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Repayment Options
Refinancing, it's a very odd-sounding concept, a little bit similar to the balance transfers that we talked about in consumer debt, because what you're doing is you're taking out a new loan to pay off an old one. And the reason that you're doing this is because the new loan that you're taking out comes at a lower interest rate, so you use those funds to pay off the existing loan, and now you're focused on paying off this new loan at a lower interest rate, that's going to, hopefully, then save you a lot of time and money in repaying your student loans. Now, they also could potentially lower your monthly payments because it's a lower interest rate, so again, going back to this idea of giving you breathing room in your monthly budget. It also consolidates all your payments into one easy payment, so similar to the direct consolidation loan, if you refinance, you can refinance a bunch of loans together and make it one simple payment, as opposed to potentially having three, four, five differ...
ent lenders that you're making payments to every month. There are some huge catches, though, when it comes to refinancing. For one, it's only available as a private loan. This isn't a federal program, so if you actually refinance federal student loans, you are turning them into private student loans, which means you are no longer eligible for any federal programs. There goes income-driving repayment plans, and there goes any forgiveness options. Now, private loans are private anyway, so refinancing them, it's not going to make you lose any sort of perk, unless your particular lender offers you some sort of perk. But like I said, no income-driven repayment, no forgiveness, no deferment or forbearance. You are now turning your federal loans into private loans, so make sure that, if you're going to refinance, you're refinancing because you are 100% confident you can always be making these payments, and you weren't going to be using any of those federal loans in the first place, but another reason to refinance is it might have been a private student loan debt to begin with. That woman I mentioned earlier that had, I believe, it was a 13% interest rate on her private student loan, if she could refinance down to something like four or five, six percent, that's going to save her likely thousands of dollars and a lot of time on repaying her loan, and that debt was private to begin with, so private to private really makes no difference in terms of perks and opportunities. Now, maybe you also work some sort of very high-paying job, you're looking to just get out of debt as fast as you possibly can, and you know that income-driven repayment was never gonna be an option for you, because you either, A, didn't need it, or your monthly payments were still gonna be high because your salary's high. Refinance could, then, in that case, be a good opportunity for you on your federal student loans because you weren't gonna use the programs to begin with. Now, an ideal candidate for refinancing has a 700-plus credit score, has at least six months of employment history, so if you just graduated, usually it takes about six months of having steady employment to prove that you're an eligible candidate for refinancing. They tend to also like people that have higher-paying jobs. I'm not saying it's a requirement, but it is something they tend to like in their underwriting. You need to have never, ever once been late on a student loan payment. That could actually make you immediately ineligible for refinancing. Going back to the idea of credit scoring, what's an indicator if someone's going to make payments on time in the future? Have they done it in the past? And as soon as you didn't do it in the past, they think you're likely to replicate that behavior in the future. And they also definitely wanna see job stability from you, as well as a healthy income. It is not impossible for self-employed people to get refinancing opportunities, but it's certainly a little bit tougher, and it might require that you have at least one or two years of self-employment history and tax returns that you can prove income. Repayment hacks, any questions about refinancing before I move on? Yes? This is less of a question as much I'm just hoping you could shed some light onto this. So, you mentioned refinancing, you can take loans from multiple institutions and, in essence, get one payment. In my brain, it seems like four institutions could be losing money in that transaction off of your potentially missed payments or interest, so I was just wondering how does that work, exactly? Why are four banks or entities potentially okay with taking lower interest rates? You know what I mean? How does that work out? How are they playing nice, so to speak? So, why would they be willing to refinance your debt? Because they're still getting your interest, so it's still a deal for them. If you didn't have an account with them in the first place, that's still good money for them. A lot of the refinance programs, too, that have come out are not traditional banks, so they are new startups that are focused primarily on refinancing, and then tend to have other arms of the institution. Maybe they also do wealth management, maybe they offer different types of loans, personal loans, mortgages, so student loan refinancing may not be making up the bulk of how they are earning their income as an institution as well, which is not that it's a not-for-profit sector of the company, but it might not be the main moneymaker of the company.
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Jay Valencia
Erin covers a lot of ground and she delivers it all with an approachable vocabulary. This is a series of classes well worth watching.
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