Why You Should Consider Refinancing Your Student Loan Debt Early in 2018
What is going on in 2018 that makes it more pertinent than ever to consider refinancing your student loan debt? According to Forbes, the federal government is set to raise rates again in 2018. For those debt with variable interest rates, such as some private student loans, this could mean big changes to your expected monthly payment and total loan cost.
Most industry experts are predicting another quarter percent rise in interest rate levels in early 2018, followed by more throughout the year.
Many factors have evolved together in a perfect financial storm, including a new Chair of the Federal Reserve, sweeping changes in a massive tax reform bill, and less concern for inflation rates. The Financial Times noted that, according to expectations, the feds will very likely bump up interest rates three times in 2018, to as high as 2.25 percent.
Many borrowers might look at that number and think, “What’s wrong with a tiny raise of 0.25 percent?” But a seemingly tiny percentage point can have a long-lasting impact on your interest payments, especially if you are just getting started in repayment or happen to carry large loans with variable interests rates.
Before that rate hike hits is the perfect time to consider refinancing your student loans and avoid the additional financial burden.
What Does it Mean to Refinance?
It’s not uncommon for graduates to carry the burden of a poorly negotiated student loan long after graduation. Considering a student loan is often the first interaction a person has with a financial institution beyond daily banking activities, interest rates might have been quite high to begin with.
However, your financial situation is very likely to have changed after graduation as well. Your credit score may have improved with continued timely payments, and you may be in much better financial standing, so lenders will see you as more trustworthy and may be willing to offer you a lower rate. Also, let’s not forget that some people juggle multiple student loan payments at the same time, all with different interest rates, which can be consolidated into one, more manageable loan.
These are all perfect reasons to consider refinancing.
Refinancing, in the simplest terms, is when a lender pays off your old loans and issues you a new one, typically with a lower interest rate. Its borrowing money from one source, to pay off all other outstanding loans.
The new loan replaces the outdated ones, and depending on circumstance, should always have a lower interest rate than before. Not only is it possible to refinance from variable rates, into a fixed rate loan, you can refinance both federal and privately held loans.
Do note that most refinance loan options carry a rather strict eligibility requirements. Be prepared to submit to a soft credit check, and demonstrate that you have never defaulted on your current loans. Keep in mind, if you refinance a federal loan through a private institution, you’ll lose all federal benefits like student loan forgiveness and access to income-based repayment plans.
Why is it Important to Refinance Early in 2018?
If you have a fixed rate student loan, you can breathe easy. Any interest rate hikes in 2018 will only affect people with variable rate loans. Although fixed interest rate loans never fluctuate with the market, a variable rate will rise and fall depending on conditions in the market.
To give you a very rough idea, if the federal government raises interest rates as expected (0.75 percent), a monthly payment on a $35,000 loan with five percent interest will jump from $371 to $384.
Although $13 a month might seem manageable, put that in perspective.
A 0.75 percent interest hike on a variable rate loan means you’ll be paying an extra $1,556 in interest payments alone over the lifespan of the loan, assuming a 10 year repayment term.
Circumstances change, and so too do interest rates. Many of the institutions who offer students loans also offer refinancing options. Before the first interest rate hikes take effect this Spring, speak with a financial advisor to determine if refinancing makes sense for you.
Thanks a lot for the guest post, Tom! Tom runs FIREd Up Millennial – a blog about his relentless pursuit of Financial Independence so he can Retire Early. You can stay updated with his latest articles and random thoughts by following him on Twitter.