When you're faced with a high student loan bill every month, it can make other financial goals -- such as buying a house, paying off your car or getting out of credit card debt -- seem like a fantasy. But that outlook can change if you alter the terms of your student loans.
One option is refinancing. If it's right for you, it could be one of the quickest ways to cut into your debt. Refinancing can lower your interest rate, which in turn often lowers your monthly payments. When you refinance, a lender pays off your federal and private loans and replaces them with one new private loan, with a different term length.
Choosing to refinance was easy for Brooke Keiser, a senior financial analyst at the University of Kansas Hospital in Kansas City. "I had met with a retirement specialist and we looked and found I still had 28 years to pay on my loans," Keiser says. "Over the last year, I have made payments that totaled $4,000, and over $3,000 went toward interest. I definitely wanted to get my loans paid off sooner and lower the interest rate."
The majority of Keiser's approximately $33,000 in loans were federal and carried an interest rate of 6.75%. After refinancing with Credible, a student loan refinancing company, she now has an interest rate of 5.99% and 15 years of payments left. These terms actually increased her monthly payment by about $20, but she is on track to save nearly $27,000 over the life of her new loan compared to her previous situation.
Keiser says refinancing has made her other financial goals more attainable. "I have a lot more confidence that I can reach them," she says. "I can look at paying off my car now. It has made life a lot easier on me financially."
While refinancing was right for Keiser, it may not be right for you. If you refinance federal loans, you'll be giving up benefits such as income-based repayment plans, loan deferment and student loan forgiveness options. Refinancing works best for those with a stable job, higher income and a great credit score. Those with higher degrees often garner the biggest savings from refinancing, since they may have greater debt than those with only undergraduate degrees.
If you choose to refinance, make sure you compare offers using a refinancing marketplace, such as NerdWallet's powered by Credible, LendKey, Earnest, Darien Rowayton Bank, Purefy or SoFi.
Before you decide to refinance, consider all options that could affect how you manage your debt:
When you consolidate your federal loans, the government pays off your existing debt and issues a new single, consolidated loan. Your new fixed interest rate on the loan is the weighted average of your prior loans' rates, rounded up to the nearest one-eighth of 1%. You'll also have a new repayment schedule, ranging from 10 to 30 years depending on the total amount owed. The main downside of consolidation is you'll end up paying more interest on an extended repayment term.
Consolidation is best for those with multiple federal loans and separate payments who don't want to lose protections such as deferment, income-based repayment and loan forgiveness.
Income-driven repayment options
With income-driven repayment options, your monthly federal student loan bill is based on your earnings. There are four income-driven repayment options, each with its own qualifications based on the size of your debt and when you first took out loans. These plans are best for those who have high debt compared to income or high monthly payments.
Public Service Loan Forgiveness
Those who are employed by the government or qualifying nonprofit organizations may be eligible for Public Service Loan Forgiveness on federal direct loans. In this program, borrowers must make payments for 10 years or 120 qualifying months and be employed full-time in certain fields, such as emergency management, military service, public safety, law enforcement, public education or public health.
Figure out your own combination
There's no one-size-fits-all when it comes to managing your loans. You can even pick and choose multiple options to best suit your situation. For instance, if you don't want to give up federal loan protections, you might consolidate or apply for an income-based repayment plan on just your federal loans and refinance only your private loans. Compare your options and decide which path can get you on track to managing your debt and planning for other financial goals.
Anna Helhoski is a staff writer at NerdWallet, a personal finance website. Email: firstname.lastname@example.org. Twitter: @AnnaHelhoski.
-- This feed and its contents are the property of The Huffington Post, and use is subject to our terms. It may be used for personal consumption, but may not be distributed on a website.
Source: Elder Care Huffington Post