I regularly meet pharmacists, lawyers, and MBAs with $200,000 in student loan debt, struggling to pay off interest years after graduation.
When you borrow money to invest in your education, you know paying interest on that student loan debt is just part of the deal. But interest may seem like an abstract notion when you take out a loan for the first time!
Over time, this becomes a force to be reckoned with, especially if you have six-figure student loan debt to pay off. Fortunately, as the student loan market has grown, so have the repayment options available to borrowers.
There is also the option of refinancing using a private loan, given today’s historically low interest rates. Here’s what you need to know about the various repayment plans, as well as refinancing student loans.
The case of refinancing
Refinancing student loans is similar to refinancing a mortgage. If you are able to refinance your student loans at a lower interest rate, you may be able to:
- Save money on total interest
- Make lower monthly payments
- Shorten the term of the loan
- Switch from a fixed rate loan to a variable rate loan, or vice versa
- Simplify your monthly bill with consolidation
Hidden Dangers in Student Loan Debt Repayment Plans
There is a lot of misunderstanding, even among highly trained professionals, about the details surrounding their student loans. To start, many students take out federal student loans.
Federal loans offer a few different repayment options not available with private lenders, including a graduated repayment plan where payments start small and increase over time.
There are also income-oriented repayment plans that allow borrowers with high debt-to-equity ratios to make lower monthly payments, with remaining principal potentially forfeitable after 20 to 25 years.
The problem with relying too much on the details presented by the government is that the rules can change. Over a 25-year payback, you have the potential for seven different presidents and 13 different sessions of Congress!
Some borrowers may choose to refinance federal student loans using a private lender. While this may lead to a lower interest rate or better terms, it may mean sacrificing some of the protections built into federal student loans and the associated repayment plan.
The wisdom of professional help
It is confusing, complicated and time consuming to understand all the details and competing factors that can affect student loan repayment. Especially if you have already spent years studying law, medicine or business.
This is an area where a specialist, such as a financial planner, can help you. After all, the consequences of one misstep can cost you dearly, potentially thousands of dollars in interest.
No matter how confusing your student loan debt seems, an experienced financial planner can help you develop a detailed, personalized plan. Think about it, all the money you can save can be reallocated to a better quality of life. Whether it’s buying a house, buying a business, starting a family or increasing your wealth!