How to make student loans less scary

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You don’t need Halloween to remind yourself that student loans can be scary.

According to make lemonade, there are over 44 million people who collectively owe $ 1.4 trillion in student loan debt.

The good news is that student loans don’t have to scare you off if you adopt these 4 strategies.

1. Refinance your student loans

Refinancing a student loan allows you to combine your existing federal and private student loans into a single new student loan with a lower interest rate.

You can choose a fixed interest rate or a variable interest rate and flexible loan terms ranging from 5 to 20 years. With student loan refinancing, you will make a monthly payment and only have one student loan manager.

Since the federal government does not refinance student loans, private lenders handle the refinancing of student loans.

This means that when you refinance federal student loans, you forgo certain benefits such as forbearance and deferral, although some lenders now offer some form of job protection and other benefits in times of hardship.

You can apply online and know your new rate in just a few minutes.

To be approved, you typically need to be employed (or have a written job offer), have some work experience, a solid credit rating and income, and a history of financial responsibility.

Let’s look at an example with this student loan refinance calculator. Suppose you have $ 100,000 in student loans at 7% payable over 10 years and you can refinance those student loans with a private lender at 3%.

With student loan refinancing, you reduce your monthly student loan payment by $ 195 and save $ 23,457 in total.

2. Consolidate your student loans

Another option to help manage student loan repayment is federal student loan consolidation. With Federal Student Loan Consolidation, you combine your existing federal student loans into one direct consolidation loan.

This program is administered by the federal government and is a tool to help you organize your separate federal loans into one student loan.

Unlike student loan refinancing, federal student loan consolidation does not lower your interest rate or your monthly payment.

With a direct consolidation loan, your resulting interest rate is a weighted average of your existing student loans, rounded to the nearest 1/8%. As a result, the interest rate on your student loan may increase slightly.

The advantage is that you would make a monthly payment and only have one student loan manager.

here is a student loan calculator to help you compare student loan refinancing and student loan consolidation.

3. Increase your monthly student loan payment

This strategy may seem counterintuitive, especially if you are already making large monthly payments.

However, if you can increase your monthly student loan payment by $ 100 per month, you can save significantly on interest charges in the long run.

For example, with this student loan prepayment calculator, suppose you have $ 100,000 in student loans at a 7% interest rate with a standard 10-year repayment term.

By paying an additional $ 100 per month, you can save $ 4,696 in interest charges and pay off your student loans 1.08 years earlier.

Here are the savings if you increase your student loan payment by the following monthly amounts:

$ 200 additional / month: $ 8,370 in total savings (1.91 years earlier)

$ 300 additional / month: $ 11,323 in total savings (2.67 years earlier)

$ 400 additional / month: $ 13,752 in total savings (3.25 years earlier)

$ 500 additional / month: $ 15,786 in total savings (3.75 years earlier)

4. Make a lump sum payment

If you aren’t able to make a higher monthly payment (or even if you are and have additional funds), you can make an additional one-time, lump-sum payment on your student loans.

Sources of a lump sum payment might include savings, bonuses, tax refunds, or inheritance, for example.

Whenever you make an additional student loan payment that is greater than your minimum monthly payment, be sure to notify your student loan manager in writing that any additional payment should be applied to the current monthly payment (not to a future monthly payment). .

Also, if you have credit card debt or a mortgage that has a higher interest rate than your student loan debt, paying off the loan with the higher balance may make more financial sense. . Likewise, you can also use these funds to contribute to a retirement plan and invest to earn a return that is greater than the cost of your debt.

Having said that, let’s look at an example of a lump sum payment with this lump sum additional payment calculator. Suppose you have $ 100,000 in student loans with an interest rate of 7% and a repayment term of 10 years.

If you make a one-time lump sum payment of $ 5,000, you’ll save $ 4,132 on your student loans and pay off your student loans 8 months sooner.

summary

Here’s a recap:

1. Student loan refinancing = lower your interest rate

2. Federal Consolidation = organize your student loans (weighted average interest rate)

3. Higher monthly payment = save interest, repay faster

4. Lump sum payment = save interest, repay faster



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