Student loan refinancing has become really popular. But does it actually help you pay off debt? Here’s my simple and easy explanation of student loan debt refinancing.

Check out this video I did that explains student loan refinancing. Don’t forget to subscribe to my channel!

Difference between student loan refinancing and student loan consolidation

First, there is a difference between student loan consolidation and student loan refinancing. 

Student loan consolidation is a government program. This happens at the federal level and with the Federal Student Aid office. You combine multiple federal loans into one new loan.

Student loan refinancing allows you to combine both federal and private student loans into one new loan. You can refinance your student loans with a private lender. There are several of them out there. In fact, I can’t believe all of the commercials that have come out about refinancing. It’s a hot topic!

Refinancing could give you a lower interest rate which would decrease the amount of money you pay back on your student loans. But it’s not for everyone. Let’s cover who might or might not be a good fit.

Student loan refinancing could be good for:

Those who have good credit.

Those who receive a consistent monthly income.

Those who have federal and private student loans, and a lot of it.

Those who want one monthly payment towards one loan, instead of multiple.

Student loan refinancing could give you a lower interest rate which would decrease the amount of money you pay back on your student loans.”

Student loan refinancing may not be good for:

Those who want to use the Public Service Loan Forgiveness program.

Those who have poor credit.

Those who have unpredictable income.

Those who have loans with already low interest rates.

What is the current interest rate for Federal student loans?

You can find the current interest rates for Federal student loans on the federal student aid website. Here are the current interest rates as of 2020:

Direct Unsubsidized and subsidized loans for undergraduates – 4.53%

Direct unsubsidized loans for graduates – 6.08%

Direct PLUS loans for parents and graduates – 7.08%

To give you an idea of how this compares to roughly 10 years ago, I took out federal unsubsidized loans and subsidized loans between 2007-2011. The interest rate for the unsubsidized loans as an undergraduate was 6.8% and the subsidized loans were at 4.5%. Interest rates for unsubsidized loans has gone down which is good.

Let’s look at this refinancing scenario

Some student loans could be as high as 9-13%. You may be tempted to refinance. So let’s look at a simple scenario.

Let’s say you have $100,000 in student loan debt with an interest rate of 10%. That’s $10,000 per year that you are paying in interest. This is on top of paying back the original $100,000. Eesh.

Now let’s say you check out a refinancing lender who is offering you 7% interest. That’s $7,000 in interest per year. So, you are saving $3,000 but here’s the thing. $3,000 doesn’t fix a $100,000 problem.

Refinancing is not the get-out-of-debt secret. If you choose to refinance, make sure you do not incur any early payoff penalties. That could be a costly mistake with your student loan debt.

You are the secret. You coming up with a plan and sticking to it is going to get you out of debt.

If you want a foolproof plan to getting out of debt, check out my online course, The Freedom Project. It’s the exact steps I took to pay off $35k in student loan debt.

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