Education Debt Refinance Programs Offer Choice to BorrowersJune 27, 2016
According to a study by the Association of American Medical Colleges, the average medical student in 2014 graduated with $176,000 of debt from medical school alone. However, when you tack on the average undergraduate loan amounts, estimated by the Project on Student Debt, the total loan averages soar to over $200,000.
Until recently, college graduates interested in consolidating student loan debt had limited options beyond bundling multiple federal loans into one single payment. However, a new trend, driven largely in part by private lenders, extends borrower benefits beyond consolidation to offer more choices that fit the borrower’s needs, especially when compared to the traditional, “one size fits all” approach associated with federal programs. For instance, if we assume that federal PLUS loan interest rates for graduate and professional students have remained above 7% for the majority of time since 2006, some private lenders are able to offer competitive rates and repayment options that could help graduates save money and possibly get out of debt faster.
For borrowers simply in need of a lower monthly payment, refinancing could extend the repayment period as long as 20 years, which may reduce the monthly payment amount significantly. While a longer repayment term may mean that more interest accrues over the life of the loan, borrowers can make additional payments whenever possible, with no prepayment penalties, to chip away at the principal balance more quickly.
Alternatively, borrowers who are comfortable with their current payment amount — or could afford to contribute a little more each month — may want to consider shortening their loan term, as shorter loan terms may generate lower interest rates, thereby resulting in greater interest savings over the life of the loan. Some borrowers could achieve the best of both worlds: simultaneously lowering their monthly payments with a longer term, while still enjoying a lower total loan cost due to a decrease in interest rates. Furthermore, unlike federal programs, many private student loan consolidation programs allow borrowers to combine both federal and private education debt, extending any potential benefits to their entire student loan profile.
With Education Loan Finance, ideal candidates for student loan refinancing include individuals with steady income proportionate to their debt balance and at least $15,000 in student loan debt. However, we understand that private refinancing of student loan debt is not for everyone or every student loan situation. Special attention should be given to federal student loans, as some protections offered under the federal student loan program may be forfeited through private refinancing. Borrowers should also consider whether they may need hardship exceptions, such as deferments or forbearances, before applying; however, many of the private lending options also offer many of the deferment options offered under the federal program. Additionally, depending on factors such as creditworthiness and interest rates on current loans, the new loan may have a higher monthly payment or interest rate. Given these possible scenarios, some people may still find the convenience of having one loan payment is worth the process. The good news is that if a borrower decides that refinancing all of his or her student loans is not ideal, he or she may also choose to refinance only the loans for which interest rates would decrease — a benefit that is possible due to the fact that student loan interest rates vary depending on the type of loan and when it was originated.
Graduates now, more than ever, have greater flexibility to find a student loan repayment plan that best fits their individual needs. To determine what your payments could be when you refinance with Education Loan Finance, check out our payment calculator or contact one of our education loan specialists. In any case, students and graduates should explore the many options that may help them better utilize their hard-earned money, as well as reduce debt faster.