Couple Money

Is Now the Right Time to Refinance Your Private Student Loans?

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Ready to knock out your student loans, but not sure what's the best approach? Learn about your options and what you need to know to create a plan that works for you!

Know Your Options to Pay Off Your Student Loans Faster

Should you pay off your student loans faster? The answer depends on a lot of factors, see how to weigh the pros and cons to see what fits your family's finances and goals!

To help sort through the jargon, we're speaking with Meagan Landress from Student Loan Planner.

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The Key Differences Between Federal and Student Loans

Elle Martinez: I'm excited to talk about this because a lot of people in my community are dealing with student loans, especially with couples. They have a mix between the two of them federal and private loans.

they're trying to figure out okay, with this year, how we're going to handle our finances and we have to come up with a plan with our student loans?

And that's your expertise so I do appreciate you taking time to chat with me.

Meagan Landress: Yeah. Thank you for having me. I'm excited to nerd out about this with you.

Elle Martinez: This is what we need, because I think. A lot of couples struggle with this for a couple reasons. One, the student loan balance with couples . I think I saw the average could be between 10 to 25,000 for student loans.

that could be a significant chunk, but then also the hearing on the other side, well, you don't want to pay it off faster because relatively speaking, they could be lower interests. So they're trying to kind of prioritize where do we put student loans? Is this something we should pay off quicker?

I want to jump right in now with the differences between federal and private student loans . I hate to say this, but my first year of college I saw this packet and I didn't understand really the differences between the federal and the private so could you go over that?

Meagan Landress: Yeah, definitely. And it is confusing because, they are very different. federal loans are a lot more complex, meaning they have different repayment options .

you can base off of income. You could still have amateurize options where they spread the payment out over a specific period of time and have either a fixed or a graduated payment.

the sheer just number of repayment option, you have up to either eight or nine repayment options within the fed system makes it overwhelming all altogether.

another thing that's different about federal loans is the forgiveness opportunity that they could carry. there's public service loan forgiveness, which I'm sure we'll dive into later on and then there's also the forgiveness on any of the income driven plans. If you hit the maximum repayment period, which is either 20 or 25 years, depending on which, which plan it is.

they're not a traditional debt and so sometimes we don't need to be treating them like a traditional debt in certain circumstances, but private loans are a little more straightforward.

private loans, we don't have income driven options. I don't really, I haven't seen private lenders offering them. they don't have forgiveness opportunity.

you pay based off of the terms you committed to. So the term, or the timeframe to pay them off the interest rate. And the balance, and you're kind of stuck with that payment unless you were to refinance, which is to take that private loan to another private company and they offer you ideally a lower interest rate.

you can kind of manipulate your terms from there. private loans are a little more simple, treat them like a traditional debt. Federal loans are a little interesting and so they might take another pause to maybe decide how you need to treat them.

Elle Martinez: Yeah and I do want to talk a little bit about that because like you said, because they're different, the way you approach it is going to be different.

that makes it a little more complicated because you're trying to figure out when we're prioritizing one paying off debt, where does that fit in?

then two, if a couple has other goals, like down the line, buying a house, starting a business, starting a family, all of the above. Like where does that fit in and what would be the best option?

Meagan Landress: I think federal student loans, it depends on if we're taking an aggressive route with them or a passive route with them.

if we're taking an, an aggressive route, that's where we are treating it like a debt, it's probably better to pay it off sooner rather than later reduce that interest costs.

So that's where refinancing could be really valuable because interest rates right now are really low. but maybe a pause there because right now interest rates on federal loans are 0%. And so we have to make sure that we, we feel confident in that refinancing decision and we're not walking away from any flexibility or federal benefits that we could take advantage of.

generally, if we're taking a more aggressive route, paying it down sooner and, it's better. Now where that falls on the totem pole interest rates generally on student loans are lower.

if you're issued a private loan going to school, you might find, I mean, the average is really range because it is based off of credit when you borrowed, but I've seen as low as 4% to as high as 12% for a private student loan.

I think first and foremost priority order of where that falls. If we have any credit card debt in the mix, we need to tackle that that's likely going to have a much higher interest rate. Yeah.

Elle Martinez: Those numbers are I've seen like past 20% in certain cases.

Meagan Landress: Yeah, me too. Yeah. I think 29.99 is the most it can go, but my goodness, that's an expensive debt to carry.

Yeah. so I would say tackle that first. I also like to suggest making sure your emergency fund is, properly funded, before slamming a ton of money into the student loans.

I think if that interest rate. Is in that gray area or high, and I consider that to be anywhere above, you know, five to 6% that's when we kind of get in a gray area to where that's costing us quite a bit. we might want to look at accelerating that.

I almost never like to suggest accelerating debt, unless it's credit cards, without also saving towards our future. I think there's a really healthy balance you can achieve there.

if we can't get that debt refinanced, and you're at 11%, you might one you might want to definitely make sure there's nothing on your credit. That's really negative or maybe it's credit card debt that you have to pay down too. I think that that could be a good route to go as far as priority order there.

Consolidating vs Refinancing Your Student Loans

Elle Martinez: I love that you did talk about, you have to consider so many different factors. I do appreciate sometimes when there is a, like a step-by-step plan, but then the reality in life is.

Wait a minute, we have to reevaluate one factors like what are our goals? What's the interest rate, what benefits? And like we mentioned that the difference between a federal and a private loan.

I do want to talk to you about this because people hear this consolidating their student loans and makes it easier for them or refinancing.

First of all, can you clarify the difference between the two and then what are some considerations couples should take into account before making a decision?

Meagan Landress: Yeah, I'm really glad you're bringing this up because I feel like those words get used interchangeably and they are very different things. so consolidation is combining your federal loans within the federal system.

So we keep them federal. All we're doing is we're just simplifying. And, pros to that is one, it simplifies, Two, it can open up eligibility to different repayment options that maybe you didn't have previously

some cons to consolidation that you want to make sure you know about are it does wipe away payment history.

So if we are pursuing forgiveness in any fashion, you'd want to think about it before refinancing to see if it's worth erasing those years that you've had.

Sometimes it makes sense, but other times it doesn't, And it doesn't, maybe a con, but not really a con is it, it doesn't change your interest rate. It takes the weighted average of your existing interest rates and rounds up to the, the nearest one eighth of a percent.

it doesn't make it worse necessarily, but it definitely doesn't make it better. So, you know, that's not going to improve your interest rates significantly.

refinancing on the other hand, that's where we either already have private loans or we have federal loans and we're taking them to another private company and we're essentially paying off the other loan with a private loan.

the reason you would do this is to get a lower interest rate, change your terms, maybe simplify. I see that being a big positive thing sometimes. So that's the primary differences between the two, but they are, you know, those words, I hear it all the time.

People will say consolidate, but they meant refinance and vice versa. They even say like on the commercials, it makes me so mad.

Is Refinancing Your Student Loans the Best Option?

Elle Martinez: Well, I'm glad you did clarify that because sometimes we're busy. We are glancing at those letters that we get in the mail and a couple might say, you know what? refinancing is the way to go then maybe they look online and they see consolidation and in their mind they kind of switched things around.

So when would be a good time to look at refinancing versus consolidation? What would you say keep your federal student loans versus maybe refinancing and making it private?

Meagan Landress: Yeah, so you should definitely keep your loans federal, for a lot of different reasons. Main one would be for flexibility and right now is a perfect example of the flexibility and the generosity of the federal system.

Meaning we're having this COVID-19 pandemic here , and part of the cares act, they implemented student loan relief. But only for federally held student loans.

it wasn't really mandated for private loan companies to offer relief to borrowers. People who have federal loans, they have no payments currently. Their interest is at 0% and that it has been extended.

but interest has been frozen or at 0% since March. So, that's an example of some flexibility

Elle Martinez: benefit. I mean, especially with, people dealing with unemployment or reduction in their income, a little less stress.

Meagan Landress: Yeah. Oh yeah. And so, you know that to kind of continue on that point. You know, federal loans are just very generous.

If we were to lose our income or lose our job, having an impact to income or just generally need to press pause on payments for a period of time, they're a lot more flexible.

You have up to three years of forbearance availability and so you can use that generally at your discretion. that doesn't really exist in the private student loan world.

You'll have some like financial hardship for bearance opportunity but it's not as generous. It'll be a couple months, three months maybe. you might need more than that.

Yeah, so that's one thing. Another thing you'd be giving up leaving the federal system would be, federal loans are a hundred percent dischargeable upon death or permanent disability.

Something to know private loans will typically having their terms that they're not dischargeable upon death. That means they stand in line with your other creditors upon your death, or they're still going to be due if you're not able to earn income and you're disabled. So, that's something definitely worth noting for a protection piece.

Elle Martinez: Yeah. Another reading a story about that in the New York times where, parents had co-signed. in one particular case, their son died and they went after the parents. that was insane.

And something you don't think about, at the time, like I'm healthy, I'm going to pay this back, but with private loans yeah.

Meagan Landress: Yeah, so private loans are, worse from that perspective.

Some other downsides to leaving the fed system if you're working in public service or, if we have a very large balance, meaning our balance as much more than our annual income the federal system has income driven plans that make that payment way more affordable than it would be if you were to amateurize it or pay it off as a regular debt.

And it has the, safe Haven of forgiveness. If that balance is large enough to where those income driven plans don't pay it off in that 20 or 25 year timeframe, which some folks might be gasping now like, Oh, is that possible? But I see it a lot.

I see jumbo size balances and it's not something that is going to back you into a corner. If you stay in the fed system, there's definitely a way to plan around it and it could mean going that forgiveness route. So there's some opportunity there.

I'm not against refinancing. I know I probably sound like it right now, but I just think there's some really serious considerations to make sure you take into account before you pull that trigger.

Hopefully that makes sense and didn't scare anybody.

Elle Martinez: No, no, I appreciate it because whatever decision a couple makes, I want them know. Eyes wide open on that.

they may decide thanks to your explanation where they'll keep their federal loans where they are, but then refinance the private and make sure they don't take away those protections or benefits.

Again every couple has to make their own decisions, but they should be informed about the consequences of that.

Understanding Public Service Loan Forgiveness

Elle Martinez: So I do want to talk about forgiveness. That's come up a few times in our conversation with the Federal loans, but the biggest program that a lot of people probably heard about is that public service loan forgiveness program.

And Megan, I've seen some new stories where basically it says it's almost impossible to get it, that people have had their files loss, all that progress. You know, it's a headache and a pain. So this is a two-parter I want to ask.

What do you think, about the program, its validity, if it's actually something people should pursue or kind of base their finances on that?

Because some people are making that decision based on the fact that they believe it's going to be forgiven.

And then, if they decide to go that route, what steps should couples take to make sure that they comply with the program?

Meagan Landress: Yeah. So PSLF definitely has maybe some stigma around it right now. For some background, it's a newer program, meaning it was enacted in 2007.

So the first time we could have ever seen anybody get forgiveness was 2017. That's just three years ago and so pSLF, it's not a repayment plan. It's really a forgiveness program that you can pursue if you're checking all the boxes correctly.

Just like anything, you know, if you're trying to enter a contest, you have to follow the rules and submit your information correctly so think about it in that way.

The program itself, if we're doing our due diligence on our loan situation and we check those boxes, you are going to achieve that PSLF forgiveness. It's just a matter of keeping a pulse on that over time and making sure that we're doing our due diligence throughout our alone periods.

Another big contributor I think to the stigma is, I think bad data, honestly.

I think I'm convinced there's certain topics that they just know they're going to get a lot of attention on.

One of the biggest articles and you probably heard of this one, but it was 99% of PSLF applicants were denied and yeah. I feel like everybody saw it, even if they didn't have student loans.

This article was of course horrifying if that was something you were pursuing, but if you break apart the math, literally in that article, you can really start to identify what went wrong or why that number Happened.

The majority of those rejections came from people applying for the forgiveness before reaching 120 payments, which is the 10 year timeframe essentially.

What I think happened and I'm speculating, but what I think happened is there was a buzz in 2017, 2018, that you could then apply for PSLF and get your loans forgiven.

I feel like people who hadn't even done the time yet just said, Oh, I'm going to apply and see what happens and so it really inflated the numbers because part of that program is you have to work in public service full-time and make 120 qualifying payments, which is 10 years.

Someone who graduated in 2015, that applied of course would have been denied and so I feel like they should have taken that data out. Other factors we can talk about with the qualifications, but I think that's where the majority of some of the bad data comes from, honestly.

Elle Martinez: Yeah. I think that's interesting., I do want to talk to you a little bit about going through the checklist. This is definitely a case of keep good records. You have to have on your end, some kind of record of the payments in the history.

But could you kind of go through, high level of steps for the program?

Meagan Landress: Yeah, so, and I think it's a really, it's really simple. So there are five requirements, which sounds like a lot, but it's not that much.

The first is the most obvious we have to be working in public service for this forgiveness program. That's any government entity that's any nonprofit or five Oh one C3. as long as they're tax exempt, they should qualify for this program.

Second requirement is we have to work full time for that entity. And so they determined that as 30 hours on average or more, unless the employer has a different definition. So if your employer says full-time is. 40 hours and you need to be working 40 hours on average per week.

These two things are verified on an employer certification form. It's really simple to double-check that your employer qualifies from the get-go. So it's not a shocker if they do or don't, you can simply Google this just the PSLF employer certification form and you'll find it.

Third requirement is you have to have the correct type of loans. This is where you want to look at your loan file. It's only for federal loans and it's only for direct loans. So as long as your loan code or what it says on your statement says direct somewhere in it, you should be good.

Fourth requirement is we have to be paying on an income driven plan. There's four options you could potentially have for an income driven plan. If we're going towards forgiveness, we want to pay as little as possible to maximize the forgiveness. So you choose one of the lower plans, which could be either revised pay as you earn pay, as you earn.

Those are both 10% of your discretionary income.

The last requirement is just making 120 qualifying monthly payments. And so a qualifying payment is one where all four of those previous things I mentioned exist at the same time.

One misconception is, your employment has to be with the same employer. It doesn't, you can go from one public service entity to another, just file another employment certification form.

Another misconception is if you miss a payment or if you skip a year in service that you lose all your payment history, and that's not true either.

If you do have a break in service or you go private practice and then come back to public service, payments when you were in private practice, don't count, but they pick back up where they left off if you go back into public service.

Those are the five requirements and some of the technicalities, maybe to elaborate on.

Elle Martinez: Thank you. I appreciate this, Megan. I know like we've only scratched the surface, but just clarifying terms and kind of taking step by step, especially with the public service loan forgiveness this is definitely gonna help out a lot of people.

If anyone wants to learn more about student loans and kind of get a plan for it and they want to work with you, what's the best way they can reach out to you?

Meagan Landress: Yeah. So to reach out to me, I consult with a company called student loan planner. You'll find our website and we, our blogs are a wealth of information on any student loan topic you could think of.

If you have questions about some of the terms we talked about today, Maybe check out our blog. We have a podcast as well.

if there's something where you wanted to customize plan a, you can schedule a consult with us and, I consult specifically Mondays and Wednesdays, but you can always request me if you'd like.

The rest of our team is lovely as well. There is as big of a student loan nerd as myself. So you'll be taken care of.

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