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Student Loan Refinancing

So I’ve Refinanced My Student Loans – Now What?

November 29, 2019

By Caroline Farhat

 

Congratulations! You just made the big step of refinancing your student loans. Your wallet is fatter and you’ve likely shaved off thousands of dollars from what you will have to pay on your student loans. That’s a huge achievement that will positively impact your financial life.

 

You may be tempted to use your new found moolah on brunches and vacations, but don’t start spending lavishly quite yet. While present you may be saying “yes!” to fancy dinners, future you would really benefit from spending this extra cash in a smarter way. If you’re feeling financially empowered, you’ll love these five financial tips for what to do after you refinance to maximize your money.

 

1. Reexamine (or create) your budget

Any time you have a change in your financial situation, such as a raise or a new recurring bill, it’s important to evaluate your current budget. If you don’t already have a budget, getting a little extra money each month can be a great motivator to start one. We’re fans of the zero-based budget system. With zero-based budgeting, you allocate each dollar you make to a specific expense or goal so it can help curb unnecessary expenses you may regret later. For example, say you bring in $4,000 a month after taxes. You spend $3,000 on fixed expenses such as rent, utilities, and food. Your monthly payment for student loans is $600, leaving you with $400 extra each month. Under zero-based budgeting, you would allocate the extra $400 to other goals (such as contributing to a savings account) or wants (such as a travel budget). Once you have figured out exactly where each dollar will go, you should set up an automatic transfer to a savings account so that you never get tempted to spend money that you should be saving.

 

Of course, budgets aren’t one size fits all. If you have a method that works for you, then use that! The important things to know and keep track of are:

  1. How much money you have (after taxes and health insurance payments)
  2. Your essential fixed expenses (such as housing, utilities, food, student loan payments)
  3. Your non-essential fixed expenses (such as gym memberships, Netflix, etc.)
  4. Your long-term financial goals (buying a house, saving for a child, retirement)
  5. Your short-term financial goals (dining out, travel)

 

2. Start or pad your emergency savings account

If you don’t have at least three months of living expenses saved up, you need to start right now. We don’t want to set off alarm bells, but an emergency savings account is the number one thing everyone needs to have on their financial to do list. Depending on your situation, you may benefit from stashing away six to nine months of living expenses, but start with at least three months and build from there. Be sure to have this money easily available, so put it in a savings or checking account that does not incur any fees or penalties for withdrawing money. For example, you do not want to put your emergency savings in a CD, even if it will yield you a higher interest rate, because getting your money out can be a costly and sometimes time-intensive process. That said, find a savings account that will pay you interest so you don’t lose all your earning power on that money.

 

3. Pay down other high-interest debt

After you have a healthy savings account, paying off high-interest debt should be your next priority. Just like how refinancing your student loans helped you save money in the long run, paying off debt with high interest rates such as credit card debt or a personal loan will help you shave off hundreds or possibly even thousands of dollars that you would have to make in interest if you just paid the minimum monthly payment. Even putting an extra hundred dollars a month to this debt can pay off big time in the future. Additionally, lowering your debt load can help bolster your credit score, especially if you are carrying a lot of credit card debt. Your debt-to-income ratio is critical if you want to get a mortgage or other big-ticket items so paying down high-interest debt can only work to your advantage.

 

4. Contribute to your retirement

Say you have a healthy emergency savings, you’ve paid off all of your credit cards, and you have enough to cover your living expenses with a little bit of extra fun money. First, congrats! That’s a big feat and you’re killing it with your finances!

 

Set your future self up for success is by starting or increasing your contribution to a retirement account such as a 401(k) or IRA. Retirement accounts benefit from compounding interest so the sooner you start, the better. Plus, many employers have matching programs that help you pad your retirement account. Remember the free money you can make from a high-interest savings account? This is similar, but your future self will be the one to reap the benefits.

 

5. Treat yourself, responsibly

If you have refinanced your student loans, it’s safe to say that you’re clearly on top of your financial game. Let’s be real — there will always be a list of things you can and should do with your money. But it shouldn’t all be about the work. You deserve to treat yourself! Just be sure to do it responsibly. Should you suddenly move into a budget-busting luxury penthouse apartment? Probably not. But you absolutely should treat yourself to that nice dinner or new pair of sneakers you’ve been eyeing. The keys to a successful financial life are staying informed and staying balanced. Just like any other goal, providing little rewards along your journey can help you stay motivated. So take this as our encouragement to enjoy yourself! Just do it responsibly with an eye on your financial independence.

 

 

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Woman thinking about using credit card to pay down student loans
2020-11-30
Should I Pay Student Loans with a Credit Card?

Paying off student loans can be a challenging process, so it’s natural to look for creative ways to accomplish your goal. One question some student loan borrowers have asked is whether they can use a credit card to pay student loans.    Technically, it is possible, but it’s generally not a good idea. Here’s what you should know before you try it.  

Can You Use a Credit Card to Pay Student Loans?

Unfortunately, making monthly student loan payments with your credit card isn't an option. The U.S. Department of the Treasury does not allow federal student loan servicers to accept credit cards as a payment method for monthly loan payments.   While that restriction doesn’t extend to private student loan companies, you’ll be hard-pressed to find one that will offer it.   That said, paying off student loans with a credit card is technically possible through a balance transfer. Many
credit cards offer this feature primarily as a way to transfer one credit card balance to another, and if you’re submitting a request directly to your card issuer, that’s typically the only option.   However, some card issuers will send customers blank balance transfer checks, which gives you some more flexibility. For example, you can simply write a check to your student loan servicer or lender and send it as payment. Alternatively, you can write a check to yourself, deposit it into your checking account, and make a payment from there.   Balance transfer checks often come with introductory 0% APR promotions, which give you some time to pay off the debt interest-free. That said, here are some reasons why you should generally avoid this option:  
  • Once the promotional period ends, your interest rate will jump to your card’s regular APR. The full APR will likely be higher than what your student loans charge.
  • Balance transfers come with a fee, typically up to 5% of the transfer amount, which eats into your savings.
  • Credit cards don’t have a set repayment schedule, so it’s easy to get complacent. You may end up paying back that balance at a higher interest rate for years to come.
  • Credit cards have low minimum payments to encourage customers to carry a balance, which could cause more problems. 
  • You won’t earn credit card rewards on a balance transfer, so you can’t count on that feature to help mitigate the costs.
  So if you’re wondering how to pay student loans with a credit card, it is possible. But you’re better off considering other options to pay down your debt faster.  

Can You Use a Student Loan to Pay Credit Cards?

If you’re still in school, you may be wondering if it’s possible to use your student loans to pay your credit card bill. Again, technically, yes, it is possible. But there are some things to keep in mind.    The Office of Federal Student Aid lists acceptable uses for federal student loans, and private student lenders typically follow the same guidelines. Your loans must be used for the following:  
  • Tuition and fees
  • Room and board
  • Textbooks
  • Supplies and equipment necessary for study
  • Transportation to and from school
  • Child care expenses
  If you incur any of these expenses with your credit card, you can use student loan money to pay your bill. However, if you’re also using your credit card for expenses that aren’t eligible for student loan use, it’s important to separate those so you aren’t using your loans inappropriately.   Also, the Office of Federal Student Aid doesn’t list credit card interest as an eligible expense. So if you’re not paying your bill on time every month and incurring interest, be careful to avoid using your student loan money for those expenses.  

How to Pay Down Your Student Loans More Effectively

If you’re looking for a way to potentially save money while paying down your student loans, consider student loan refinancing   This process involves replacing one or more existing student loans with a new one through a private lender like ELFI. Depending on your credit score, income, and other factors, you may be able to qualify for a lower interest rate than what you’re paying on your loans right now.    If that happens, you’d not only save money on interest charges, but you could also get a lower monthly payment.    Refinancing also gives you some flexibility with your monthly payments and repayment goal. For example, if you can afford to pay more and want to eliminate your debt faster, you can opt for a shorter repayment schedule than the standard 10-year repayment plan.    Alternatively, if you’re struggling to keep up with your payments or want to reduce your debt-to-income ratio, you could extend your repayment term to up to 20 or even 25 years, depending on the lender.    Keep in mind, though, that different refinance lenders have varying eligibility requirements. Also, just because you qualify, it doesn’t necessarily mean you can get more favorable terms than what you have now.   However, if you’re having a hard time getting approved for qualifying for better terms, most lenders will allow you to apply with a creditworthy cosigner to improve your odds of getting what you’re looking for.   Before you start the process, however, note that if you have federal loans, refinancing will cause you to lose access to certain programs, including student loan forgiveness and income-driven repayment plans. But if you don’t anticipate needing either of those benefits, it won’t be an issue.  

The Bottom Line

If you’re looking for ways to pay off your student loans more effectively, you may have wondered whether you can use your credit cards. While it’s possible, it’s generally not a good idea. Also, if you’re still in school, it’s important to be mindful of how you’re allowed to use your student loan funds, especially when it comes to making credit card payments.   A better approach to paying down your student loan debt is through refinancing. Take some time to consider whether refinancing your student loans is right for you, and consider getting prequalified to see whether you can get better terms than what you have on your current loans.
Woman refinancing her student loans
2020-11-18
Student Loan Refinancing vs. Income-Driven Repayment Plans   

Student loans can be a real budget killer, with the average student loan payment being $393 per month. Over time, you may want to lower your monthly payment to make it more manageable or to put your savings toward other financial goals. Depending on the types of loans you have, you may choose to pursue income-driven repayment or student loan refinancing.   If you have federal student loans, you may be eligible to select an Income-Driven Repayment plan. Alternatively, for private and federal loans, student loan refinancing could be a better choice. To figure out whether you have federal student loans, check the Federal Student Aid site where all the information on federal loans will be available. To determine whether you have private student loans, request your credit report to see any reported private loans.   Once you know the types of loans you have, here are a few options that may reduce your student loan payment:  

Student Loan Refinancing

When you refinance your student loans, you obtain a new loan with a different lender, often a bank, credit union or third party. You can refinance your private or federal student loans, or a combination of both. Your refinanced loan will have a new interest rate, term length and monthly payment. Here are a few important things to know about student loan refinancing:  

Eligibility

To qualify for student loan refinancing, you must meet certain eligibility requirements.   Most lenders require:
  • A minimum credit score in the high 600s
  • Stable employment with proof of income
  • A minimum student loan amount
  • Debt-to-income ratio of less than 50%
 

Interest Rate

One benefit of refinancing your student loans is that you may earn a reduced interest rate, which can save you thousands of dollars. Here’s how it works:   If you have $65,000 in total student loan debt, a 15-year term and an interest rate of 6.8%, your monthly payment will be approximately $577. When you refinance, if you keep the 15-year term and qualify for an interest rate of 3.77%, your payment will be reduced by $104 per month. This results in $18,000 in interest savings over the life of the loan!  

Loan Terms

In addition to potentially reducing your interest rate, another benefit of refinancing student loans is you have more control over the terms of your repayment. You can select a fixed or variable interest rate, choose the loan provider that best meets your needs, and choose the amount of years of the loan.   If you want to pay your loan off more quickly, you can select a shorter student loan repayment term, although this will most likely increase your monthly payment. If you want to reduce your monthly payment, you can lengthen your student loan repayment term, but this may result in paying more in interest over the life of the loan. Try ELFI’s Student Loan Refinance Calculator* to see how much you could save.  

Income-Driven Repayment Plans

These plans are only available for federal student loans. There are four Income-Driven Repayment (IDR) plans offered, and with each plan, the payment is based on income and family size. Here are a few important things to know about Income-Driven Repayment:  

Recertification

To select an IDR plan, you must apply through your loan servicer. Once an IDR plan is established, you’ll be required to recertify each year by submitting documents to prove your income and family size.  

Types of Income-Driven Repayment Plans

Once you recertify the monthly payment can go up or down depending on your income. The IDR plans available are:  

Revised Pay As You Earn (REPAYE)

The payment is always based on your income and family size. Your payment can increase to be higher than your payment on the standard repayment plan if your income increases significantly. The term length is 20 years for undergraduate loans and 25 for graduate loans.  

Pay As You Earn (PAYE)

The payment is 10% of your discretionary income but your payment cannot increase to be more than the payment on the standard 10 year repayment plan. The term length is 20 years for all loans.  

Income-Based Repayment (IBR)

The payment is 10% or 15% of your discretionary income, depending on when you borrowed the loans. Your payment will never be more than the 10-year standard repayment amount. The term length is 20 or 25 years depending on when you borrowed the loans.  

Income-Contingent Repayment (ICR)

The payment can be up to 20% of your discretionary income and the loan term is 25 years.  

Student Loan Refinancing vs. Income-Driven Repayment

To determine which option is best for you, it is helpful to evaluate the differences between student loan refinancing and income-driven repayment plans:  

Interest Rate

Although either option may reduce your monthly student loan payment, the major difference between Income-Driven Repayment and student loan refinancing is the interest rate change.   Income-Driven Repayment will not lower your interest rate. Rather, it will remain the same throughout the life of the loan. Student loan refinancing, on the other hand, may reduce your interest rate for the remaining life of the loan.  

Federal Benefits

With IDR plans, you are still eligible for federal benefits such as deferment, forbearance and forgiveness, although some private lenders also offer deferment and forbearance options.  

Financial Costs

There is no cost to refinance, and you may even save on interest costs if you qualify for a lower rate. With an IDR plan, there is no cost to apply for a plan, but your loan balance may actually increase on certain plans. This can happen when your minimum payment based on your income is not large enough to cover the interest costs that are accumulating. The interest costs can be added to your loan and your loan amount will actually increase rather than decrease.  

Payment

When you refinance, you have the option to select a fixed interest rate, as opposed to a variable rate, that will keep the payment the same throughout the life of the loan. On an IDR plan, there is uncertainty to what your payment amount will be each year, since you are required to update your income and family size. Your payment can change each year and your budget must account for it.  

Bottom Line

When you want to lower your student loan payment, evaluate the options and decide which works best for your financial plans. Both options can make your payment more manageable, but each have different long-term outcomes.
Grad student graduating with minimal student debt
2020-11-16
6 Ways to Minimize Grad School Student Loan Debt

Embarking on your grad school journey can be an exciting time because it puts you one step closer to your dream career. But paying for grad school may cause anxiety if you are borrowing loans to cover the costs.   According to the U.S. Department of Education, in 2020 the average student loan debt from a graduate degree was $84,300. However, the cost of school shouldn’t prevent you from achieving your dreams. Here are 6 ways to minimize your grad school student loan debt:  

Minimizing Graduate School Debt

If you’re looking to graduate debt-free, here are a few tips for reducing your graduate school debt:  

Apply for a Stipend

If you are trying to decide which school is right for you, do your research and find out which schools provide stipends for graduate students. Certain degree programs will provide a stipend for living expenses, which will help reduce the loans you will need to borrow. The stipends may be provided for conducting research or teaching a class as a graduate assistant.   If you are fortunate enough to receive a grad school stipend, make a budget to help maximize the value of it so you can cover most, if not all of your expenses. Use some of these next tips to minimize your expenses.  

Earn Money Elsewhere

If getting a stipend is not possible, look into internships or a part-time job in your field of study. Although these may be low-paying options, working outside of school will not only bring in income that can help offset your costs, but will also offer you job experience.  

Reduce School Expenses

Of course you know tuition and living expenses need to be considered when paying for grad school, but be sure to think about the extra expenses too. Textbooks most likely will still be a necessary item for your program but it doesn’t mean you can’t save on the rising costs.   Try to buy textbooks secondhand from your school’s bookstore or online. You may also be able to rent your textbooks if you don’t think you will need to refer to them in the future. Although the expense of textbooks can add up, you can find ways to keep more money in your bank account.   Your wardrobe may not come into mind when budgeting for the extra expenses, but it should be something to consider. You will most likely need professional clothing for future internships or recruiting interviews. Professional clothing may be stretching your budget but a necessary expense.   If you are looking to minimize your grad school debt, you may want to consider shopping for used clothing or see if your school has an option to borrow professional clothing. Some schools, such as the University of Northern Colorado and Manhattan College, offer such options.  

Reduce Your Living Expenses

You may have thought your roommate days were gone once you graduated college. If you are considering grad school, however, living with a roommate can help lower expenses. A roommate may also be a built-in study partner if you choose to live with a fellow grad student.   To further reduce your living expenses, consider eating primarily at home. Although you may not have a lot of time for cooking when you are in grad school, when you consider the savings, it may be worth the effort.   Money Under 30 explains that eating out is about three times more expensive than cooking at home. This can add up to hundreds of dollars of savings each month. To help combat the problem of not having time, try meal prepping one day each week.   When curbing your eating out, remember a coffee habit can add up, too! If you are used to grabbing a cup of coffee from a shop on your way to class, instead try brewing some at home to save yourself an average of $2.99 each time. Every little bit of savings will help you minimize your grad school expenses.  

Minimizing Student Debt After Graduation

If you have already finished grad school and it feels like you’re facing a mountain of student loan debt, you still have options to help reduce your debt.  

Refinance Your Loans

If you have already graduated and are employed, refinancing student loans is a beneficial way to minimize your loan payments. Refinancing is when you obtain a new private student loan to pay off outstanding student loans, whether they are private student loans or federal. You can refinance just one loan or multiple loans.   One of the benefits of student loan refinancing is the chance to lower your interest rate, thereby lowering your monthly payment. It also helps reduce interest costs over the life of the loan, which can add up to thousands of dollars. If refinancing sounds like it could be a good fit for you, use the Student Loan Refinance Calculator* for an idea of how much you could save.  

Research Employer Benefits

Seek out an employer that offers student loan repayment assistance. Some employers may provide you additional money, monthly or yearly, to help repay your loans.   If you receive any money from your employer for loan repayment, try to use it for extra payments towards your loan rather than for monthly payments. Making extra payments towards the student loan principal will reduce the balance, helping you pay them your loan off more quickly and save on interest costs.  

The Bottom Line

Earning a graduate degree is a big accomplishment and something you should be proud of, but it doesn’t have to mean you will be paying for your education the rest of your life. Just using a few of these strategies can help minimize the financial burden of getting your degree and set you on a strong financial path. Good luck!