Refinancing vs. Student Loan Grace Period

May 14, 2018

April showers bring May flowers, but what do May flowers bring? Millions of college grads who will enter the workforce with an average of $37K worth of student loan debt. Fortunately, the government has your back (at least for six months, anyway) in the form of the student loan grace period. But before you lower your poolside lounge chair down a couple notches and nap through the sunny afternoon, take note of the late summer storm brewing on the horizon.

It’s grace, you just have to pay for it

It’s true that you are NOT required to make repayments on your federal loans for six months. What you may not know is that, in most cases, interest still accrues during this grace period. Furthermore, you may not be aware of how much you could save by taking advantage of early repayment rather than the grace period.

An article on studentloanhero.com puts it this way:

“Let’s say you have $30,000 in student loans at 6% interest. Make just one extra payment of $500 dollars this summer and you could cut $1,120 in interest from the lifetime cost of your loan. If you really want to get serious about putting extra payments towards your student loans, contribute $1,500 before payments become due and reduce the time it takes to pay off your debt by two years – plus earn $3,188.29 in interest savings.”

If you consider how much interest is going out the window, it’s important to remember you are, in a sense, paying for that six-month buffer. By putting in a couple weeks’ worth of work, you can stretch your hard-earned summer dollars quite a long way and reel in the length of time you’ll have to stare at your student loan debt out of the corner of your eye.

Steps to repaying your student loan debt

Regardless of whether or not you choose to take ‘advantage’ of the grace period, you will eventually have to start making payments. An excellent article on cnbc.com outlines the steps you might consider in order to avoid common mistakes many recent grads make.

1) Know your loans

2) Update your contact info

3) Monitor your cash flow

4) Register for autopay

5) See if your employer will chip in

6) Consider consolidating or refinancing

We encourage you to read the article and explore the options therein, but we implore you to seriously consider Step #6 by refinancing your student loans (maybe even bump it up to, let’s say – Step #1 or #2 because it actually encompasses the others). It’s free and will help you in virtually every sense – a low, fixed interest rate with a single monthly payment and a repayment term that best fits your budget. The only way refinancing could be considered a disservice is if you’re planning to hang your hat on one of the federal loan forgiveness or repayment programs, as refinancing will automatically forgo many of those options. Though, if you do your research on those programs, avoiding them might be the most graceful step you can take.

Borrow Smart, Save Smarter

Refinancing with a reputable lender like Education Loan Finance can save borrowers an average of $280* per month and more than $26K over the life of their loans. The smartest move you can make after school would be to lock yourself into historically low-interest rates while simultaneously paying down your loan balance over the summer. Besides, you can still relax by the pool (on the weekends, of course), only instead of avoiding the impending storm of student loan debt, you can daydream of being free from the burden of student loans years before the rest of your graduating class.

Learn More About Education Loan Finance

* Member Lifetime Savings – Average member lifetime saving calculation of $26,215.92 total savings is based on information provided by Education Loan Finance customers who refinanced their student loans between 08/16/2016 and 10/07/2017. While these amounts represent average amounts saved, actual amounts saved will vary depending upon a number of factors.

Should I Refinance Private Student Loans?

Refinancing private student loans is very similar to the process of consolidating student loans, which is when you combine multiple student loans into one loan with a weighted average interest rate. However, there are several potential benefits of refinancing private student loans that student loan consolidation does not offer. Here are a few of the benefits of student loan refinancing.

Lower Private Student Loan Refinancing Rates

Above all, the primary benefit of refinancing student loans is the potential to save money by lowering your interest rate. When you graduated from your respective program, the interest rates on your private student loans may have been higher than what private lenders currently offer to refinance student loans. For example, if you took our $50,000 in private student loans at a 6.0% interest rate for a 20-year term, your monthly payment would be $358.22 per month, and you would pay a total of $85,971.73 over your loan term if all payments were made on time, with approximately $35,971.73 of that total being paid on interest alone. If you refinanced your $50,000 private student loans to the 20-year term with a 4.5% interest rate, your monthly payment would drop to $316.32 and you would pay just $75,917.93 over your loan term, with approximately $25,917.93 of that total being paid in interest. You would save $41.90 per month and $10,053.80 in interest costs. The interest rate that is offered to you depends on a variety of factors that are typical when taking out a loan, such as your credit score, credit history, debt-to-income ratio, among other factors. Raising your credit score 50 or 100 points could make a considerable impact on how much you could save by refinancing private student loans. See how much you could potentially save by using our student loan refinancing calculator.*

Adjusting Your Repayment Terms

In addition to lowering your interest rate, refinancing private student loans also allows you to adjust the length of your loan term to fit your goals and budget. Typically, shorter loan terms come with lower interest rates, allowing you to save on interest over your loan term, while longer loan terms come with slightly higher rates, but allow you to save on your monthly payments. Here are three ways that adjusting your repayment can help you better manage your student loans.

Simplify repayment by combining loans. When you refinance your private student loans, you can consolidate or combine multiple loans into a single loan with a single monthly payment. This can help you better track your total loan balance and get a clearer look at your repayment timeline.
Extend your loan term to save on monthly payments. By extending your loan term, you can spread out your payments over a longer period of time, often allowing you to reduce the amount you pay monthly. Having this extra cash can allow you to use that money for other financial goals, such as saving for retirement or purchasing a home.
Shorten your loan term to save on interest and pay off your loan faster. Oppositely of extending your loan term, shortening your loan term can often allow you to lower your interest rate and will shorten the amount of time that interest accrues, allowing you to save on interest and pay off your loans faster.

Choosing a New Lender

Another benefit of refinancing private student loans is the opportunity to switch to a new lender who may have additional benefits, such as forbearance options in the case of financial hardship or superior customer service. For example, with Education Loan Finance, if you are unable to repay your loan because of financial hardship or medical difficulty, Education Loan Finance may grant forbearance for up to 12 months. Additionally, Education Loan Finance offers superior customer service in the form of readily available Personal Loan Advisors who can help you through each step of the refinancing process and guide you toward the right repayment plan. Keep in mind that refinancing student loans for the sole purpose of switching lenders may not be the best decision, especially if it costs you money. If you're interested in refinancing student loans, learn more about Education Loan Finance.

Reasons Not to Refinance Private Student Loans

Refinancing private student loans can be beneficial to many people, however, there are certain circumstances in which this may not be the case. It's important to understand whether refinancing private student loans will help you save on your student loans or pay them off faster. For example, if you attempt to refinance private student loans and the interest rate you qualify for doesn't either help you save in total interest paid, nor helps you lower your monthly payments, you may want to wait some time and improve your borrowing credentials before refinancing. In some situations, even if you are able to lower your monthly payments, but will be paying a significant amount more in total interest costs, you may want to consider if it's the best solution. Likewise, if you are saving in total interest, but your monthly payment will be unmanageable, you may be at risk of missing payments or, even worse, defaulting on your loan. Additionally, refinancing with a new lender may cost you certain benefits that your current lender offers.

Consolidating Private Student Loans vs Refinancing

When you are attempting to adjust your student loan repayment terms, you may come across student loan consolidation options. While student loan refinancing and consolidation are similar in that you are combining multiple loans into one loan with a single lender, the two are not exactly the same. Learn more about the difference between student loan consolidation vs. refinancing.

Can I Refinance My Private Student Loans?

Anyone with private student loans can refinance them as long as they qualify by meeting a private lender's specific eligibility requirements for refinancing student loans. For example, in order to refinance with Education Loan Finance*, you must meet the following criteria at a minimum:

be a U.S. citizen or permanent resident alien without conditions and with proper evidence of eligibility.
be at the age of majority or older at the time of loan application.
have a minimum loan amount of $15,000.
have earned a Bachelor’s degree or higher.
have a minimum income of $35,000.
have a minimum credit score of 680.
have a minimum credit history of 36 months.
have received a degree from an approved post-secondary institution and program of study.

In conclusion, refinancing private student loans can be very helpful to individuals who qualify and are interested in saving money in interest or lowering their monthly payments. Learn more about student loan refinancing with ELFI to see if it's right for you.

paying down student loans with a credit card

2020-10-27

Should I Pay Down Credit Card or Student Loan Debt?

Dealing with student loans can be incredibly challenging for many college graduates. According to Experian, Americans carry an average student loan balance of $35,359. On top of that, the average credit card debt is nearly $6,200, says the credit reporting agency. In most cases, targeting one debt at a time can help you pay off your balances faster and save you more money on interest. So should you pay down credit card or student loan debt first? Here’s how to develop your strategy:

Should You Pay Off a Credit Card or Student Loan First?

In the vast majority of cases, it’s better to prioritize your credit card debt before your student loan debt. This is primarily because credit cards charge higher interest rates than student loans. Additionally, credit cards don’t have set repayment schedules, so it’s easy to add to your balance even while you’re paying them off. As a result, credit cards may keep you in debt for longer than student loans with firm repayment terms. For example, let’s say you have the following debts:

A credit card balance of $7,000 on an account with a 20% annual percentage rate (APR) and a $120 monthly payment.
Combined student loans worth $30,000 with a weighted-average rate of 6.5% and a $341 monthly payment.

In total, your minimum monthly payment would be $461, and if you were to pay just that amount and add no new debt to your credit card, you’d pay off the student loans in 10 years and the credit card in a little more than 11 years. You’d also pay a total of $24,739 in interest over that time. Now, let’s say you could afford to put $510 toward your debt every month. If you were to add the extra payment toward your credit card debt until it was paid down, your balance would be paid off in a little under six years. Then if you use the total amount you were putting toward your card toward your student loans, you’d pay those off about a year and a half early. You’d also save $9,643 in interest. If you were to do the opposite and focus on your student loans first, you’d pay those off sooner, but the higher interest rate on your credit cards will result in more total interest charges. You can use a debt avalanche calculator to find out what you could save with your specific situation.

Can You Pay Off Student Loans with a Credit Card?

Another thing you may be wondering is, can you transfer student loans to a credit card? The U.S. Department of the Treasury doesn’t allow federal student loan servicers to accept credit cards as a payment method, and it’s unlikely you’ll find a private lender that offers it as an option. But you still can technically use a credit card to pay off a student loan by using the balance transfer feature.

Many credit card issuers send out blank balance transfer checks that you can use to pay off other credit card accounts or other types of debt. These checks often include an introductory 0% APR promotion, which could potentially save you money as you pay down your balance. To use one to pay off student loans, you’d write the check out to your loan servicer and submit it as payment or write the check to yourself and deposit it into your checking account, then make a payment. But just because it’s possible to do this doesn’t mean it’s a good idea. In fact, you’ll be hard-pressed to find a scenario where using a credit card balance transfer to pay off a student loan is the right move. Here’s why:

Balance transfers come with fees, which can range up to 5% of the transfer amount.
If you don’t pay off the balance before the promotional period ends, you’ll be stuck paying a higher interest rate, which can be in the mid teens or even upwards of 20%, on the remaining balance.
The lack of a set repayment term on a credit card can make it more difficult to stick to your repayment plan and keep you in debt longer.

In other words, if you have credit card debt, using a balance transfer credit card to pay it off interest-free is generally a good idea. But it’s not worth doing the same thing with your student loan balance. If you have a cash-back rewards credit card, you can also opt to use your rewards to help pay down your student loans.

Using Your Credit Cards Wisely While You Have Student Loan Debt

In an ideal world, you’d never carry a balance on a credit card because when you pay your bill in full every month, you’ll avoid interest charges. But if your financial situation is tight because of student loan debt and other obligations, it can be difficult to avoid. Whether or not you can afford to avoid credit card debt right now, here are some tips to help you limit your exposure to the risks they present:

Always pay on time

Even if you can just make the minimum monthly payment, paying on time will ensure that you don’t get slapped with late fees and a ding to your credit score. If you do miss a payment, make sure to get caught up quickly — you won’t avoid a late fee but late payments aren’t reported to the credit bureaus until they’re past due by 30 days.

Try to avoid a high balance

Your credit utilization rate is the percentage of available credit you’re using at a given time. So if you have a $1,000 balance on a card with a $2,000 credit limit, your utilization rate is 50%. There’s no hard-and-fast rule for what your rate should be, but the higher it is, the more damage it will do to your credit score. So if you can, try to keep your balance as low as possible relative to your credit limit.

Seek lower interest rates

As you work to pay down credit card debt, a balance transfer card with a 0% APR promotion can be a great way to save money on interest charges, even if you can’t pay the balance in full before the promotional period ends. If you can’t qualify for a balance transfer card, you may try to call your card issuer and see if you can get a reduced interest rate. There’s no guarantee your request will be granted, but credit card companies will sometimes offer a lower rate for at least a short period.

Avoid using your card as you pay it off

If you keep adding charges to your credit card while you’re paying down the balance, it can feel like you’re taking two steps forward and one step back. If you can, try to stick to using cash or your debit card while you pay down your debt — at least for most of your expenses — to make it easier to achieve your goal. As you take these steps, you’ll be able to avoid some of the drawbacks that come with using credit cards regularly. They’ll not only help preserve your credit score but also make it easier to pay off your balance, so you can turn your focus to your student loans.

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2020-10-22

Should I Build Home Equity or Pay Down Student Loans?

Owning a home is a goal for many people. In fact, 40% of young millennials are saving to buy a home. If you already own a home, congratulations on achieving your goal! If you are now faced with a mortgage and student loans, you may wonder which debt you should prioritize. Should you build home equity or pay down your student loans? Here we will explain what home equity is, how to build it and when it’s better to focus on home equity or paying down student loans.

What is Home Equity?

When you pay on a mortgage, even if you haven’t yet paid it off completely, you’re building equity in your home. Home equity is the difference between the market value of the house and what you owe. Here’s an example of how to calculate it:

How to Calculate Home Equity

You can calculate your home equity by subtracting the balance of your mortgage from the current value of your home. The value of your home is determined by the fair market value of your house or the appraised value. This number is the true value of your asset (your house) since it takes into account the amount you owe on the loan. Your home equity is calculated in your net worth. You may have heard that home equity can be “tapped into.” This means you can borrow against the equity of your home and use the money in a variety of ways. A home equity loan can cover home renovations or pay off higher-interest debt. Your home is valued at $375,000 and your mortgage balance is $275,000. You determine the equity by taking the value of $375,000 and subtracting the mortgage balance of $275,000. The equity in your home is $100,000.

Home Equity and the Housing Market

Your home’s equity often increases when you make mortgage payments, especially when paying down the principal on your loan. Your home’s equity can also increase when its value rises. Although the value is determined primarily by the housing market, you can raise the value through home improvements. Just as the value of your home can increase based on the market, however, it can also decrease based on the market. The only sure way to increase your home equity is by paying down your mortgage loan. The more of the loan you pay off, the more your equity increases.

Building Home Equity vs. Paying Down Student Loans

If you follow the normal payment schedule, you’ll increase your home equity slowly. If you make extra payments towards your mortgage, you can build equity faster. However, if you also have student loans, should you build home equity or pay down your student loans instead? Let’s take a look at some factors that can help determine the best course of action:

Interest Rates

If either your mortgage or any student loan has a variable interest rate, you may want to focus on that loan first, because you are at risk that the rate can rise and leave you with a higher payment to make. In addition, if one of your loans has a much higher interest rate than the other, you may choose to focus on it first.

Security

With student loans, in certain instances, if you are facing financial hardships you can temporarily suspend payments. Mortgages offer less flexibility with payments, therefore missing payments can result in foreclosure and losing your home.

Loan Balances

If you have student loans with lower balances than your mortgage, you may be able to pay them off more quickly. Then, you can continue to build equity after paying down your student loan debt.

Tax Implications

You may get a bigger tax break by building equity versus paying off student loans. However, this doesn’t apply to everyone. Interest paid on student loans is deductible, however, there is a cap on how much. As of 2020 the cap is $2,500. Your income must meet the requirements to be able to deduct this amount. Interest paid on mortgages is also deductible, but only if you itemize your deductions. The mortgage interest deduction can be much higher than $2,500. To learn more about either of these options, consult with your tax advisor.

Refinancing Your Student Loans With ELFI

If you don’t want to choose between building equity or paying off your student loans, then consider refinancing your student loans with ELFI. Use our student loan refinance calculator* to see how much you may be able to save.

The Bottom Line

Each person’s financial goals and situation are unique, so you have to make the best decision for you. Hopefully, however, knowing more about both options and which is better in certain circumstances will help you make an informed decision.