8 million people are paying more than they need to on their student loans
By Scott Hudson
Over 44 million Americans currently hold about $1.3 trillion in student loans. That’s a lot of people who are potentially struggling to pay down their debt. But managing student debt could be a lot easier for up to 8 million of these borrowers.
That’s because a recent study found out that 8 million borrowers could qualify to refinance their student debt at lower interest rates. By refinancing their debt, these borrowers could potentially lower their monthly payments or pay off their loans faster.
Refinancing student loans could transform the financial lives of many of those people as the study found that the average person could reduce their monthly payment by $221.
So, what do you need to know about refinancing your loans? Here are the basics for those who are interested in learning more:
Who is Eligible?
While you might think that only doctors and lawyers with great salaries would qualify to have their loans refinanced – you would be wrong. How much you need to make to qualify to refinance your loans depends on how much you have in student debt. According to the study, those who were able to refinance their loans had an average income of $54,200 and student loans totalling $49,379.
You also need to have a good credit score or a co-signer with a good credit score in order to qualify for refinancing and get a low interest rate.
While many people with private student loans consider refinancing their loans, those who have older federal student loans with much higher interest rates might consider refinancing their debt as well. While you could lose some of the protections you get from federal loans, many private lenders are offering some similar protections like deferments now and so it’s important to shop around.
How Much Can You Save?
According to the study, you could save a lot! By either choosing a shorter repayment term and paying off your loan early or qualifying for a lower interest rate, you are able to pay less interest over the life of your loan.
The study found that the borrowers that they looked at were able to save about 1.7% in interest on their loans and tended to opt for a shorter repayment term – which was expected to save about $18,668 in interest over the length of the loan. That’s a considerable amount of money!
While a shorter term could mean a higher monthly payment, people who are trying to aggressively repay their loans might appreciate that.
What Kind of Term Lengths Are Available?
Most lenders offer terms of 5, 10, 15, and 20 years. The general rule is that the longer the loan term is, the smaller your monthly payments will be since they’re averaged out over a longer period of time. But because you’re borrowing money for longer, you will end up paying more in interest over the life of the loan.
If you choose a shorter loan term, you will have to pay more each month, but a higher percentage of your payment will go towards your principal which means that you’ll pay less in interest over the life of your loan.
Depending on what is important to you, one option might make more sense than the other. So long as your lender doesn’t have penalties for repaying your loan early, you could decide to get a longer loan term and pay off your loan aggressively by paying more than your monthly payment each month.
Why Don’t People Do It?
You might be wondering why 8 million people who are eligible to save up to $18,000 aren’t taking advantage of the opportunity to do so? Many people don’t know that refinancing their student debt is a possibility and so they don’t apply. Others don’t believe that they’ll qualify or don’t realize how much they could save.
Among those that are aware of the benefits, some don’t want to refinance federal loans and lose the protections and benefits that they offer. But you don’t have to refinance all your loans. You could refinance just your private loans.
Another common reason that people don’t take advantage of student loan refinancing is because they worry that the origination fee on the loan will negate their savings, but if you shop around you could get a loan from one of the lenders that don’t charge a fee.
If you’re considering refinancing your student loans, it’s important that you spend some time researching your options and find the refinance lender that is right for you.
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