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Should I Save or Pay Down Student Loan Debt?

January 2, 2020

This blog has been prepared for informational purposes only and does not constitute financial advice. Always consult a professional for guidance around your personal financial situation.

 

Whether it comes as a check from grandma, a bonus from work, or a tax return, extra money in your bank account is a great feeling. However, it can be surprisingly difficult to decide what to do with that extra cash. You’d be tempted to spend the cash frivolously, like booking a much-needed vacation or splurging on eating out. But if you’re in debt, you know that money belongs elsewhere. The only question you should face when you come into a windfall is whether to contribute to savings or pay extra on your student loan debt. Luckily, that question is relatively easy to answer.

 

Save First. Pay Student Loan Debt Second.

Saving money—to a point—is necessary to ensure you’re prepared for unexpected financial emergencies. Car accident? Broken bone? Laid off? You need a “rainy day fund” so you can pay the bills when life challenges you without warning. By not saving, you could end up living on credit cards with interest rates that are likely two or three times higher than your student loan debt. Then you’re burdened with even steeper financial obligations to pay off. 

  

It’s recommended that you save at least six months of your current salary to be fully prepared for emergencies. Once you get your savings stockpiled, turn your attention to paying down student loan debt.

 

To explore why this is the case, consider savings accounts usually offer rates around 2%. However, your student loan debt likely comes with an interest rate of around 4%-7% interest if you have loans through the federal government. If you keep depositing money in your savings account instead of reducing your loan balance, you accumulate more debt (in interest owed) than you save. 

 

 Basic savings accounts are fairly safe—your balance only grows, as long as you don’t withdraw money from the account. The payoff for this safety is a lower interest rate. Low risk equals low reward. 

 

So, you might be thinking, “What saving options make me more money?” 

 

Related: Yes, You Need A Side Hustle

 

Are Stocks worth the investment?

Stocks are a popular option that is high risk and high reward. When you buy stock in a company, you own a piece of that company. The benefit for them is that your money is an investment in developing new products and other growth-based projects. The benefit for you is that your money could grow with the company. The downfall, however, is that your money can be depleted if the company’s stock takes a downturn. 

 

Stocks can also be an intimidating game since companies like Alphabet (Google) and Amazon generally sell for more than $1,000 a share. However, some companies like Robinhood are trying to make stocks more accessible to the everyday investor, highlighted with their soon to be released fractional share trading options. With the new feature, you can buy one-millionth of a share or just $1 worth of any stock.

 

Could I place savings in a CD?

A more middle-of-the-road option is a CD. Not to be confused with a compact disc, these Certificates of Deposit are savings accounts that are typically federally-insured and usually have higher interest rates than traditional savings accounts. The beauty of placing your money in a CD is that it becomes harder to spend your money frivolously since there are predetermined dates for withdrawal. Common terms are 3, 6, 12, and 18-months, with penalties assessed if money is withdrawn before the maturity date. 

 

Ready to Save But Short On Funds?

Saving and paying off debt is great…when you have the extra cash to do so. But not everyone has a wealthy grandma or job that comes with a bonus. Here are some quick ways to save.

 

Student loan refinancing through companies like ELFI* could free up more money by lowering your monthly payment through loan consolidation and a lower interest rate. In fact, customers reported saving an average of $309 every month and an average of $20,936 in total savings after refinancing student loans with Education Loan Finance.

 

Related: 7 Benefits of Refinancing Student Loans

 

You could also save hundreds of dollars a month after canceling unused subscriptions. Banks or apps like Truebill and Trim can help you find and cancel subscriptions that are unused or that you forgot you signed up for in the first place. These apps also connect to your bank account to make automated weekly money transfers into a savings account. With automated transfers, think small—just $25 a week can turn into $1,300 a year.

 

Apps like Acorns can make your investments even more simple by setting aside leftover change from purchases you make. With the Acorns debit card, the spare change from each purchase is placed in an investment account of your choosing. And when you shop via the Acorns app or Chrome Extension at 350+ retail partners, a percentage of your total purchase is deposited into your selected savings account. 

 

At ELFI, we work hard to help you reduce student loan debt with great student loan refinancing options. By refinancing student loans with ELFI, you can pick the payment plan and terms that fit your life. See what you could save with our quick, no-obligation quote.

 


 

*Subject to credit approval. Terms and conditions apply.

 

¹Average savings calculations are based on information provided by SouthEast Bank/Education Loan Finance customers who refinanced their student loans between 8/16/2016 and 10/25/2018. While these amounts represent reported average amounts saved, actual amounts saved will vary depending upon several factors.

 

Notice About Third Party Websites: Education Loan Finance by SouthEast Bank is not responsible for and has no control over the subject matter, content, information, or graphics of the websites that have links here. The portal and news features are being provided by an outside source – the bank is not responsible for the content. Please contact us with any concerns or comments.

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2020-01-21
5 Things to Do Immediately After Graduation

By Kat Tretina

Kat Tretina is a freelance writer based in Orlando, Florida. Her work has been featured in publications like The Huffington Post, Entrepreneur, and more. She is focused on helping people pay down their debt and boost their income.

 

If you’re in your senior year and preparing for graduation — congratulations! Graduating from college is a huge accomplishment.

 

But after the hat toss, you have to start worrying about things like finding a job. And, if you’re like most college students, you probably have student loan debt to manage, too. As you start preparing for graduation, here are five things you should do to handle your student loans.

 

1. Find Your Loan Details

You likely needed to take out several loans to pay for school. It’s common for graduates to have as many as 12 different student loans when they graduate from college. Worse, your loans can be sold and transferred to different servicers, making it difficult to keep track of your debt.

 

After you graduate, look up all of your student loans and figure out who your loan servicers are, what your monthly payment is, and your due dates.

 

Federal Student Loans

To find your federal loans, use the National Student Loan Data System. Just enter your Federal Student Aid ID and password and you can view all of the federal loans under your name. The site will list your loan servicer and loan balance. Once you have that information, you can go to the loan servicer’s website and create an account and start making payments.

 

Private Student Loans

For private loans, you can identify the different loans and lenders by looking up your credit report at AnnualCreditReport.com, which allows you to get one free credit report per year. Your credit report will show what company currently manages your loan. When you find your loan servicer, you can contact the company directly to find out how to open an online account and make payments.

 

2. Create a Budget

Your student loan payments will likely eat up a significant part of your monthly income, especially when you’re just starting out in your career. To make sure you can afford the payments and your other living expenses, spend some time creating a monthly budget.

 

While you can use software like You Need a Budget (YNAB), you can also make a budget with just a simple pen and paper. List all of your monthly income, including earnings from your job and side gigs. Next, list all of your expenses, such as rent, utilities, internet service, student loan payments, car payments, and insurance.

 

Hopefully, your income exceeds your spending. If that’s not the case, you’ll have to look for areas to cut to give you some more breathing room in your monthly budget. Or, you can boost your income by freelancing or launching a side gig.

 

3. Sign Up for an Income-Driven Repayment Plan

If your starting salary is too low, or if you can’t afford the payments on your federal student loans, consider signing up for an income-driven repayment (IDR) plan.

 

There are four different IDR plans. While the specifics of each plan vary, the general concept is the same: the loan servicer extends your repayment term and caps your monthly payments at a percentage of your discretionary income. Depending on your income and family size, you can dramatically reduce your monthly bill. In fact, some people qualify for payments as low as $0.

 

After 20 to 25 years of making payments, the loan servicer will forgive your remaining loan balance. While the forgiven amount is taxable as income, IDR plan forgiveness can still help you save thousands.

 

You can apply for an IDR plan online.

 

4. Refinance Student Loans

If you have private student loans or a mix of both federal and private loans and want to pay off your debt as quickly as possible, look into student loan refinancing. By working with a private lender to take out a loan for the amount of your existing debt, you could potentially lower your interest rate, helping you save money. Or, you could get a longer repayment term and reduce your monthly payments, making them more affordable.

 

How effective is student loan refinancing? The savings can be significant. According to The Institute for College Access & Success, the average graduate has $29,200 in student loan debt. If you had that much debt with a 10-year repayment term and a 6% interest rate, your monthly payment would be $324. By the end of your loan term, you’d pay a total of $38,902.

 

But if you refinanced your debt and qualified for a 10-year loan at 4% interest, your monthly payment would drop to $296 per month. Over the course of your loan, you’d repay just $35,476. Refinancing your student loans would allow you to save over $3,400.

  chart showing the difference between refinances student loan and original loan

While there are some drawbacks to refinancing your education debt, refinancing can be a smart way to manage your loans. If you decide that student loan refinancing is right for you, use ELFI's Student Loan Refinancing Calculator to get an idea of what your repayment plan could look like. Prequalification is 100% online, free, and won’t affect your credit score*.

 

5. Sign Up for Automatic Payments

Managing your different loans and their various payment due dates can be overwhelming. But missing a payment can hurt your credit, and you could be subject to costly fees and penalties.

 

Signing up for automatic payments is a great way to ensure you never miss a payment and improve your credit history.

 

The Bottom Line

Your college graduation may feel far off, but it’ll be here before you know it. When it comes to preparing for graduation, developing a student loan repayment strategy is essential. By creating a plan now, you can ensure you’re ready to handle your student loan debt when your payments are due.

 
 

*Subject to credit approval. Terms and conditions apply.

 

Notice About Third Party Websites: Education Loan Finance by SouthEast Bank is not responsible for and has no control over the subject matter, content, information, or graphics of the websites that have links here. The portal and news features are being provided by an outside source – the bank is not responsible for the content. Please contact us with any concerns or comments.

2020-01-17
This Week in Student Loans: January 17

Please note: Education Loan Finance does not endorse or take positions on any political matters that are mentioned. Our weekly summary is for informational purposes only and is solely intended to bring relevant news to our readers.

  This week in student loans:
House of representatives

House Democrats Overturn DeVos on Student Loan Forgiveness

This Thursday, the Democrat-controlled House voted to overturn regulations introduced by Education Secretary Betsy Devos that eliminate the "borrower defense" rules introduced by the Obama administration. Critics have said the new regulations make it more difficult to get student loan forgiveness if a college suddenly closes. Sources say that the move to overturn Devos' new regulations won't pass the GOP-controlled Senate, however – and Trump is likely to veto the bill even if it does.  

Source: USA Today

 

signing legislation

Could Elizabeth Warren Really Wipe Out $1 Trillion in Student Loans in a Single Stroke?

Democratic Presidential Candidate Elizabeth Warren recently vowed to eliminate hundreds of billions of dollars in student loans on her first day in office if elected president. Her plan was released just before Tuesday night's Democratic primary debate. While the ability to erase debt is typically a decision left to Congress, student loans may be a different story due to a loophole involving the "Higher Education Act" passed in 1965.  

Source: CBS News

 

can't pay student loans

Study: Barely Anyone is Paying Off Their Student Loans

A recent study revealed that very few people are making progress on paying off their student loans, along with shifting factors in the nation's rising student loan debt. The study found that 51 percent of students who took out loans from 2010-12 haven’t made any progress in paying them off. Additionally, it showed that while in the past higher enrollment and rising tuition costs were the main drivers in the rising debt, slow repayments and amassing interest have now become the primary drivers.  

Source: NY Daily News

 
IRS building

IRS Issues Tax Guidance On Discharged Student Loans

The Internal Revenue Service recently issued guidance for some taxpayers who took out federal or private student loans and qualified to have their loans discharged. Typically, having loans discharged is treated as a taxable event, in which the forgiven amount is treated as income – but the tax break from the IRS allows the discharged amount to not be recognized as taxable income.

 

Source: Forbes

  That wraps things up for this week! Follow us on FacebookInstagramTwitter, or LinkedIn for more news about student loans, refinancing, and achieving financial freedom.  
 

Notice About Third Party Websites: Education Loan Finance by SouthEast Bank is not responsible for and has no control over the subject matter, content, information, or graphics of the websites that have links here. The portal and news features are being provided by an outside source – the bank is not responsible for the content. Please contact us with any concerns or comments.

Graphic of question mark
2020-01-16
7 Common Student Loan Refinancing Questions Answered

By Kat Tretina

Kat Tretina is a freelance writer based in Orlando, Florida. Her work has been featured in publications like The Huffington Post, Entrepreneur, and more. She is focused on helping people pay down their debt and boost their income.

  If you have student loan debt, you know how painful interest charges can be. High interest rates can cause your loan balance to grow over time, forcing you to repay thousands more than you originally borrowed.
Student loan refinancing 1 is a strategy you can use to manage your debt and save money. In fact, ELFI customers have reported that they see an average savings of $20,936 after refinancing their student loans2. However, there are questions about student loan refinancing out there that may be preventing you from submitting a loan application. Here are some of the most common questions — and answers — you should know about.  

1. Does refinancing student loans cost money?

One of the biggest myths is that refinancing student loans is expensive. And that’s because student loan refinancing is often confused with other forms of refinancing, such as refinancing mortgages. While refinancing a mortgage does involve closing costs, student loan refinancing should not. Plus, most lenders don’t charge any application or origination fees. And with Education Loan Finance, there are no prepayment penalties, so you’re free to pay off your new loan as soon as you’d like.  

2. How long does it take to qualify for student loan refinancing?

Some forms of loans can take months to process, but student loan refinancing is different. You can complete the application in minutes, and you can do everything online. Once you submit your application, the lender will review your information and make a decision. In most cases, you’ll find out whether or not you’re approved in as little as one business day. If approved, the lender will work to disburse your loan. It can take a few days to a few weeks for that process to be completed, so keep making payments on your current debt until you receive a notification that the loan was disbursed. If you refinance your student loan with ELFI, you’ll have a personal loan advisor who will be your guide throughout the entire process.  

3. Is savings from refinancing student loan debt significant?

You may think that student loan refinancing isn’t worth the work because it won’t save enough money for you. But taking just a few minutes to submit a refinancing application can help you save thousands over your loan repayment term. For example, let’s say you had $30,000 in loans at 7.08% interest — the current rate for federal PLUS Loans.  If you repaid your loans over the course of 10 years, your monthly payment would be $350. In total, you’d pay $41,948 by the end of your repayment term; interest charges would add nearly $12,000 to your loan balance. Use ELFI’s student loan refinance calculator1 to find out how much money you can save by refinancing your debt.  

4. Will refinancing student loans affect my credit?

Some people hold off on student loan refinancing because they’re afraid it will damage their credit. However, lenders like ELFI allow you to get a rate quote (prequalify) with just a soft credit inquiry, which doesn’t affect your credit score. If you find a quote that works for you and submit a refinancing application, the lender will then complete a hard credit inquiry, which can impact your credit. However, the effect is usually minimal. According to myFICO — the organization behind the FICO credit score — one hard credit inquiry will typically take less than five points off your FICO credit score.  

5. Is refinancing federal student loans a good idea?

If you have federal student loans, you may have heard that refinancing your debt isn’t a good idea. However, that’s not the case for everyone. When you refinance your loans, you will lose out on federal benefits like income-driven repayment plans and loan forgiveness. But those perks are only valuable if you’d actually use them. If you make too much money or don’t work in a qualifying field, you wouldn’t be able to take advantage of those programs. If you can afford your monthly payments and feel secure in your job, refinancing your federal student loans can help you save money and become debt-free sooner.  

6. Do only federal student loans have forbearance or deferment programs?

A big perk of the federal loans is the ability to enter into forbearance or deferment. With these options, you can postpone making payments on your debt without entering into default. Few refinancing lenders offer forbearance benefits. However, there are some exceptions. With ELFI, you may be able to postpone your payments for up to 12 months if you’re facing a financial hardship, such as a job loss or medical emergency. That period can give you time to get back on your feet before you have to worry about making payments.  

7. Can I refinance student loans more than once?

If you already refinanced your loans once, you may think you’re out of luck, and you’re stuck with your current interest rate. However, there’s no limit to how many times you can refinance your loans. If your credit score improves or you get a raise at work, you can refinance your loans again to see if you qualify for a lower interest rate. As you progress in your career and your finances stabilize, refinancing multiple times can help you pay off your debt even faster.  

Refinancing your student loans

While student loan refinancing can be an effective way to manage your debt, there are a lot of myths and misinformation out there. Now that these common questions have been answered, you can move forward with the refinancing process with confidence. Use ELFI’s Find My Rate tool to get a rate quote without affecting your credit score1.           1 Education Loan Finance is a nationwide student loan debt consolidation and refinance program offered by Tennessee based SouthEast Bank. ELFI is designed to assist borrowers through consolidating and refinancing loans into one single loan that effectively lowers your cost of education debt and/or makes repayment very simple. Subject to credit approval. See Terms & Conditions. The interest rate and monthly payment for a variable rate loan may increase after closing, but will never exceed 9.95% APR. For example, a 10-year loan with a fixed rate of 6% would have 120 payments of $11.00 per $1,000 borrowed. Rates are subject to change.   2 Average savings calculations are based on information provided by SouthEast Bank/Education Loan Finance customers who refinanced their student loans between 8/16/2016 and 10/25/2018. While these amounts represent reported average amounts saved, actual amounts saved will vary depending upon several factors.   Notice About Third Party Websites: Education Loan Finance by SouthEast Bank is not responsible for and has no control over the subject matter, content, information, or graphics of the websites that have links here. The portal and news features are being provided by an outside source – the bank is not responsible for the content. Please contact us with any concerns or comments.