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Fixed or Variable: Which Student Loan Rates Do You Want?

College graduates have essentially proven themselves to be a smart bunch. You made a good decision for your future, did the hard work and now you have a degree to show for it. Sure, you had to take on some student loan debt in the process, but as the saying goes, you have to spend money to make money, and investing in yourself is always smart.

Now you’ve nabbed a good job and you’re on your way to becoming the best version of yourself, complete with the career of your dreams. You’re grabbing life by the horns and adulting like a pro, building your resume, networking and paying down your student loans as you go. You didn’t get to this position in life by making poor decisions, so it’s only natural that you’re interested in refinancing your student loans as a way to save money, get ahead and knock out that five-year plan in just three.

Before you pull the trigger, however, you might want to stay your hand and take a moment to consider whether fixed- or variable-rate loans are more likely to deliver the best advantages. It’s tempting to follow the knee-jerk reaction that fixed-rate loans are safer (because quantities are known), but this might not actually serve your best interest, so to speak. Here’s what you need to know about fixed versus variable rates before you refinance your student loans.

Fixed Rate Pros and Cons

The difference between fixed- and variable-rate loans is pretty rudimentary. The former is characterized by a locked-in interest rate that remains the same throughout the life of the loan, regardless of market fluctuations. The latter starts out at an agreed-upon rate, which may change as the market changes, fluctuating in response to market interest rates and altering your payments in the process.

Is one better than another? That depends. Let’s look at the pros and cons of fixed rates first. The major benefit is that you always know what your payment is going to be – it’s predictable. A fixed rate is static, so your interest today will be the same as the day you pay off your loan. This can help you to plan your monthly and annual budget and bring you peace of mind.

Of course, peace of mind can cost you. The biggest downside to fixed-rate loans is that they are almost sure to have higher interest rates than their variable counterparts, at least initially, and this has to do with risks. Banks are betting that rate variances will work out in their favor in the long run, showing greater returns (and ultimately costing you more). Avoiding such risk will mean paying more up front to lock in a fixed rate. However, if your current plan involves a long term for repayment, say 20 years, this is probably your best option.

Variable Rate Pros and Cons

As you’ve probably guessed, the major downside to choosing a variable-rate loan is the potential for interest rates to increase and bump up your monthly payments. The upside is that rates could also remain low or even go down, saving you what you might have been stuck paying with a fixed-rate loan.

In other words, it’s a bit of a gamble. It can be a calculated risk, though. At the moment, the market is on the rise, with the prime increasing to 4.25% in June. Will it go down again? Eventually, but probably not before further increases, since the economy is currently on an upswing. If you’re on track to pay off debt early and the market is trending down, variable rates make sense. In the current economic climate, it’s probably better to proceed with caution.

Which is Right for You?

Choosing the right loan for you depends not only on current economic conditions, but also on your particular circumstances. Some personal considerations could include:

  • Current loans
  • Income
  • Debt-to-income ratio
  • Your personality

If you have yet to refinance or consolidate, you’re probably juggling at least a few student loan payments, some of which may be fixed while others are variable. Since July of 2006, all federal student loans feature fixed interest rates, although the set rates have fluctuated from year to year and from one loan type to another, so that different loans have different rates. You might also have some private student loans with either fixed or variable rates.

There’s a lot to be said for consolidating all of your loans to lock in a single, fixed rate, and when you do so with a favorable lender like Education Loan Finance, you can consolidate all your loans (whereas only federal loans can be consolidated into a Direct Consolidation Loan through the government, and there may be restrictions based on loan type and eligibility). On the other hand, you might prefer a variable rate that is lower than fixed options, especially if your income allows you to make larger payments, pay down debt before rates go up, and take advantage of less accruing interest in the meantime. A low debt-to-income ratio could net you even better rates and improve your odds of speedy repayment.

Naturally, your personality also plays a role. Are you a risk-taker or do you hyperventilate at the thought that loan rates, while low now, could increase next month or next year? If you play it safe, will you be kicking yourself over the money you could have saved with variable rates? In Hamlet, Polonius famously uttered the oft-quoted line, “To thine own self be true.” You have to know yourself if you want to make a decision about refinancing that you can reasonably live with.

Whether you end up choosing fixed rates or variable when you refinance, you need to understand both options so you can make an informed decision that confers the greatest benefits. To a degree, it might depend on the offers you receive, but assuming both options are on the table, you’ll want to consider the terms, research the forecast for interest rates, and perform a realistic appraisal of yourself and what you can manage. Then you can weigh all the pros and cons to select the terms that will have you refinancing your student loans like a boss.

Don’t Let Trump Turn You into a Chump: The 411 on Loan Forgiveness

The Public Service Loan Forgiveness (PSLF) program, first introduced in 2007 with the goal of encouraging students to work toward careers in teaching, social work, and other public service professions, could quickly become a defunct golden goose that fails to deliver on promises made to hundreds of thousands of graduates counting on loan forgiveness after years of faithful payments on student loans.  According to the office of Federal Student Aid, students that make “120 qualifying monthly payments under a qualifying repayment plan while working full-time for a qualifying employer” will gain the benefit of loan forgiveness for remaining debt, which means the earliest enrollees are just now becoming eligible to see the remainder of debt forgiven.  There are currently more than half a million grads on track to receive benefits, starting this October.

Unfortunately, the Trump administration seems intent on throwing a wrench in the works, as evidenced by the recent release of his proposed education budget, which seeks an end to PSLF.  With $10.6 billion in proposed cuts (with savings slated to go toward Education Secretary Betsy DeVos’s “school choice” initiative), the PSLF program isn’t the only one on the chopping block.  For borrowers that have jumped through numerous hoops and endured hardships to ensure compliance and eligibility, however, the news is a major blow.

What does this announcement mean for students awaiting loan forgiveness?  Until the final budget is approved, we won’t know for sure, but the mood is understandably bleak.  NPR reported that borrowers with the PSLF program have been feeling “frightened” and “anxious”, among other emotions, about the prospect of losing loan forgiveness.  However, you needn’t simply wait around for the other shoe to drop.

You can take control of your financial situation and take advantage of low interest rates when you choose to consolidate and refinance your student loans with a company like Education Loan Finance that puts you on track for speedy repayment.  If you’re hesitant to let go of the dream of loan forgiveness, there are a few things you should know before placing your trust in the current administration to honor the benefits promised years ago.

Winter is Coming…in Summer

When seasons change, you know summer will follow spring, and winter comes after fall.  There’s a natural progression you can rely on.  This is not the case with the PSLF program, it seems, where apparently promises made can be reneged at any time.  Just look at the recent case of four attorneys whose employers were approved as “qualified” initially.

These graduates did everything right, but on the eve of their forgiveness, they were informed that their eligibility had been revoked.  They launched a lawsuit, backed by the American Bar Association (ABA), to which the Department of Education responded that FedLoan Servicing, which acts on behalf of the Department of Education to process Employment Certification Forms, “does not reflect a final agency action on the borrower’s qualifications for PSLF”.  What does this mean?  The promise of loan forgiveness could be nothing more than a pipe dream if the Education Department can retroactively revoke qualifying status.

If you’re working toward loan forgiveness yourself, this should certainly worry you, as should the prospect of complete elimination of the plan.  You’d hope the government would honor their commitments to hard-working professionals that took out student loans and went into public service jobs based on the promise of loan forgiveness down the line, but there’s no guarantee this will happen, even if by some miracle the current administration doesn’t scuttle the entire program.

Forecast for Your Loans

So, you’ve been toiling away in job that, let’s face it, you might not have taken if not for the PSLF program and the promise of forgiveness at the 10-year mark.  How far along are you when it comes to paying your loans?  If you work in a low-paying public service job and you’ve been operating on an income-based payment system, you could actually owe more now than when you started, if your payments fail to keep up with accruing interest.  What the what?  While you’ve been awaiting forgiveness and making steady payments, it’s possible your debt has been growing, and if forgiveness is suddenly off the table, you could find yourself in a terrible financial situation.

Even if you receive loan forgiveness, you’re not out of the woods.  Did you know that some loan forgiveness is considered a tax liability?  Students that receive forgiveness under the PSLF program enjoy tax exempt status for this financial benefit, but the same cannot be said for those who are eligible for loan forgiveness through income-based repayment plans.  Under the Federal Direct Loan Program, also known as the Obama Student Loan Forgiveness Program, borrowers that pay 10% of their income toward student loans for 20-25 years are eligible for loan forgiveness.

Sweet deal, right?  Not if you get stuck with a gargantuan bill from the IRS once your loans are forgiven – loan forgiveness is treated like income.  You’re basically trading in one type of debt for another, and the IRS is a lot less forgiving, so to speak.  You could end up owing the taxman 25% of the amount forgiven for the year your loans are paid off.  If $50,000 is forgiven, you could get a subsequent bill from the IRS for $12,500, just for example.

Don’t Panic

Okay, take a deep breath, watch a cat video, and relax.  Maybe you owe more money now than when you graduated from college, or maybe student loan forgiveness will sink you in a mire of tax debt.  The whole system could get blown to smithereens when the federal budget is approved.  You might not have a lot of control over these circumstances and events, but neither are you impotent to act.

It’s time to look into refinancing your student loan debt with a reputable organization like Education Loan Finance.  It’s not too late to take advantage of low interest rates and other benefits that could save you thousands of dollars over your current student loan situation.  If you’re understandably nervous about the apparent unreliability and shaky future of the system you’ve placed your trust in, consolidation and refinancing could be just the ticket to regain control of your own financial future.

Failure to Launch: Why Haven’t You Refinanced Your Student Loans Yet?

According to a report from Google Consumer Surveys, which polled 1,001 Americans with student debt, roughly two-thirds of graduates paying down student loans have yet to refinance, despite the fact that about 62% are familiar with prospects for refinancing. More interesting, perhaps, is that there seems to be no consensus on why, with respondents citing various reasons. Some said they intend to refinance at some point while others had no clear reason for their lack of interest.

What, exactly, is holding them back? The average student debt for undergrads who finished school in 2014 is $28,950 in combined federal and private loans. If refinancing has the potential to lower interest rates, monthly payments and/or overall debt, why aren’t they jumping at the chance? As a graduate paying down student loans yourself, you might be struggling with this very issue. If you have yet to refinance, consider that you may have fallen into a couple of common traps that are causing your peers to stall out.

Feels Like the First Time

You’ve taken out loans before, but this time is different in a key way.  Whereas many students have the assistance of their parents when taking out their initial student loans, and there are fairly consistent set terms thanks to limited types of loans (Perkins, Direct, etc.), neither of these conditions may apply when you decide to refinance your loans. Refinancing could be the first opportunity many graduates have to make serious financial decisions on their own as adults. Independence is exciting, but it can also be scary.  It’s no wonder some grads are hesitant to leave their comfort zone (i.e., the loans they already have).

Look at it like your current student loans are your high school sweetheart. You’ve been together a long time so you’re used to his/her habits – the fixed interest rates that prefer to watch TV instead of going out to a movie, the tax-deductible interest payments that make you breakfast in bed once a year on your birthday, and the knowledge that the prepayment penalty will never leave you for a younger partner. Is it really the best relationships for you, though?  Sure, it’s familiar, but don’t you think you could do better?

Refinancing is like getting back into the dating game, and you might find some potential partners that don’t bring the same benefits as your previous, long-term relationship. Then again, you might meet someone like Education Loan Finance that offers a prettier package with lower interest rates and better terms, as well as the long-term commitment you’re looking for. Seeking loan refinancing in this world of internet dating might feel new and overwhelming, but a little research and honesty could lead you to a fulfilling financial match.

What if I’m Not Worthy?

Fear of rejection. It’s something that plagues even the most confident among us from time to time, and it could be what’s holding you back from taking the leap toward refinancing existing student loans. That said, if you’re doing well financially and diligently working to pay down your student loan debt, you’re probably a pretty good candidate for refinancing. Think about it – you were able to take out student loans as a high school graduate, probably with little or no income or credit history.

Now you’re a responsible and gainfully-employed adult. You have a steady income and money to spare each month. By making loan payments on time and in full, you’re building your credit – increasing your score and creating a favorable history that puts the minds of lenders at ease. Steady income and a solid credit score are what lenders want to see, and if you have both, you have little to fear. Naturally, some lenders weight certain criteria more heavily, but even if you’re not the perfect candidate in the eyes of the first lender you approach, it doesn’t mean you’re out of luck.

Even if you get rejected, it’s not a hard no – you can always try again and you’ve probably learned a lot that will lead to success the next time you try to refi. What can you do if a lender turns you down?

  • Get the 411 – Why were you rejected? Whether you’re still working toward that top tier credit score, you didn’t realize how your car loan impacted your debt-to-income ratio, or you’re on your way to a promotion and raise that will bump your income, knowing which factors held you up with lenders can give you the data you need to make changes and refi down the road, sooner rather than later.
  • Comparison Shop – If you needed avocados for your toast, would you give up when the first grocery store you went to didn’t have them? No. You’d head down the road to Trader Joe’s or Whole Foods. As a consumer, you have many options, and you need to explore them to find the best deals. This applies to seeking refinancing, as well as avocados.
  • Get a Leg Up – Asking mom and dad for help is not a desirable proposition, but successful adulting sometimes involves knowing when to bite the bullet and ask for help, especially if it means taking advantage of limited opportunities. Interest rates are on the rise, with the prime going up again this year, to 4.25% in June. If you want to lock in the lowest rate for refinancing, you can’t afford to wait. Having a parent or other family member co-sign so you can get the best rates might be the most responsible thing you can do for your financial future.

The prospect of refinancing student loans may give some graduates pause due to the unfamiliar situation and the fear of rejection, but it’s best approached from the stance of benefits to be gained. If you take the time to research options, choose a preferred lender, and get all your ducks in a row, there’s no reason you can’t take advantage of low rates before they go up again. Overcoming fear is a big part of becoming a responsible adult, and the rewards could be a lot bigger than the risks. Now is the time to see what a lender like Education Loan Finance can do for you.