Student loan refinancing: Should you wait until after the 2020 election?
November 18, 2019
Student loan forgiveness is a hot topic among 2020 presidential candidates. In the race for the oval office, candidates are trying to find answers to America’s $1.5 trillion student loan debt crisis. It’s a burden that’s hampering the growth of small businesses, slowing down the housing market and jeopardizing financial futures.
But should you wait until the next election to review new student loan forgiveness programs, or should you opt for current student loan relief options, such as student loan refinancing?
The top student loan relief proposals from presidential candidates
Some presidential candidates are proposing tuition-free public colleges, but that won’t help those already drowning in student loan debt. For recent college grads and millennials with tuition bills, here are the five boldest student loan policies proposed by leading presidential candidates:
Is student loan forgiveness possible?
Findings of a 2018 study say the policies that presidential candidates are peddling are both plausible and beneficial to the economy. Wiping out student loan debt would stimulate economic growth by lowering unemployment and raising the GDP.
But, you could be waiting a long time for something that may or may not happen. In the meantime, your student loan bills may be wreaking havoc on your finances.
Student loan forgiveness is available today
There are multiple student loan forgiveness and repayment options you can take advantage of now. Public Service Loan Forgiveness (PSLF), for example, forgives any federal student loan balance after 120 qualifying payments made by eligible borrowers.
Many states and careers also offer student loan repayment assistance to diminish professional shortages. The Alfond Leaders program, for instance, pays up to $60,000 in student loan repayment assistance for STEM professionals living and working in Maine. Other programs offer doctors and dentists up to $120,000, while teachers, veterinarians, and military personnel have their own offerings to choose from.
What about student loan refinancing?
If you aren’t eligible for student loan forgiveness programs, refinancing your student loans will lower your monthly payments and save you thousands in interest over the life of your loan.
Consider that average interest rates are 4%-7% for federal loans and as much as 12% for private. Refinancing your student loans can bring those rates down to as low as 2.05%. Simply by reducing your interest rate from 7% to 3.5% on a $30,000 loan with ten years remaining saves $52 per month, and a whopping $6,201 over the life of the loan.
And, you don’t have to fear taking a leap too soon, because even if a new president brings lower student loan refinancing rates, you can always refinance your student loans again.
Is refinancing your student loans worth it?
Your current student loan interest rate is one of the first questions to ask when thinking about refinancing your student loans, but there are other key questions to examine as well, including:
What type of loan do I have?
Refinancing federal loans turns them into a private loan, and you can never revert back. Private loans aren’t eligible for any federal repayment assistance plans like IDR, deferment or forbearance. You also lose any service credit credits you’ve accumulated toward federal loan forgiveness programs like PSLF.
If you’ve never used any federal student loan benefits and don’t see yourself needing them in the future, refinancing can be an excellent option. But if you want to keep your benefits, consolidating your federal loans may be the better choice.
What interest rates can I get?
You can shop around for the best student loan refinancing rates, but your final rate depends on your creditworthiness and if there’s a cosigner. If you’re not approved for a better rate than what you have, it generally doesn’t make sense to refinance.
What’s my debt-to-income ratio and credit score?
Lenders may look at how your income compares to your other required monthly payments to evaluate your debt-to-income ratio. If bills like rent and credit cards take too big of a bite out of your monthly income, it may be harder to get reasonable interest rates.
Also, the best interest rates and term offers usually go to those with good to excellent credit scores, that’s to say FICO scores above 670. Many lenders also have a minimum credit score requirement for student loan refinancing.
How can you build your credit for better student loan refinancing rates?
College students with no or low credit history may want to increase their credit before submitting a student loan refinance application. One of the best ways to boost scores is by using a credit card. Paying your credit card bills by their due date, and keeping your credit utilization ratio below 30 percent, will have the most impact on building your credit. Below are two credit cards that can help.
Discover it® Secured
The Discover it® Secured card is one of the best credit cards for bad credit, and it’s also one of the best cash back credit cards for secured cards—thanks to its generous reward card offers. You can earn 2 percent cash back on your first $1,000 spent per quarter on restaurants and gas, and 1 percent on all other spendings. There’s also no annual fees and a 10.99 percent intro APR on balance transfers for the first six months, then a 24.74 percent variable APR after that. Purchases also have a 24.74 percent variable APR.
Citi® Secured Mastercard®
If your creditworthiness is good but thin, a Citi credit card like Citi® Secured Mastercard® is a basic, low-hassle card that gets you closer to a more robust credit profile. Purchases have a 24.24 percent APR, but there are no annual fees. And like Discover it® Secured, you can graduate to a regular credit card when you’re ready to move on. Citi’s other credit card offerings include various travel credit cards, low-interest credit cards and business credit cards.
How do you refinance your student loans?
Student loan refinancing isn’t a complicated process, and there are only four steps to it:
Step 1: Compare rates with lenders
Comparing interest rates and offers won’t impact your credit score, because lenders only make a soft inquiry into your credit report, and you’re never under any obligation to commit to a lender or offer. You can check rates with private lenders like banks, credit unions and student loan refinancing companies. Some of the most popular lenders include Citizens Bank, Earnest, LendKey and SoFi.
When you submit a preliminary request, you’ll need to provide basic information like:
Step 2: Pick your lender and loan terms
If you’re eligible, lenders will come back with a range of offers. You’ll want to compare the loan length, the type of interest rate given, and the interest rate amount to see which are the better offers. Longer loan terms usually mean lower monthly payments, but accumulated interest might mean you pay more over the life of your loan.
You’ll also have a choice between fixed and variable interest rates. Fixed rates never change, while variable rates fluctuate depending on the market. Usually, variable rates are the lower of the two in the beginning, but tend to increase over time. If you have a short loan term, it can make sense to use a variable interest rate.
Step 3: Complete the application
You’ll need to upload multiple documents with your online form. Most lenders want to see:
If there’s a cosigner, you’ll also need to provide their information and requested documents. Once you send your application, the company will do a hard pull on your credit report to verify your eligibility.
Step 4: Wait for approval
It can take a few weeks for your student loan refinancing application to be fully approved. In the meantime, it’s crucial to keep paying your student loans until your new lender tells you it’s okay to stop.
Once approved, you can set up an autopay with your bank. As an incentive, many lenders will discount your interest rate if you do.
Can you pay your student loan bill with a credit card?
Using your credit card to pay a monthly student loan bill seems like a win-win; you get to keep money in the bank, rack up rewards on your credit card, and build your credit score.
Most private and federal loan servicers don’t offer the option to pay your bill with a credit card, however, only with a checking or savings account. But, with a company called Plastiq, you can get around that restriction. Plastiq sends a check, wire transfer or ACH transfer to the recipient and charges your credit card for the amount. Although there’s a 2.5 percent transaction fee, it could still be worth the cost if your card has great rewards.
As another option, you can use Plastiq to move your entire student loan balance, or a portion of it, to a credit card and earn even bigger rewards. Just keep in mind that if your credit card’s balance isn’t paid off in full by its due date, you’ll effectively be charged interest twice; once by your loan servicer—since your monthly payment amount already includes interest—and again by your credit card provider on your next bill.
College students looking to build credit should remember to keep credit utilization ratios to less than 30 percent to avoid negatively impacting their credit scores.
Take charge of your student loan debt
If you’ve chosen student loan refinancing as the right path for you, there’s no reason to wait until the next election. Policies and laws are constantly changing, and what you are waiting for might not happen or take years. Take control of your student loan debt now by refinancing, or going with alternatives if it yields better results. Strategically using credit cards for student loan payments can also move you closer to financial freedom, while giving you more for your money through reward card offers.