Have you made your New Year’s resolutions? It’s definitely that time of year when most Americans do theirs. The most typical ones are to lose weight, start eating healthier, quit smoking, drink less (or not at all) and volunteer to help a nonprofit.
Some of the other most popular resolutions have to do with personal finance. For example, you might resolve to save more money, develop and stick to a budget or get out of debt.
But if you’re trying to repay student loans then one resolution you should make for sure is to refinance them.
It doesn’t require that much effort
Good money management can take more than a fair amount of work. For example, if you did resolve to make and stick to a budget, this is something that takes both time and a lot of self-discipline. Fortunately, there are some resolutions you could make that won’t require that much effort. One of them is resolving to refinance your student loans.
Refinancing private student loans
If you took out private student loans in 2007, 2008 or 2009 – at the peak of the Great Recession you’re probably paying sky high interest rates. In addition, it’s pretty clear that our Federal Reserve is in the process of raising its short-term interest rate, which will mean higher interest rates on just about any money you could borrow.
This means the sooner you refinance those private loans the better.
If you have a decent credit rating
Do you know your credit score? If not, you can get it free from a number of sources including Credit.com, CreditKarma.com and CreditSesame.com. While this won’t be your true FICO Score, it will be close enough for you to see where you stand.
Lenders generally look at credit scores in ranges: 781 to 850 (Excellent Credit), 661 to 780 (Good Credit), 611 to 650 (Fair Credit) and so forth.
If you have Good or Excellent Credit, there will be a number of loan options available to you at much lower interest rates. As an example of this, if you own your home and have equity in it you could today get a fixed 15-year refi with an APR as low as 2.875%
This makes it basically a no-brainer to move your private student loans to a new one at a cheaper interest rate.
Refinancing a federal student loan
If you have federal student loan debts this would also be a good time to refinance them.
The Department of Education now offers several types of loans that are tied to the person’s income. The newest of these is the Revised Pay As Your Earn Repayment Plan (REPAYE). This plan restricts monthly payments to no more than 10% of your discretionary income. And if haven’t repaid your loan in full after 25 years, any remaining balance is forgiven.
There is also the Pay As You Earn Repayment (PAYE Plan). It’s available if you were a new borrower after October 1, 2007 and received a Direct Loan disbursement on or after October 1, 2011. It also caps monthly payments at 10% of your discretionary income.
Choose one of the two plans and if you’re a low-income earner, your monthly payment could actually be $0.
Other income-based repayment plans
There are two other income-based repayment plans for federal student loans. They are Income-Based Repayment (IBR) and Income-Contingent Repayment (ICR).
All the income-based repayment plans have their restrictions. For example, PAYE, and REPAYE are available only to people that had loans made under the Direct Loan Program. And the IBR program is available only to borrowers under the Direct Loan Program or FFEL.
To repay your loans faster
While one of the income-based repayment plans could be a great option there are some other things to consider. For example, if your goal is to get rid of that student loan debt as fast as possible you might want to stay on 10-year Standard Repayment and double up your payments. That would get you debt-free much faster than any of the income-contingent repayment plans.
The best of both worlds
If you have both private and federal student loans one really good option would be to refinance your private loans, take out as much money as possible and use it to pay down your federal student loans. Do this and you’d have basically the best of both worlds–a cheaper private student loan and less federal student loan debt.
Do your homework
If you have federal student loans at high interest rates or high monthly payments, it would certainly make sense to refinance them to one of the income-based repayment plans. But it’s important to look before you leap. Go to the Federal Student Aid website and click on How Do I Manage My Loans. Read about each of the options carefully so that you will choose the one that will best fit your financial situation.