Student Loan Debt Refinancing Explained

Student loan refinancing has become really popular. So let's go over what exactly it does and if it's right for you. Hey guys, it's Justine with Debt Free Millennials, the channel to help you crush your debt and live a debt-free life. That includes your student loan debt. So if you're new to the channel and you wanna live debt-free and become debt-free as quickly as possible, stick around and subscribe. I actually got this, did I just spit on myself? I think I did. Hey, I got this question from Amy Tran on YouTube and she writes, please talk about student debt refinancing. I wish I knew more before taking out student loans, but it would be so helpful if you could talk about it. Amy, thanks so much for your question. I feel like a lot of graduates get kind of stuck where they're like, I have private loans and I have federal loans and I have this interest rate and I don't know what to do. Trust me, I was there because I had a loan with Sallie Mae. I had a ---- ton of federal loans. I had a loan through the university even. So it's like, where do you even begin when it comes to maybe considering refinancing? First things first, I want to break down the difference between student loan refinancing and student loan debt consolidation. There is a difference. So if you've heard of the term student loan consolidation, that only happens at the federal level. So with student loan consolidation, you can consolidate all of your federal loans and let's say you have multiple. I myself had like 10 federal loans. So it would be combining all of those loans into one consolidated federal loan and then you'd have one interest rate and one payment instead of multiple loans with multiple interest rates. Make sense? Now, student loan refinancing is different in that you can combine federal loans and private loans, lump them together into one new loan, the refinancing loan. You would have one interest rate, one predictable monthly payment and you'd have one student loan lender that you are working with. That's the biggest difference between consolidation and refinancing. So just to clarify those terms. Okay, so you can't refinance your loans through a federal government program, but you can refinance your loans through a private lender. There are a ton out there. I can't believe how many commercials are out there for student loan refinancing right now. But the big thing that you want to consider if you think you might be a candidate for student loan refinancing, let's go over this. Student loan refinancing could be good if you have good credit. It's good for those that receive a consistent monthly income, those that have federal and private student loans and a lot of it, and those who want one monthly payment towards one loan instead of multiple. Now, student loan refinancing is not really a good option for those who want to use the Public Service Loan Forgiveness Program. I can cover that in another video if you're not familiar with it. And it's not good for those who have a poor credit or those who have unpredictable income or those who have loans with already low interest rates. So the whole reason that you would want to combine and refinance your student loans is if you have a high interest rate on those student loans and you're wanting to lower the amount of interest that you pay. We all want to pay less in interest so that we don't ever have to pay interest again. Now, what's interesting here is I checked the current interest rates for federal student loans and direct unsubsidized and subsidized loans for undergraduates is currently at 4.53%. Direct unsubsidized loans for graduates is 6.08% and then the plus loans is at 7.08%. So to give you an idea of how this compares to roughly 10 years ago when I was in college, I took out federal unsubsidized loans and subsidized loans between 2007 and 2011. And the interest rate for the unsubsidized loans as an undergraduate was 6.8% and the subsidized loans were at 4.5%. So the direct unsubsidized loans now has decreased from the time that I was in school to where it is now, it's dropped a couple percentage points. So you could have student loans that are as high as nine to 13% and maybe you're looking to refinance and get that percentage rate down to maybe like a 6%. But here's the thing, let's take a look at an example. Suppose you have $100,000 in student loan debt and your current interest rate is 10%. Whoa, okay, so that means you're paying $10,000 in interest on that student loan debt on top of paying back your principal. I mean, that's pretty crazy, right? So let's say you check out a refinancing lender who's offering to pay you a 7% interest rate. So instead of 10%, you'd pay 7%. So that's three percentage points less than what you'd be paying. So you'd be paying, what, $7,000 in interest per year. So you're saving yourself $3,000. But here's the thing, $3,000 does not solve a $100,000 problem. You still have to come up with a debt-free plan. You still have to make it a point to pay it off as quickly as possible by putting extra payments towards your debt. Yeah, if I saw $3,000 on the ground, heck yeah, I'm picking it up. And so you could move the needle like this much by refinancing, but know that refinancing is not the secret to getting out of debt. It's not the end-all to your debt-free journey. You still have a lot of headway to go. And if you work the steps of getting out of debt, saving and budgeting, I actually have four steps to my debt-free plan. It's in my online course, The Freedom Project. And that is having a money mindset, saving for emergencies, budgeting every single month, and then picking a method to paying off debt. I'll link to that in my description below. But if you're working that plan just like I did, then you can pay off your student loan debt without having to refinance. I personally did not refinance. I can see how in some situations, like the example that I pointed out, that you may consider refinancing, and that's fine and all. You can do that. And also, you have to take these other steps. So that's student loan refinancing in a nutshell. It works for some people. In other cases, it's just like roll up your sleeves and get to work and start paying down the debt. Otherwise, I think there are some situations that you could use refinancing, but remember to work your debt-free plan first, and you are good. And you give G.