challenge to meet. Refinancing into a loan with a longer repayment term — say 15 or 20 years, instead of the standard 10 — can help make those monthly payments more manageable. The tradeoff to that approach can be higher overall repayment costs.

Other borrowers who are further along in their careers may have seen an earnings boost that allows them to make bigger monthly payments than they could when they graduated. That opens up the door to refinancing into a loan with a shorter repayment term, which gets them a bigger interest rate reduction and maximizes their overall savings.

A third strategy employed by graduates with large loan balances is to refinance into a loan with roughly the same repayment term. That’s a choice that can reduce both the monthly payment and the overall amount repaid.

There’s quite a bit of information to digest on this topic, but the basic concepts are easy to grasp without throwing a lot of numbers at you.

Choosing a repayment term

Many borrowers who are exploring refinancing are focused on the interest rate and monthly payment they’ll end up with — and rightly so. But the interest rate and monthly payment on your new loan depends not only your credit, but how many years you’ll take to pay back your loan (the repayment term).

The standard repayment term for government student loans is 10 years. Private lenders who refinance student loans typically offer a choice of repayment terms, such as five, seven, 10, 15 and 20 years. So borrowers who are refinancing student loan debt have three basic choices: pick a loan with a shorter repayment term, a longer repayment term or a repayment term that’s about the same as their existing loan.

Shorter repayment term

One thing to keep in mind is that the shorter the loan term, the lower the interest rate. Borrowers who refinance into loans with shorter repayment terms will see the biggest overall savings because they’ll make fewer payments, and pay less interest.

They may also have to make bigger monthly payments — it depends on how many payments they want to eliminate, and how much of an interest rate reduction they can get.

Longer repayment term

That doesn’t mean a shorter repayment term is always better. Borrowers who are looking for a big reduction in their monthly payment often choose to refinance into a loan with a longer repayment term.

If you stretch out your payments over a longer period of time in a government repayment plan, you won’t get an interest rate reduction. That means the overall cost of repaying your loan can increase dramatically if you don’t end up qualifying for loan forgiveness.

But borrowers who extend their repayment term by refinancing their student loan debt with a private lender often qualify for a lower interest rate. That can reduce, or eliminate, the increase in costs associated with extending the repayment term. It all depends on how much of an interest rate reduction you can qualify for, and how many additional payments you plan to make.

Similar repayment term

Borrowers who would like to reduce their monthly payment and also save on their total repayment costs can look at refinancing into a loan with a repayment term that’s similar to what they have now. If you’ve been paying off your loans for three years on the standard 10-year government repayment plan, for example, you could refinance into a loan with a seven-year repayment term.

Issues to keep in mind

Choosing a refinancing strategy that’s best for you depends on your goals, the monthly payment you can afford and the interest rate you will qualify for.

Determining the monthly student loan payment you can afford requires making a budget. Be realistic — the idea is to put yourself on firmer financial footing, not stretch beyond your means.

When it comes to interest rates, your rate will depend on your credit history and credit score. Remember that most government student loans are made without underwriting and rates are “one-size-fits-all.” This is one of the reasons refinancing is available — once you’ve established earnings and credit history, you may qualify for rates that are lower than what you’re paying on your existing loans.

Remember that while rates on government loans are fixed for life, private lenders typically offer both fixed- and variable-rate loans. Which one is right for you depends on your tolerance for risk. While variable-rate loans start you out with a better interest rate than you’d get on a fixed-rate private loan with the same repayment term, the rate can move up or down with whatever index the lender has pegged your rate to — usually the London Interbank Offered Rate (LIBOR) or the prime rate.

Although refinancing is not for everyone, everyone with student loan debt owes it to themselves to explore their options.

This article was written by Stephen Dash from Forbes and was legally licensed through the NewsCred publisher network.

The strategies mentioned in this article will often have tax and legal consequences; therefore, it is important to bear in mind that First Republic does not provide tax or legal advice. This information is provided to you as-is, does not constitute legal advice, is governed by our Terms and Conditions of Use, and we are not acting as your attorney. We make no claims, promises or guarantees about the accuracy, completeness, or adequacy of the information contained here. Clients’ tax and legal affairs are their own responsibility. Clients should consult their own attorneys or other tax advisors in order to understand the tax and legal consequences of any strategies mentioned in this article.