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Student Loans

Smart Ways to Manage Your Student Loans

You could consolidate or refinance to lower your payments, but some options will increase your overall costs or eliminate federal loan safeguards.

Blair Green Thielemier paid off the balance of her federal student loans in less than two years after refinancing to a lower-cost private loan. Selavie Photography

Blair Green Thielemier graduated in 2011 from the University of Arkansas for Medical Sciences with a doctorate of pharmacy and $65,000 in federal student loans. She diligently paid more than her required payments every month, but after four years her balance still stood at $35,000–primarily because a large portion of her payments went toward interest. Thielemier, 31, wanted to pay off her loans faster, so she decided to refinance with CommonBond, a private lender, which offered to reduce her 6.3% fixed rate to a roughly 2% variable rate. With more of her payments going toward principal, she was able to pay off the balance in less than two years.

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Refinancing your student loans has advantages, but it also poses risks. You can streamline the repayment process by combining your loans into a single monthly payment. You may be able to lower your monthly payments by extending the repayment schedule. And some options, such as the one Thielemier chose, can lower your overall interest rate. But plans that make your payments more affordable typically increase the total amount you pay over the life of the loan. Plus, re-financing federal loans with a private loan, as Thielemier did, means giving up some protections that only federal loans have. Those protections include deferment and forbearance, which allow borrowers to postpone or reduce payments if they're unemployed or experience other types of economic hardship, as well as loan forgiveness.

If you're interested in refinancing, start by identifying which of your loans are federally sponsored and which, if any, were issued by private lenders. Review the interest rate on each loan, as well as your monthly payments and how they fit into your budget. From there, consider whether your primary goal is convenience, a more affordable monthly payment or a lower interest rate. If you're simply looking for a way to streamline your federal student loan payments, you may want to consolidate rather than refinance them. Consolidating your federal loans will allow you to select a repayment plan that works best for your budget.

Pros and Cons of Consolidation

If you have several federal student loans, consolidating them through the federal government can make payments more convenient. Most federal student loans, including direct loans, Stafford loans and Perkins loans, can be consolidated into a single loan through the Department of Education's Direct Consolidation Loan program. You can't include loans from private lenders.

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Consolidating won't lower your interest rate or save you money over the life of your loan. The interest rate of your new loan will be the weighted average of the interest rates of the loans that you combine, rounded up to the nearest one-eighth of a percentage point. Federal student loan interest rates vary annually and by loan type, but direct subsidized and unsubsidized loans for undergraduates have carried fixed interest rates of between 3.76% and 4.66% in recent years. To see what your new interest rate would be, use the loan-consolidation calculator at www.finaid.org/calculators.

Once your loans have been combined into a direct consolidation loan, the change can't be undone. If you're a public-service worker, the payments you've already made will no longer count toward the 120 payments required to qualify for federal loan forgiveness. If you have Perkins loans, which are granted to low-income borrowers, you may qualify for loan cancellation if you are employed in certain fields or volunteer with AmeriCorps or the Peace Corps. However, that benefit disappears in a consolidation, so you may not want to include those loans. Borrowers may choose to exclude other loans from a consolidation, too. For example, some may decide to keep the highest-interest loan and funnel any extra cash toward early repayment.

Repayment Options

In addition to converting several payments into a single monthly payment, consolidating your federal loans will allow you to pick a new repayment plan. Most borrowers with federal student loans are put on a 10-year plan, in which you pay the same amount each month until the loan is paid off. If that's unaffordable, look for another option.

There are three main types of repayment plans: ones that stretch repayment over a longer period, ones that gradually increase the amount of your monthly payments, and ones that base the amount of your payments on your income.

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Borrowers with more than $30,000 in federal debt who want to lower their monthly payments can choose the extended repayment plan, which increases the loan term to 25 years. The graduated repayment plan requires lower monthly payments at first, then increases them, usually every two years, as your income presumably rises.

The government also offers several income-driven repayment plans. With these, you'll be expected to dedicate 10% to 20% of your discretionary monthly income toward your loans for 20 to 25 years, after which any remaining amount is forgiven. (For public-service workers, the remaining balance will be forgiven after 10 years.) Another option, the income-sensitive repayment plan, calculates payments based on your annual income, with a repayment period of up to 15 years.

To see what your monthly payment and loan terms would look like under different repayment plans, go to StudentLoans.gov and use the Repayment Estimator. The longer the re-payment period, the more you will ultimately pay in interest, so pick the plan with the highest monthly payment you can afford.

Private Loan Trade-Offs

Unlike the federal government, private lenders will refinance both private and federal student loans into one loan. Assuming you've established a good credit history, you'll likely be able to score a lower interest rate on a private loan than you did during college, and borrowers with stellar credit profiles may be able to get a reduced rate for their federal loans, too.

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If you refinance your federal loans with a private lender, you'll typically lose such benefits as deferment and forbearance. Still, borrowers with high-paying jobs in the private sector may conclude it's worth giving up those safeguards in exchange for a lower interest rate, says Miranda Marquit, of StudentLoanHero.com, a website that offers student loan management and repayment tools.

Start by contacting your current loan servicer and bank, as well as a few other lenders, such as Citizens Bank, Discover and Laurel Road. Borrowers who are eligible for private-loan refinancing may also want to consider nontraditional lenders, such as CommonBond and SoFi. The stronger your overall credit profile, the lower the interest rate you'll receive. Fixed interest rates currently range from about 3% to 10%, and variable rates range from 2.5% to 8%.

Get several quotes so you can compare interest rates and terms, and ask about other benefits that the lender offers. For example, CommonBond and SoFi allow borrowers to postpone payments under certain circumstances–if you lose your job, say, or you return to school. To compare lenders and see additional options, visit StudentLoanHero.com, Credible.com or StudentLoanConsolidator.com.

Most lenders let you choose to pay off the loan over five to 20 years. A longer repayment term will lower your monthly payment (and increase the amount of interest you pay overall), whereas shorter terms generally come with a lower rate. Most private lenders don't offer flexible repayment options, such as ones that base your monthly payment on your income.

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Some lenders charge an origination fee, typically up to 2% of the amount of the loan, but many roll the fee into the loan. Most lenders offer both fixed-rate and variable-rate loans. The Federal Reserve is expected to raise interest rates at least two more times this year, which would make a variable-rate loan more expensive. Still, a variable-rate loan could be a smart strategy if you think you'll be able to pay off a large portion of the debt while the rate is still low, or if the loan has a cap that will keep your interest rate from increasing by more than a few percentage points.

Be prepared to clear a high bar to qualify. Last year, nearly 60% of borrowers who applied to refinance student loans with a private lender were turned away, according to a survey from LendEDU, a loan-comparison website. The average credit score among those who qualified was 764, and about one-third of borrowers who refinanced had a co-signer. Only about 43% of those who were approved ultimately refinanced, suggesting that the interest rate many were offered wasn't low enough to seal the deal.

For those who qualify for a lower rate, though, the savings can be substantial. Say you have $40,000 in loans with an average interest rate of 6% and a 10-year repayment period. If you qualified for a 4% fixed-rate loan, you would pay roughly $40 less each month and save about $4,700 over the 10-year repayment period.

To see how much you would save by refinancing at a lower rate or shortening your repayment term, visit StudentLoanHero.com and use the site's student loan refinancing calculator.

Don't Count on Loan Forgiveness

If you're employed by the government or a nonprofit organization, Uncle Sam may forgive your federal loans. To qualify for the Public Service Loan Forgiveness program, you must work full-time for the federal or a state or local government, a tax-exempt 501(c)(3) nonprofit organization, or a private not-for-profit organization that provides a qualifying service, such as emergency management, law enforcement or early childhood education. The Consumer Financial Protection Bureau estimates that about one-fourth of U.S. workers–including teachers, social workers, nurses, police officers and employees at nonprofit organizations–are in a public-service job that may qualify them to have the balance of their federal loans forgiven after 10 years under an income-based repayment plan.

The requirements sound straightforward, but some borrowers who thought they were making qualified monthly payments are learning otherwise or facing major delays getting their loans forgiven. If you want to qualify, make sure your loans, your employer and your payments are eligible for the program, and keep records of loan consolidation, payments and other communications. Borrowers seeking loan forgiveness should submit an Employment Certification Form to the Department of Education each year to confirm eligibility and the number of qualified payments they've made.

Ten years after the public-service loan forgiveness program launched, its future is uncertain, which is important to keep in mind if you're planning a career in public service. The first group of participants were eligible to have their loans forgiven last fall, but it's still unclear how many borrowers from that group had the balance of their loans wiped out. Meanwhile, legislation pending in Congress includes a Trump administration proposal to end the program for new borrowers.

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