Below, you’ll see five things that may seem very different. But they actually have one thing in common — see if you can pick up on what the common denominator is:
- Spending a week at one of your top travel destinations.
- Enjoying a meal at your favorite restaurant.
- Making a down payment on your dream home.
- Buying concert tickets to your favorite band.
- Donating to your favorite charity.
Each of those things is more fun to spend money on than student loan interest!
When you spend more on student loan interest than you need to, that’s less money that you’re able to spend on things that you enjoy or that really matter to you.
But what can you do about it? In many situations, refinancing your student loans could help you slash your interest cost and keep more money in your pocket.
How to save student loan interest by refinancing
When a lot of people hear the term “refinancing,” they think of refinancing their mortgage. Few people realize that student loans can be refinanced as well. But refinancing your student loans can save you money in much the same way that refinancing your mortgage can.
When you refinance your student loans, the goal is to get a lower interest rate than what you have now. If your credit score and income have increased since you graduated, you may qualify for a better interest rate on your student loans.
Cutting your interest rate by just 2% to 3% can reduce your monthly payments and help you save a ton of money overall. For example, let’s say you have $50,000 in student loans at 6.5% By refinancing to a 3.5% rate, you could save $74 a month and $8,797 overall!
Why don’t more people refinance their student loans?
So if people can on student loan interest by refinancing their student loans, why don’t more people do it?
Because sometimes the interest rate isn’t the most important thing. If you have federal student loans, they come with benefits that could easily be more important to you.
For instance, federal student loans are eligible for Income-Driven Repayment (IDR) plans. With an IDR plan, your payment will be 10 to 20% of your discretionary income. The downside to income-based repayment is that you could end up paying more overall.
For example, with $50,000 in student debt and a starting salary of $50,000, you’ll pay $10,000 to $40,000 more over the life of your loans with income-based repayment (depending on which plan you choose).
But, in the meantime, your monthly payment will be lower. As the above screenshot from the Student Loan Planner calculator shows, your first monthly payment could be up to $300 cheaper with an IDR plan.
Once you refinance federal student loans, you’ll no longer be eligible for income-based repayment. So if monthly cash flow is your top priority, you may want to stick with an IDR plan instead of refinancing.
Federal forgiveness options
Federal student loans also come with some forgiveness benefits that you may want to pursue. For instance, with income-based repayment, you’ll be eligible to have your remaining balance forgiven after 20 to 25 years.
And public sector workers could be eligible for forgiveness in as little as 10 years with the Public Service Loan Forgiveness (PSLF). Once again, you’ll no longer be eligible for these forgiveness programs if you refinance your student loans.
Who should refinance their student loans?
Basically, if you owe less than 1.5 times your income, work in the private sector AND have an emergency fund, then you like giving away free money by not refinancing to a lower rate. Let’s break those three criteria down.
1. You owe less than 1.5 times your income.
If your student debt total is less than 1.5 times your income, you could be a prime candidate to refinance your student loans. Here’s why. First, Income-Driven Repayment (IDR) plans won’t benefit you as much when you’re in this situation. And, second, you’ll have a good chance of qualifying for a prime interest rate.
If you have $50,000 in student debt and you have a $50,000 annual salary (like in the example we showed earlier), you have a one-to-one debt-to-income ratio. That’s good for refinancing purposes.
In fact, as long as your student debt is below $75,000 (1.5 times your annual income) it could be worth it to refinance. But with a $50,000 salary, an income-based plan may be a better choice once your student loan total exceeds $75,000.
2. You work in the private sector.
Even if you owe less than 1.5 times your income, that doesn’t necessarily mean you should rush into refinancing your student loans.
Do you work for a government or non-profit employer? If so, joining the Public Service Loan Forgiveness Program (PSLF) is probably your best student loan repayment strategy. With PSLF, you’ll be eligible for tax-free 100% student loan forgiveness in as little as 10 years.
Let’s take a look at our sample scenario one more time. Once again, you owe $50,000 in student loans and make $50,000 a year. But the only difference is that you happen to work for a PSLF-qualifying employer. In this case, PSFL could save you over $35,000 vs. the Standard 10-Year plan.
In nearly every situation, you’ll save the most money by choosing PSLF if you qualify for the program. But if you work in the private sector, refinancing could be a great choice.
3. You have an emergency fund.
One of the biggest perks about federal student loans is that they come with generous forbearance and deferment options. And with income-based plans, if your income drops, your monthly payment will drop too.
But income-based repayment won’t be an option after you refinance your student loans. And, depending on the lender that you choose, your forbearance and deferment options may be more limited. In other words, private student loans aren’t nearly as flexible if you have a sudden income drop or job loss.
For these reasons, you’ll only want to refinance your student loans if you have an emergency fund saved up. Depending on who you talk to, you’ll hear different advice on how much you should have saved in an emergency fund. But 6 months of expenses is a good rule of thumb.
How to save the most money during a student loan refinance
So do you meet all three of the student loan refinancing criteria? If so, you’re probably giving away money each month by not refinancing your student loans.
People also happily give away free money by not getting the best rate during refinancing. MoneyHax readers know that when it comes to buying consumer products, price change protection tools can save you money. But with student loans, the best price protection tool is to shop around with at least three different lenders.
Finally, people give away money by not getting a cash bonus. Once again, many MoneyHax readers are familiar with credit card sign-up bonuses. But did you know that it’s possible to get a cash bonus when you refinance your student loans too?
Oftentimes, you need to use a referral link to qualify for the bonus. At Student Loan Planner, for instance, we’ve negotiated refinance bonuses of $350 to $750 for borrowers who use our referral links. Whether you use a Student Loan Planner referral link or a link from one of our competitors, you’re giving away money if you don’t get a cash bonus when you refinance.
The bottom line
Anything is better than giving away money to student loan people! What would you do with the money that you could save by reducing the interest rate on your student loans?