Submitted by Lee Perlman, New Jersey Bankruptcy Attorney
Upon graduation, borrowers are inundated with the task of paying off all of their student related debts. Most graduates will finish their undergraduate degree with federal loans with an average balance of $30,000. At Credible, we see federal student loan borrowers everyday look for options and ask us what they can do about their higher rate student loans.
Depending on when you took out your federal loans, your interest rate could vary by several percentage points since federal loans are influenced by market conditions. If you are a recent grad and took out federal loans, it is very possible that you have some interest rates around 6.0 percent (Direct Subsidized 08-09) and others around 3.4 percent (Direct Subsidized 11-13). If you are wondering what you can do to help reduce these higher interest rates faster, here are some options to consider:
Prepaying
Prepaying on these high interest loans is a great way to start knocking down the overall interest accumulated on your loans. All student loans are prepayment penalty free, but it is important to talk to your loan servicer to make sure your payments are going to principal and not just your next payment. Make sure that you direct prepayment towards these loans specifically and try to pay them off as fast as possible.
Refinancing
Your federal loans can be refinanced as well as combined with any private student loans you may have. Refinancing will take advantage of your improved financial situation since graduation and reassess your interest rate at a potentially lower rate. There are a couple ways to go about this process when you have a combination of high and low rates:
- Option 1: Refinance all of your student loans together much like a federal consolidation only this time your rate will not be a weighted average, but based on your financial credit.
- Option 2: Lenders will allow you to choose which loans you wish to refinance. If you have very low fixed rates, it may be in your best interest to exclude these from refinancing. See how your federal loans compare to current fixed products and potentially only refinance your higher interest rates to a lower rate. One drawback to this method is that you will still have to make payments to more than one servicer.
Federal Consolidation
This will take a weighted average of your current student loan interest rates and combine them into one loan. Although this isn’t the most effective method to directly pay down these higher interest rates, as you can’t isolate payment towards these loans, it will help you make the repayment process easier. For those who have their loans serviced from multiple servicers and want to simplify the repayment process this option is more effective in this use case. A federal consolidation will also allow you to keep all of your federal benefits associated with your current loans.
Potential Drawbacks to Refinancing
There are potential drawbacks to consider if you are looking at federal student loan refinancing.
- Potential disqualification from alternative payment plans designed to minimize monthly payments, such as Income Based Repayment or Pay As You Earn. However, if your goal is to repay your debt as fast as possible these programs extend your repayment term by several years.
- Potential disqualification from federal loan forgiveness programs.
- Potential loss of deferment and forbearance allowance. Most private refinancing lender do a great job though at preserving federal benefits, but be sure to look on a lender by lender basis if these options are important to you.
Managing your student loans can be a tedious process, but taking the time to manage them effectively can save you thousands of dollars over the course of your loans. Knowing if your interest rates are high and what you can do about them can help bring piece of mind knowing you are repaying as effectively as possible.
If you are interested in refinancing your high interest rate federal loans, visit Credible.
Originally published here by the Huffington Post.