WTFrich am I supposed to do with my student loans???
<div class="user-question">Hi Frich! I'm really stressing out about everything that's going on with student loans right now. The news on student loan forgiveness are constantly changing so I've kind of given up on this ever happening to me. Recently I've been trying to look into student loan refinancing but it's really confusing - how does that actually work?? What do I do?? And how can I qualify? Also -- are there any other approaches on dealing with my student loans?</div>
First off, take a deep breath. Student loans can definitely be overwhelming, but there are ways to navigate through the confusion. Remember, student loan debt is NOT bad debt to have. This was an investment towards your future so remember that carrying this debt should not make you feel like you are in over your head, you just need to mitigate the repercussions and lower the interest rate as much as possible!
So today, let’s break down student loan refinancing and explore some other options to help you manage your student loans.
🎓Student Loan Refinancing: How It Works
What is Refinancing?
Refinancing your student loans means taking out a new loan to pay off your existing ones. The goal is to get a lower interest rate, which can save you money over time.
How Does It Work?
1️⃣ Shop Around: Look for lenders offering refinancing. Many banks, credit unions, and online lenders provide this service. I did a quick search using Splash and earnest.
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For this example, I'll use earnest because I was able to find a rate that was 4.75% in comparison to my original loan which was at 11%. The lower the interest rate, the better, because you end up paying less on the principal. Here you can see how refinancing affected my remaining student loans:
2️⃣ Apply: You'll need to fill out an application. Lenders will check your credit score, income, and other financial factors. We will talk about what you need to qualify in the next section below.
3️⃣ Get Approved and Pay Off the Old Loan: If you’re approved, the new lender pays off your old loans, and you start making payments to the new lender at the new interest rate. The process is fairly simple and you will just need to start paying off the new loan once you receive confirmation that the old loan has been fully paid off.
4️⃣ Set it and forget it: To prevent accidentally missing payments and getting penalized, I have autopay set up so that I can rest assured I am paying off my debt every month.
🎓Qualifying for Refinancing
1️⃣ Good Credit Score: Typically, a score of 650 or higher. The higher the credit score, the better rate you can qualify for. Here are some examples of rates you can expect with different credit scores:
2️⃣ Stable Income: Proof of steady income or a job offer. Some student loans have a grace period where you don’t have to pay until after a few months past graduation to allow you to get a job.
3️⃣ Debt-to-Income Ratio: Lenders want to see that your debt isn't too high compared to your income. Generally, lenders like to see a DTI of 36% or lower for borrowers to qualify for the most favorable loan terms. Here’s an example:
🎓Other Approaches to Managing Student Loans
1️⃣ Income-Driven Repayment Plans: These plans adjust your monthly payment based on your income and family size, often resulting in a lower payment. After 20-25 years, any remaining balance might be forgiven. If you have federal student loans, you can learn more about it here. Private student loans generally do not offer income-driven repayment plans (IDRPs).
2️⃣ Public Service Loan Forgiveness (PSLF): If you work in public service (government, nonprofit, etc.), you might qualify for PSLF. After making 120 qualifying payments, the remaining loan balance could be forgiven. More information here.
3️⃣ Deferment and Forbearance: These options temporarily pause your loan payments if you’re facing financial hardship. Interest may still accrue, but it can provide short-term relief.
- Common Qualifications for Deferment:
- Enrollment in School: At least half-time enrollment in an eligible college or career school.
- Unemployment: You can qualify for up to three years of deferment if you’re unemployed or unable to find full-time employment.
- Economic Hardship: You may qualify if you’re experiencing significant financial difficulties, such as receiving state or federal assistance (e.g., SNAP benefits).
- Military Service: Active duty during a war, military operation, or national emergency, and the 13-month period following that service.
- Graduate Fellowship Program: Enrollment in an approved graduate fellowship program.
- General (Discretionary) Forbearance: Granted at the discretion of your lender, typically for financial difficulties, medical expenses, or employment changes.
- Mandatory Forbearance: Your lender is required to grant forbearance if you meet specific qualifications, such as:
- Participation in a medical or dental internship or residency.
- Serving in a national service position (e.g., AmeriCorps).
- Serving in the National Guard and not qualifying for military deferment.
- Owing 20% or more of your monthly gross income in student loan payments.
More info can be found here.
4️⃣ Student Loan Forgiveness Programs: Keep an eye on federal and state forgiveness programs, especially if you’re in a specific profession like teaching or healthcare.
🇺🇸 Current Events: What POTUS Said About Student Loan Forgiveness
Recently, the president has been actively discussing student loan forgiveness. The administration has proposed several plans to ease the burden of student debt:
🇺🇸 One-Time Forgiveness: There have been ongoing discussions about a one-time forgiveness amount for federal student loan borrowers, though specific details and amounts are still being debated.
🇺🇸 Targeted Forgiveness: Efforts are being made to streamline forgiveness for borrowers working in public service, those with disabilities, and individuals defrauded by their educational institutions.
🇺🇸 Income-Driven Repayment Plan Revisions: The Biden administration is looking to simplify and expand income-driven repayment plans, making them more accessible and beneficial for borrowers.
Stay updated on these developments here, as they can directly impact your loan repayment strategy.
FYI 2024 is an election year so your vote matters! Who you vote for and their stance on student loan firgiveness can be crucial to your financial wellbeing so take the time to educate yourself, keep up with current events, and register to vote!
Btw - here's how others are doing👀
What causes you the most stress about your student loans?
😓12% I’m not sure I can afford my monthly payments
🛍️26% The payments prevent me from affording other things
⏳22% It will take me so many years to pay off…
🙌41% They don’t stress me out!
Ooof, that was a lot. THANK YOU for hanging in there with me😅 Remember, you’re not alone in this, and there are resources and strategies to help you manage your student loans effectively. Hang in there, and keep exploring your options!
xx, Kristina
