What No One Told You About Your Student Loans

by Jay Fee

Like taxes and mortgage payments, many people view student debt as a non-negotiable — a payment you just have to accept as part of the average American’s financial load. It makes sense, considering that over 40 million Americans owe a collective $1.5 trillion in student loans. Over two-thirds of college students who graduated in 2018 took out student loans, and they entered the working world with an average debt of $29,800 — not counting their parents’ debt in federal loans.

On top of this, many new parents today are still paying off their student debt while simultaneously saving for their children’s future education. To cover the full cost of four years at an average public university 18 years from now, a parent has to start putting away about $400 a month in a 529 account from the day their child is born. Add that to the average monthly student loan payment of $200-300 a month, plus a mortgage, car payment, and retirement savings, and managing a budget can be overwhelming.  

But here’s something a lot of college graduates don’t know — you’re not stuck with the student loan payment you had when you graduated. Student loan refinancing programs are becoming more popular than ever, and they’re saving former students significant amounts of money per month.

Why? Because when you first take out a loan as an unemployed student, you are a risky borrower — you’re not making an income, you have little-to-no credit history, and you have no track record of paying down debt. In that case, many student loan interest rates end up being in the region of somewhere between 7-9%.

After you’ve been in the working world for a few years, you likely have a credit card, car payment, credit history, stable income, and you’ve been making student debt payments consistently and on time. Yet most people don’t realize that they can refinance their student loans in the same way they can refinance a mortgage or consolidate credit card debt. They also don’t realize that they qualify for much lower interest rates on their loans than they did right out of college. At PenFed, our average refinance rate on student loans is around 5% — which can translate into savings of hundreds of dollars a month for some people. For example, consider a young adult who took out a $50,000 15-year student loan at 8.6% APR with a monthly payment of $495. That loan, if the graduate qualifies, could be refinanced to a rate of 5% for a monthly payment of $395 — saving $100 a month.

A recent survey found that student loan debt has become so great that young people are putting off buying homes because of it. But saving money by refinancing a student loan can free up much-needed disposable income that can help you afford a mortgage or a new car payment. Refinancing can also consolidate student loans into one more manageable monthly payment — simplifying your finances and your budget. And rates are getting more competitive, with open-forum advertising and online tools that allow you to compare lenders in minutes.

If you’re thinking about student loan refinancing, consider these tips:

• Some lenders might offer lower rates, but that doesn’t always mean they’re the best choice. The rate may be lower but there may be extra fees involved, or a longer or shorter term to the loan than you want.
• As with a mortgage, paying off your loan early can save a lot of money, since more will go toward the principal instead of the interest. Most lenders don’t charge a fee for early or extra payments — although you should ask to make sure. With the creation of the Consumer Federal Protection Bureau in 2010, a lot of predatory tactics like hidden penalties and fees are being curtailed. 
• Before using your refinancing savings to take out new debt, like a mortgage or an auto loan, make sure your debt-to-income ratio will be below 50%. This means that the monthly payment of all of your debts is no more than half what you bring in monthly after taxes.
• Most lenders have a forbearance policy that provides debt relief if you lose your job or have an unexpected financial crisis. This could include a month or two of no-interest payments, or the ability to skip a monthly payment without it affecting the loan status.
• With all the talk of student loan debt forgiveness, I’m often asked if it’s better to defer student loan repayment. My advice would be not to wait to pay off your debt. It will improve your credit and take a burden off of your finances. And it’s more likely that the skyrocketing cost of college tuition will be addressed before everyone with student debt gets blanket forgiveness.

People don’t do finances the way they used to, sitting at the kitchen table with envelopes and a checkbook on the 30th of every month. Today, the way we shop for and pay for loans — and the kinds of loans that are available — are starkly different from twenty years ago. The student loan refinancing market is becoming more competitive than ever, with lower rates that translate into lower monthly payments. Debt simply isn’t static anymore. People of any age who are weighed down by student debt should consider refinancing. It can simplify not only your finances but your life.

Jay Fee is vice president of unsecured lending at PenFed Credit Union. PenFed is an Equal Housing Lender.