My wife and I both attended four year colleges right after high school. It felt like the only option for us. Our parents had told us that college was mandatory when we were growing up. We never considered a life where we didn’t go to college. In fact, I was the first in my family to get a college degree right after high school.
Thankfully, I was able to escape college student loan debt free. Between help from my parents, working jobs throughout college as well as winning scholarships, I found ways to pay for school as I attended. My wife wasn’t so lucky. While she also received some help from her parents, she ended up using student debt as the main source of money to pay for school. When she graduated, she owed over $80,000 in student loan debt.
Looking back, my wife did have to take out some student loans to attend college. However, the $80,000 of debt partially came from not knowing what she was getting into with student loans. Here’s what we learned about student loan debt the hard way.
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Federal Loans Only Offer So Much Aid
Everyone talks about getting financial aid when you go to college. We always thought that aid would mainly be through federal student loans. However, federal loans won’t pay for your whole college education. Instead, federal student loans are capped for each year you attend school. There is also a total cap for the amount of federal loans you can take out. I don’t remember what the caps were when we went to college. However, here are the current caps which can affect you.
For the first year of college, you can only take out $5,500 in total federal loans and a maximum of $3,500 of that can be subsidized loans. For your sophomore year, the total you can borrow increases to $6,500 and the subsidized limit increases to $4,500. Starting in your third year and beyond in undergraduate study, you can borrow a total of $7,500 per year of which at most $5,500 may be subsidized loans. There is also a total limit of federal student loans you can borrow for undergraduate education, which is $31,000. Only up to $23,000 of that total may be subsidized loans.
The Reality of Attending College
If those loan amounts seem low compared to the cost of attendance of many universities, that’s because they are. Once you combine all of the tuition, fees, room and board costs, book costs and other miscellaneous costs, you may realize you need to borrow more money to attend school. For instance, I took a quick look at the total cost of attendance at my alma mater, James Madison University. The expected cost for a year at school is $24,802 for in state students. If you attended the school I chose and took out the maximum of $5,500 in federal student loans, you’d still have to come up with another $19,302 to pay for your first year of school.
Private Loans Are Often the Answer
So, if you don’t have cash for your school expenses and you can’t get enough federal student loans, how do you pay for the rest of your school costs? For many people, including my wife, the answer is private student loans. Private student debt are vastly different from federal loans.
For starters, private student loans are issued by private institutions. These institutions are mostly interested in lending to make money. That means that these private lenders probably don’t have your best interests in mind when approving you for a loan. There are no limits on how much money you can borrow with private student loans. Technically, you can borrow as much as a lender will approve you for. Unfortunately, that leads to many students taking out more money in loans than they really need to attend school.
Differences between Federal and Private Loans
Private student loans don’t have set interest rates and repayment terms like federal student loans do. Some of the debt my wife had to take out were variable interest rate. At times, the interest rate increased to over 10% interest during the credit crisis. Needless to say, these student loans were much more damaging than a fixed interest rate federal student loan. To make things even more interesting, private student loans don’t offer the same benefits as federal loans.
For example, private loans may require you to begin repaying them while you’re still in school. Private student loan interest rates usually depend on your credit score. If your score isn’t great, you may need a cosigner or you’ll be stuck with a sky high interest rate. Private student loans do not always offer deferment or forbearance options that federal student debt does, either.
If you’re considering private student debt to pay for the rest of your college costs, be very careful. Read everything you can about the differences between federal and private student loans. Make sure you understand the differences before taking out private student loan debt.
Don’t Take out More Debt Than You Need
You need to make sure you follow one of the most important rules for borrowing money to pay for college education. It doesn’t matter whether your take out private student loans or federal student loans. You should never take out more money than you actually need to pay for your college costs.
Like with many other financial decisions, it may be hard for college students to determine what is a need versus what is a want. If you’re borrowing money to pay for school, use that money for classes, books, a reasonable place to live, food, internet, supplies and other essentials that you’ll need to further your education.
Notice I didn’t say that you should use the money to rent a luxury college apartment with granite counter tops and 60″ flat screen TVs. While there are plenty of opportunities to live a nicer life while you’re in college, you’re not there to live in luxury. Instead, rent an average apartment and get roommates to split the costs. Similarly, you shouldn’t be blowing a ton of money dining out or purchasing alcohol for parties. It’s reasonable to want to treat yourself occasionally. Just make sure it doesn’t become a regular habit. Remember, you’re in school to learn and improve your odds at landing a better paying job after you graduate.
Be Realistic about Your Future Earnings before Taking out Loans
No one I knew in college took a serious look at how much money they’d make after the graduated. They might have read an article stating the average wages of college graduates. However, no one ever spoke of researching their future line of work and how much the average starting salary would be.
Before you ever set foot on a college campus as a student, you need to know what you’ll be getting out of your education. That means you need to have a reasonable idea of how much money you’ll make after you graduate based on research rather than word of mouth. You need to focus on choosing a course of study that will be able to pay off your loans. If your future salary isn’t sufficient to pay off your loans, you might be better off choosing another course of study, a different school or skipping college altogether.
When my wife started college for her nursing degree, she had no idea how much a registered nurse makes in a year. She got lucky and her wages from nursing were enough to pay back her loans. Unfortunately, she had to make many sacrifices to make it possible. Her minimum payments exceeded the cost of the typical car loan. In fact, they actually exceeded what I paid for my share of rent in my first post college apartment.
If she had attended a less expensive nursing program, her payments would have been more reasonable compared to her income out of school. Similarly, if she had attended a school closer to home and was able to live at home, her costs and loan payments would have been greatly reduced.
You Can Actually Refinance Student Loans
When my wife graduated from college, refinancing student loans seemed impossible. We would occasionally get a piece of mail detailing a student loan refinancing program. Unfortunately, the interest rates or other terms were always worse than the debt she already had. Little did we know there were companies like Sofi. These companies would have allowed us to refinance her student loan debt and save us money in the process.
I wish we had researched refinancing her student debt more thoroughly when we were paying them back. That said, we probably didn’t lose too much money because we paid back her loans in just three years. If you have student debt, it makes sense to at least take a look at refinancing and the best student loan consolidation option. You could be able to save a significant amount of money depending on the interest rates on your current loans. Just be aware that if you refinance a federal student loan to a private student loan, you’ll lose the benefits and protections that federal student loans offer. You may not have the same repayment options, either, such as income based repayment.
Like most college students, we learned a lot about student loan debt. Unfortunately, we learned about it when we had to start paying it back. If you’re in the process of deciding whether or not to take out debt to attend college, I hope you paid attention to the lessons we learned. It could save you from going through the pain we had to endure while we repaid over $80,000 of student loan debt.
If my wife and I could go back in time and change one thing about paying off $80,000 of student loan debt, we totally would. What would we change? We would have looked harder for someone to refinance her student loan debt.
Refinancing my wife’s student loan debt likely would have saved us hundreds or thousands of dollars over the short three year time period in which we repaid her loans. Unfortunately, finding someone to refinance student loans wasn’t as easy a few years ago as it is today. If you’re reading this, you have many more options than we had, which is a great benefit to you.
So, if you’re paying off your student loan debt today, should you refinance your student loans? The answer isn’t straightforward, but there are a few things you should consider. Take time to carefully think through each item because you could save hundreds or thousands of dollars that my wife and I missed out on during our student loan repayment.
Reasons to Refinance Student Loans
You could have plenty of reasons to want to refinance your student loans. Whenever I think of refinancing anything, the number one reason I’d want to refinance is to save money. You can save money on interest payments in a few ways by refinancing. The most obvious way to save money is refinancing your student loans to a lower interest rate loan. Sometimes, refinancing to a shorter term loan will have the same effect. You get $100 cash bonus from Commonbond if you refinance your student loan through a special partnership with Fortunate Investor.
How to Calculate Potential Savings
You need to make sure you’ll really be saving money when refinancing your loans. You can check by running the numbers. First, add up the total cost of the rest of your payments on your student loan debt. Next, add up the total of all the payments on your proposed refinanced student loans. Add in any fees you have to pay while refinancing. If the proposed total is less than the original total, you could save money.
Use a Calculator If Making Extra Payments
If you’re currently making extra payments, you’ll have to use a loan calculator such as this one to calculate your true savings. Extra principal payments will reduce your interest paid and loan repayment time period which both mess up the calculation above.
Realize Variable Rate Loans Could Change over the Repayment Period
Another common mistake is comparing variable and fixed rate loans. Variable interest rate loans could have their interest rates increase or decrease over your repayment period according to the terms of the loan. Fixed interest rate loans will keep the same interest rate the entire time. If interest rates suddenly increase during your repayment period, a variable interest rate loan may cost you more than sticking with a fixed interest rate loan.
Reduce Your Payments
Another common reason to refinance a student loan is to lower your monthly payments. While lowering monthly payments could provide you a bit more wiggle room in your budget, you shouldn’t do this without much thought.
The main way most people lower their monthly payments is by extending the term of their student loans. If you end up doing this, realize you’re signing up for extra years of student loan payments. You’re likely signing up to pay more money in interest over the life of your student loans, as well.
Remove a Cosigner
When you were applying for student loans in your college years, you probably hadn’t established an amazing credit score yet. While federal student loans don’t require checking your credit, they aren’t always enough to cover your college bills. If you had to take out private student loans, you may have needed a cosigner to obtain the additional student loan money you needed.
Your cosigner is legally responsible for your debt if you don’t pay. For some, the idea that someone else is on the hook for your potential missteps doesn’t sit right with them. If that sounds like you, you may want to refinance your student loan debt today so you can pay off the old loan that has a cosigner. For others, the cosigner pressures you to refinance to take them off of the loan. Regardless of the reason, refinancing is a great way to take a cosigner off by paying off the original loan with the refinance loan proceeds.
Other Factors to Consider
While it may seem like a great idea to refinance your student loans from the information above, you still must consider a few other things when refinancing.
Interest Rate Type
As mentioned above, you can either get a fixed or variable interest rate student loan when you refinance. Fixed interest rate loans usually have a slightly higher interest rate than comparable variable interest rate student loans. The longer the repayment period is, the larger the premium will usually be for a fixed interest rate student loan.
Why do fixed interest rate student loans cost more? Right now, interest rates are at one of the lowest points they have been at in decades. It is assumed that over the next few years, rates will start to increase. If they do, your variable interest rate student loan will cost more. In fact, they could cost more than your fixed student loan payment today. Banks don’t want to lose out on those higher future interest rates. So, banks charge a premium to keep your interest rate fixed. If rates don’t go up when you have a fixed interest rate loan, the bank wins. If rates do go up, you could win.
Make sure you check to see what the maximum interest rate could be if you do refinance to a variable interest rate student loan. Calculate what the payment would be at that maximum interest rate and make sure you can afford the payment. If you can’t, you probably shouldn’t refinance to that specific variable interest rate loan. After all, you can’t afford the loan if interest rates rise rapidly. Look for different options or consider a fixed interest rate loan.
Length of Repayment Period
When you’re refinancing your student loan, you have many options when it comes to your repayment period. While the options vary from lender to lender, you can usually refinance student loans for 5, 7, 10, 15 or 20 years. Rates usually increase as the length of the loan increases while payments usually decrease as the length of the loan increases.
In general, I believe people should refinance to the shortest time period possible while still remaining comfortable with the monthly payment. You don’t want to stretch yourself too thin because you likely have other financial goals to reach, too. Additionally, you never know when you’ll hit a rough patch. If your refinanced loan payment is a bit of a stretch, a rough patch could result in missing payments.
You can opt to refinance to a longer loan term and make extra payments. Just be aware that the higher interest rate will cost you a bit more than refinancing with a shorter term. The flexibility will help if you hit a rough patch. If you opt for this method, make sure you’re disciplined enough to never skip your additional monthly payments unless you’re in a true financial bind, not just because you want the latest and greatest new gadget.
Losing Federal Student Loan Options
One of the most important reasons you may not want to refinance federal student loans is the fact you may lose certain protections and options federal student loans offer. According to Federal Student Aid, here are some of the differences that may exist between federal student loans and the private student loans you’ll end up with when you refinance.
- If you’re still in school, you may have to start making payments on student loans immediately rather than after you graduate.
- Interest rates on federal loans are fixed while private student loans may have variable interest rates.
- If you’re still in school, private loans are not subsidized and will accrue interest while you attend school.
- Interest may not be tax deductible depending on your loan and situation.
- Private student loans cannot be consolidated into a Direct Consolidation Loan.
- Some private student loans do not offer forbearance or deferment options while others may. Check with your potential lender before signing on the dotted line.
- You’ll lose federal student loan repayment options, including income based repayment, unless your refinance lender offers a special repayment program.
- You likely will no longer qualify for loan forgiveness programs for public service.
That said, some private student lenders do offer some of the above benefits of federal student loans. Be sure to check with the lender you’re considering to see what options you may retain and which options you’ll lose before refinancing any federal student loan. Of course, if you took out private student loans while attending college, they probably don’t have these benefits anyway.
Should You Refinance Your Student Loan Debt?
Only you can decide whether refinancing your student loan debt is worth it to you. If you have federal student loans, you’ll have to weigh any potential monetary benefit of refinancing against the benefits you stand to lose. If you only have private student loans, you simply need to decide on your objective and run the numbers to see if refinancing your student loans will meet that objective.
Getting married is exciting!
Many people look forward to their wedding day for years before they even meet the person they’re going to marry. Unfortunately, once people find their future spouse they may not discuss one of the biggest issues a newly married couple will face.
Talking about your finances with your future spouse may seem overwhelming, especially if you have debt. You and your future spouse should already have a plan for dealing with both you and your future spouse’s debt before you walk down the aisle. Sadly, many people don’t. Some may not even know if their future spouse has debt when they say “I do”.
Don’t set yourself up to have a major money fight soon after you’re married. There is no right answer to whether you should or shouldn’t help pay off your spouse’s debt after you get married. However, I do think you do need to be on the same page. Here’s what you should consider.
What Is the Cause of the Debt?
I firmly believe the cause of the debt should be a huge factor in deciding whether to team up to knock it down together. If your future spouse’s debt is a good type, such as a reasonable mortgage or a reasonable amount of student loans used to further their earning potential, then teaming up to pay off it off may make sense.
Paying off bad debt could help your future spouse learn to avoid repeating the same money mistakes in the future. For example, if your future spouse is bringing a $10,000 credit card bill to your marriage due to a bad impulse shopping habit, they may need to conquer it themselves. Of course, that isn’t always the situation. Your future spouse may have hit rock bottom and already reformed their spending habits but still have a large amount to pay off. If that’s the case, teaming up to pay it off might be the responsible thing to do.
How Will You Run Your Finances?
The cause of debt isn’t the only factor you should consider. A big part of deciding whether or not you should help pay off your spouse’s debt depends on how you plan to manage your finances after marriage. You might be planning to combine your finances after you tie the knot. If so, you’ll probably end up combining your debt, as well.
My wife and I combined our finances, including our debt, when we got married. It worked out great for us. It is important to get on the same financial page.
“We found that working together as a team to pay off her $80,000 of student loan debt helped us grow closer as a couple.”
At the same time, we were able to knock it out that much faster than she could have by herself. You could be SOFI get good rates if you refinance your student loan through a special partnership with Fortunate Investor.
Not everyone chooses to combine their finances when they get married like we did. You may decide to keep separate finances after you tie the knot. If that’s the case, many couples decide to keep their financials separate. To some, it seems logical that the person that incurred the expenses should be the one to pay it off. It isn’t always that simple.
Keeping debt separate may cause resentment later in your relationship, especially if there is a large amount involved and your partner has no debt at all. In fact, your partner could easily be spending money on fun toys while you’re stuck making loan payments. It’s entirely possible your partner may unknowingly tempt you to spend money that should be used to pay debt. For instance, your spouse may be able to afford their half of a swanky vacation. Unfortunately, you may have to put your half on a credit card to go, making your situation even worse.
Debt Will Affect Your Marriage Regardless of Who Technically Owes
It’s important to remember that deciding who should pay off debt after marriage isn’t a competition. When you get married, two people become one family. That means you need to start making decisions as a family, too.
Don’t let pride keep you from accepting the help of your spouse. If your spouse is willing to help, let them help after you get married. At the same time, don’t shame your spouse for their past decisions that caused them to incur their liabilities in the first place. If they’ve fixed the issue that caused them to get into debt, consider helping them. Assist with paying it off so you can have a brighter financial future as a couple.