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Should I Refinance My Federal Student Loans?

Graduating from college and starting your career is a time filled with questions and excitement. On the one hand, everything is new and getting to check all the “firsts” (first solo apartment, first salaried job, first absolutely terrible post-grad roommate) off your list is incredibly rewarding. On the other hand, some of those first financial questions can be just a bit overwhelming, especially when it comes to student loans.

Understanding your student loans, whether they are private or federal, and how much you need to pay to make a dent is all new territory and brings on even more questions. But know that you’re not alone. The latest numbers suggest over 44 million people in the country have a total of $1.4 trillion in student loan debt .

As you start managing your post-grad budget, you might realize that student loan payments are a large portion of your monthly bills. If that’s the case, it’s a good idea to start learning about student loan refinancing. Can it get you a lower interest rate? How does refinancing differ from student loan consolidation? And will any of this save you money?

The most important answer, first: Yes, student loan consolidation and refinancing can save you money. However, they are both different, and you’ll need to figure out which option is a better fit for you. Now let’s get into the nitty-gritty.

There are a few things to be aware of before you refinance fed loans. We’ve gathered the most frequently asked questions from our blog and social media channels about federal student loan refinancing to help you decide whether it’s right for you.

Student Loan RefinancingStudent Loan Refinancing

What is Federal Student Loan Refinancing?

If you graduated with student loans, you likely have a combination of private and federal student loans, which are loans funded by the federal government. Direct subsidized loans or Direct PLUS loans are both examples of federal student loans.

Interest rates on federal student loans are fixed and set by the government, so you can’t refinance at a lower rate and keep it as a federal loan. However, you can refinance your federal student loans into private loans with a new—ideally, lower—interest rate.

When you refinance into a private loan, you lose some of the benefits that come with a federal loan, which is worth keeping in mind. However, the new loan (and the new interest rate) could translate to a lower interest rate and paying off loans sooner.

How Are Refinancing and Consolidation Different?

Student loan consolidation and student loan refinancing are not the same thing, but it’s easy to confuse the two. In both cases, you’re essentially signing new loan terms that replace your old student loans.

Consolidation takes your student loans and bundles them together. This allows you to work with the provider of your choice and qualify for new repayment options. Consolidation, however, does not get you a lower interest rate. Refinancing, on the other hand, takes your old loans and finances them at new interest rates with a private lender.

When you consolidate federal loans through the Direct Loan Consolidation program , the resulting interest rate is the weighted average of the original loans’ rates, which means you don’t save any money. If your monthly payment goes down, it’s usually the result of lengthening the loan term, which means you’ll spend more on total interest in the long run.

When you refinance federal and/or private student loans, you’re given a new—ideally, better—interest rate based on your financial profile. That lower rate translates to total interest savings, and you may be able to lower your monthly payments or shorten your payment term.

What Are The Benefits to Federal Student Loans?

The main benefit is savings. If you refinance federal loans at a lower interest rate, you can save thousands over the life of the new loan. You can also lower your monthly payments or shorten your term (the latter means higher monthly payments but more total interest savings). Plus, you may be able to switch out your fixed rate loan for a variable rate loan (more on variable rates below).

Recommended: Not sure which rout to take with your student debt? Use our Student Loan Navigator to explore your options.

What Are The Potential Disadvantages of Refinancing Federal Loans?

When you refinance federal loans with a private lender, you lose the benefits and protections that come with government-issued student loans. Those benefits fall into three main categories:

Deferment/Forbearance

Most federal loans will allow you to put payments on hold through deferment or forbearance when experiencing financial hardship. Student loan deferment allows you to pause subsidized loan payments without accruing interest, but unsubsidized loans will still accrue interest.

Student loan forbearance allows you to reduce or pause payments, but interest usually accrues during the forbearance period. Some private lenders do offer forbearance; so check lender policies before refinancing.

Special Repayment Plan

Federal loans offer extended, graduated, and income-driven repayment plans (such as Pay As You Earn, or PAYE), which allow you to make lower payments than the standard plan. It’s important to note that these plans typically cost more in total interest over the life of the loan. Private lenders do not offer these programs.

Potential Student Loan Forgiveness

Some federal loans are eligible for forgiveness under certain circumstances. The most common forgiveness programs are for public service workers or teachers, or those who’ve participated in an income-driven repayment plan for 20 or 25 years, depending on the plan. Private loans do not offer forgiveness.

Related: Do You Qualify For Public Student Loan Forgiveness?

Common Questions Around Refinancing Your Federal Loans

Who Typically Chooses Federal Student Loan Refinancing?

We see a lot of borrowers refinancing graduate student loans, since federal unsubsidized and Grad PLUS loans have historically offered less competitive rates. In order to qualify for a lower interest rate, it’s helpful to show strong income and a history of managing credit responsibly. The one thing all refinance borrowers have in common is a desire to save money.

Do I Need a High Credit Score to Refinance Federal Loans?

Generally speaking, the better your history of dealing with debt (illustrated by your credit score), the lower your new interest rate can be. While many lenders look at credit score as part of their analysis, it’s not always the defining factor. For example, SoFi evaluates a number of things, including your career experience, education, monthly income vs. expenses, and track record of meeting financial obligations.

Are There Any Fees Involved in Refinancing Federal Loans?

It depends on the lender, but SoFi allows you to refinance with no application, origination or prepayment fees.

Should I Choose a Fixed or Variable Rate Loan?

Most federal loans are fixed rate, meaning the interest rate stays the same over the life of the loan. When you apply to refinance, you may be given the option to choose a variable rate loan.

Here’s what you should know:

Fixed Rate Student Loans Typically Have:

  • A rate that stays the same throughout the life of the loan
  • A higher rate than variable rate student loans
  • Payments that stay the same over the life of the loan
  • Variable Rate Student Loans Typically Have:

  • A rate that’s tied to an “index” rate, such as the prime rate or LIBOR . SoFi’s variable loan rate is tied to the one-month LIBOR rate, and can change as often as monthly.
  • A lower initial rate than fixed rate student loans
  • Payments and total interest cost that change based on interest rate changes
  • A cap, or maximum interest rate. For example, SoFi 5- and 10-year variable loans are capped at 8.95% APR; 15- and 20-year terms are capped at 9.95% APR.
  • Generally speaking, a variable rate loan can be a cost-saving option if you’re reasonably certain you can pay off the loan somewhat quickly. The more time it takes to pay down that debt, the more opportunity there is for the index rate to rise—taking your loan’s rate with it.

    What Happens if I Lose My Job or Can’t Make Loan Payments for Other Reasons?

    Some private lenders offer forbearance—the ability to put loans on hold—in cases of financial hardship. Policies vary by lender, so it’s best to learn what they are before you refinance. SoFi, for example, offers Unemployment Protection to borrowers who lose their jobs through no fault of their own.

    In those cases, SoFi suspends monthly loan payments and provides job placement assistance during the forbearance period. This benefit is offered in 3-month periods and capped at 12 months.

    For policies on disability forbearance, it’s best to check with the lender directly, as this is often considered on a case-by-case basis.

    Do Refinance Lenders Allow Co-Signers/Co-Signer Release Options?

    Many private lenders do allow co-signers and some allow co-signer release options. SoFi allows co-signers but no option for co-signer release. However, if you have a co-signer and your financial situation improves, you can apply to refinance the co-signed loan under your name alone.

    Should I Refinance My Federal Student Loans?

    It depends on how much you might save with a lower interest rate from a student loan refinance, versus how likely you are to use the benefits that come with having federal student loans.

    First, you can use our student loan refinancing calculator to figure out how much you might save with a lower interest rate. In general, borrowers often refinance federal graduate student loans and PLUS loans, since those have historically offered less competitive rates.

    Next, ask yourself: Are you going to use the programs or benefits that come with federal student loans? These include income-based repayment plans, as well as loan forgiveness for teachers, doctors, or even lawyers in public service. If that’s you, great, but if it’s not, that’s OK too.

    There are some downsides to income-driven student loan repayment plans, too. You can end up paying more in interest or get hit with a higher tax bill after your loan is forgiven.

    However, depending on your financial situation, that flexible repayment plan could be a saving grace. It depends on how much you have in federal student loans and how confident you are about your repayment options.

    The last thing you’ll want to consider before you opt to refinance your student loans is the terms of your new student loan. Weigh all the costs and benefits, and figure out what makes sense for you. We know you can do it. After all, you’re a college graduate.

    If it’s right for you, check your rates in two minutes to refinance your federal student loans. SoFi’s student refinance loan is a private loan and does not have the same repayment options/benefits offered by federal programs. You should explore and compare federal and private loan options, terms, and features to determine what is best for you and your situation.

    Ready to refinancing your student loans? Start today!


    External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
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    SoFi loans are originated by SoFi Lending Corp (dba SoFi), a lender licensed by the Department of Business Oversight under the California Financing Law, license # 6054612; NMLS # 1121636 . For additional product-specific legal and licensing information, see SoFi.com/legal.

    SoFi Student Loan Refinance
    IF YOU ARE LOOKING TO REFINANCE FEDERAL STUDENT LOANS PLEASE BE AWARE OF RECENT LEGISLATIVE CHANGES THAT HAVE SUSPENDED ALL FEDERAL STUDENT LOAN PAYMENTS AND WAIVED INTEREST CHARGES ON FEDERALLY HELD LOANS UNTIL THE END OF SEPTEMBER DUE TO COVID-19. PLEASE CAREFULLY CONSIDER THESE CHANGES BEFORE REFINANCING FEDERALLY HELD LOANS WITH SOFI, SINCE IN DOING SO YOU WILL NO LONGER QUALIFY FOR THE FEDERAL LOAN PAYMENT SUSPENSION, INTEREST WAIVER, OR ANY OTHER CURRENT OR FUTURE BENEFITS APPLICABLE TO FEDERAL LOANS. CLICK HERE
    FOR MORE INFORMATION.
    Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.

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    How Student Loans Affect Your Credit Score​: 7 Essential FAQs

    Got student loans? We’ve got you covered with our Student Loan Smarts blog series. Our expert tips and hacks will help you save money, pay off loans sooner, and stress less about student loan debt. Read the other posts in the series to get all the info you need to make intelligent decisions about your student loans.

    Student loans are the ultimate double-edged swords. Invest wisely in your education, and those loans should pay off in the form of higher income over time. But if you mismanage student loan debt, your credit score could suffer—and that could have a big impact on your financial future.

    As a student loan lender, we get a lot of great questions about how student loans affect credit score. Here are the top seven.

    1. Do I need a good credit score to take out a student loan?

    The answer depends on whether you’re talking about federal or private student loans.

    Federal loans don’t take credit scores into account, which is why mosevery borrower gets the same interest rate regardless of financial profile. However, federal PLUS loans do require that borrowers not have an adverse credit history , which is defined by FinAid as “being more than 90 days late on any debt, or having any Title IV debt within the past five years subjected to default determination, bankruptcy discharge, foreclosure, repossession, tax lien, wage garnishment or write-off.”

    Related: 5 Tips for Getting the Lowest Rate When Refinancing Student Loans

    For private lenders, your credit score is usually a key factor in determining not only student loan approval, but also the attached interest rate. In other words, the better your score, the better your rate. But SoFi does things a bit differently—our non-traditional underwriting process looks beyond your credit score to take into account factors such as education and career. This allows us to provide competitive interest rates on student loan refinancing.

    2. Which credit scores do lenders use?

    Most private student loan lenders use FICO credit scores to determine whether to extend credit and at what interest rate. Since FICO is used widely throughout the lending industry, including by mortgage, auto loan, and credit card providers, it gives lenders an apples-to-apples comparison of potential borrowers.

    3. How is my credit score calculated?

    Unfortunately, how FICO calculates your credit score is kind of a black box. While the various factors and weightings
    used in the calculation are publicly available on FICO’s website, its algorithm is proprietary, which means that no one can predict exactly how a specific financial event will affect your score. For example, a late payment will likely reduce your score, but by how many points is anyone’s guess.

    That said, there are generally three key ways to improve your credit score : pay bills on time, keep credit card balances low, and reduce the amount of debt you owe.

    4. How does a late student loan payment affect my credit score?

    Making payments on time is obviously important, but what you might not realize is exactly how damaging it is to not pay on time. Even if your credit history is pristine, it only takes one 30-days past due report to cause a material change in your score. Whether you were short on cash or just simply forgot, the FICO algorithm doesn’t distinguish—and the result is the same.

    Recommended: How to Choose Between Variable and Fixed Rate Student Loans

    So, if you have trouble remembering to make your payments, set up an automatic payment plan; most lenders will give you a small discount on your interest rate for doing so. When you know you can’t make a payment on time, talk to your lender or loan servicer right away.

    Most federal loan lenders and some private lenders offer loan deferment and/or forbearance , allowing you to temporarily suspend payments, which will minimize the impact on your credit score. But remember, there’s absolutely nothing your lender can do to help if you don’t return their calls.

    5. Will shopping around for a better student loan interest rate hurt my credit score?

    We hear this question a lot from grad school borrowers and those refinancing student loans to get the best interest rate possible on a private loan.

    One factor that can be a red flag for FICO is the number of inquiries it receives from lenders wanting to see your credit report. In other words, if it looks like you apply for more credit often, it could negatively impact your score. But the good news is that FICO attempts to distinguish between a request for a single loan and a request for many new credit lines. As long as you rate-shop in a concentrated period of time, you should be okay.

    If you really want to avoid inquiry overload, do your homework before applying for a loan. Private lenders typically list online the range of rates they offer, as well as general eligibility criteria. Researching that info will give you a good idea of whether you’ll qualify before you formally apply.

    Also, be sure ask lenders if they can tell you the interest rate you would receive without doing a “hard” credit pull, which might affect your score. You can’t get a loan without an eventual inquiry, but this service allows you to compare interest rates worry-free before applying for a loan.

    6. Will refinancing student loans help my credit?

    Refinancing student loans at a lower interest rate can have an indirect positive impact on your credit. For example, refinancing may lower your monthly payments, making it less likely you’ll miss or be late with a payment.

    And if you refinance federal loans with a private lender (in effect, turn your federal loans into a private loan), rest assured that credit bureaus don’t view these two types of loans any differently.

    7. Will paying off student loans too quickly damage my credit?

    Some people reason that because education debt is “good debt,” FICO must view it more favorably than other types of debt. And because credit scores can be improved by having open accounts that are paid on time, they think that paying off a student loan early might actually work against their score. But, while there’s no definitive answer to this question (remember: black box), there are a few things to keep in mind before buying into this belief.

    Read Next: Student Loan APR Vs. Interest Rate – 5 Essential FAQs

    First, FICO doesn’t see your student loan debt as being good or bad. In fact, the agency doesn’t distinguish it from any other type of installment debt, such as mortgage or auto loan debt. Incidentally, while installment debt is different from revolving debt (like credit card debt), it’s generally better to have positive track records with both of types of loans .

    Second, it’s true that FICO likes to see how you manage your debt. So, if you have an open account in good standing, that could help your score—but the impact would likely be small. And closing any account satisfactorily is generally a positive thing for your credit, so that could help your score, too.

    Bottom line: Instead of worrying about how prematurely paying off your student loan will impact your credit score, consider the potential trade-offs. For example, how much extra interest are you paying by leaving the account open? Also, a high loan balance may make it harder to qualify for new loans—something to think about when it comes time to buy a home.

    Take Care of Your Credit Score

    Credit is a powerful tool that can allow you to do a lot of great things, but if you’re not careful, it can hold you back. For many people, student loans represent their first experience carrying a large debt load, which means mistakes are almost inevitable. The most important thing you can do is learn how to take good care of your credit score—and eventually, it will take care of you, too.

    Here at SoFi we want to help you through your student loan journey. We’ve created a student loan help center to give you the resources you need to find the best strategy to pay off your student loans.

    Are you paying off your student loans? Learn more about student loan refinancing with SoFi.


    Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website on credit.
    SoFi Lending Corp. is licensed by the Department of Business Oversight under the California Financing Law, license number 6054612. NMLS #1121636. Terms, conditions, and state restrictions apply; see SoFi.com/eligibility.
    The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
    Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.
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    Your 12-Month Master Savings Plan to Buying Your First Home—While Paying Down Student Loans

    Not-so-breaking-news: home prices are on the rise, especially in large metro areas. In San Francisco, the median price for just an entry-level home is $450,600. Meanwhile, in Portland, average home prices grew 11% to $334,900 since last year.

    So saving for a down payment for your first house can be tough. Especially if you’re trying to buy that first home with student loans to pay off. And if you’d like to purchase that home super fast to lock in a competitive mortgage rate and put your rent money toward something that builds value, it can feel impossible.

    But here’s the good news: It’s definitely doable, even within just 12 months, if you accelerate your savings and prepare wisely. Follow our strategy below to take that big step into home ownership fast.

    Months 1–3: Save Like You’ve Never Saved Before

    Do the Math

    Saving 10% for a down payment on a home priced at $450,600 is far more manageable than following the old 20%-down school of thought, especially when you have student loans to pay off. To succeed at saving $45,060 in a year’s time, you’ll need to save $3,755 a month, which seems slightly more plausible if you take a breath and break it down into 52 weeks, at $867 a week.

    But don’t put your calculator away yet.

    In addition to saving for the down payment, you’ll need to factor in closing costs, which typically amount to about 3% of the home price. So you need to add $260 to your weekly savings goal for a total of $1,127.

    Yeah, that’s a big chunk of change. But don’t panic; the first step is always the hardest. Just imagine yourself hosting your first dinner party or Super Bowl bash, and remember to consider student loan refinancing, which can help lower your interest rate, monthly payments, and ultimately save you money.

    Revise Your Budget

    Hunker down and take a hard look at your budget. If you’ve decided to refinance your student loans, don’t forget to adjust your monthly fixed expenses to account for your lower payments. Compare your income and expenses to get a clear view of your spending habits, and then make the necessary changes to meet your weekly savings goals.

    Look closely at your expenses to see what you can give up to increase your savings, and what costs you can cut back on. Can you nix the cable in favor of a Netflix subscription, or join a rideshare to save on gas? Also consider setting limits on eating out and buying clothing or gadgets you don’t really need.

    Related: The Realtor’s Guide to Getting Your Dream Home

    Start a Home Fund

    Open a savings account just for your down payment, and avoid dipping into it. This will keep that money accessible and help you keep careful tabs on your progress. If you’re looking for a non-traditional option, consider opening a SoFi Money® cash management account.

    Reach out to Your Family and Friends

    Within your 12 months of saving you’re going to have a birthday and celebrate gift-giving holidays. So, let your friends and family in on your major goal of buying a house, and ask that they give money toward a down payment in lieu of material presents.

    Just remember that you’ll need gift letters from the generous people in your life, indicating that there is no expectation of repayment. Depending on the mortgage loan, rules vary when it comes to how much of your down payment can come from gifts.

    Months 3–6: Spend Less, Earn More

    Flex your Negotiation Muscles

    Put your savvy bargaining skills to use to get lower interest rates on existing credit cards and auto loans, or discounted rates on subscription services, such as cable and Internet.

    Ramp up Your Income

    Think of creative ways to use your expertise and skills to boost your income. You did invest a substantial amount of time and money in your education, after all, so maximize the ROI to rake in some extra cash to put toward your home fund.

    Perhaps you can roll out an e-course or teach a professional seminar at your local junior college. And, if the time is right, ask for a raise.

    Months 7-9: Boost Your Credit

    Review Your Credit Report

    Make sure your credit report is error-free and that your credit score is as high as it can be. And mind the cardinal rule of credit scores: pay your credit cards, student loans, and bills on time.

    Check your credit utilization ratio (the amount of your credit card balances against their limits), too; you want that number to be low.

    Now is also the time to be wary of applying for new lines of credit, as that will result in lenders doing a “hard pull” on your credit. Too many of these within a 6-month time frame could ding your credit score.

    Recommended: 7 Ways to Make Buying a Home on Your Own a Reality

    Keep an Eye on Your DTI

    Make sure your debt-to-income ratio (DTI) is as low as possible. Your DTI is a key part of securing a mortgage loan, and while the lower the better, it should fall below 36%.

    Months 10–12: Learn the Ins and Outs of the Mortgage Process

    Do Your Mortgage Application Prep

    Your mortgage company will require quite a bit of paperwork to get your loan approved. Complete what’s necessary and be sure to ask about the application, origination, and lender fees up front so you don’t get blindsided late in the game. Also check your credit score once more to make sure it’s still solid.

    Related: Adjustable Rate Mortgage vs Fixed Rate Mortgage

    Explore Homebuyer Assistance Programs

    In addition to a Federal Housing Administration (FHA) loan, there are home upgrade options, such as the Energy Efficient Mortgage (EEM) program. The EEM program can provide benefits if, for example, you’re looking into buying a green home.

    If a fixer-upper is your goal, the HUD 203(k) loan is worth exploring. And depending on where you’re looking to buy, you might find city- or state-specific homebuyers assistance programs.

    With focus, drive, student loan refinancing, and some lifestyle changes, you can boost your savings fast to buy your first home.


    The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
    SoFi Mortgages not available in all states. Products and terms may vary from those advertised on this site. See SoFi.com/eligibility-criteria#eligibility-mortgage for details.
    Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.
    Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website on credit.


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    Student Loan APR vs. Interest Rate: 5 Essential FAQs

    Pop quiz: What’s the difference between student loan APR and student loan interest rate?

    If you don’t know the answer, that’s completely understandable. It’s not information you need every day, but it will come in handy when applying for or refinancing student loans. Both terms impact how much money you’ll spend on total interest, so they should factor into your decision when comparing loans and lenders.

    It’s hard to weigh your options when some student loans display an interest rate, while others state an APR. So how do you know which loan is actually giving you the better rate? We’ve got the answers.

    What do I Need to Know About Student Loan Interest Rate?

    The interest rate represents the amount your lender is charging you to borrow money. It’s expressed as a percentage of your principal and doesn’t reflect any fees or other charges that might be connected to your loan.

    What is Student Loan APR, and How is it Different From Interest Rate?

    APR, or annual percentage rate, represents a more comprehensive view of what you’re being charged—meaning it does include additional loan fees, if there are any. Because of that, a loan’s APR may be higher than its interest rate.

    What Additional Fees/Charges Might be Included in Student Loan APR?

    For student loans, the most common fee is the loan origination fee—an upfront fee most lenders charge for processing your loan application.

    The fee can vary widely from one lender to the next, and some loans may not even have one. SoFi, for example, charges no origination fees on student loan refinancing.

    Another factor included in the APR is the time the loan spends in forbearance, when payments are on hold but interest is still accruing.

    When payments resume, that accrued interest is capitalized (added to the loan’s principal), which means the amount spent on interest increases, so your APR increases, too.

    Since it’s unknown if and when you might put your loan in forbearance, a new loan’s APR won’t typically reflect this cost. Just remember that if you use the forbearance option, it will likely affect your APR on the back end.

    If a Loan’s Interest Rate and APR Are the Same, Does That Mean There are no Hidden Fees?

    Not necessarily. Lenders handle origination fees in different ways, and that has a bearing on the APR. For example, for federal student loans, the origination fee is deducted from your loan disbursement up front, which keeps the fee out of the APR calculation.

    Private lenders, on the other hand, commonly add the origination fee to the loan amount and “finance” it, which means it is included in the APR.

    When I’m Shopping for a Loan, Should I Look at Interest Rate or APR—or Both?

    The benefit of the APR is that it can give you a more apples-to-apples comparison of loan costs. If you just compare straight interest rates, you could miss the big picture in terms of the total cost of the loan, and sometimes those additional fees can make a big impact.

    However, even the APR doesn’t always tell the whole story. As mentioned above, the APR on a federal loan doesn’t include the origination fee, which, in some cases, is pretty significant.

    For example, the current interest rate on a Direct PLUS loan is 6.31%, but the loan origination fee is a hefty 4.276% . That can make it a more expensive option than a private loan with a lower interest rate and/or a lower origination fee.

    What’s the Takeaway?

    The lesson here is to ask the right questions when considering a new student loan or refinancing an existing student loan. Find out the student loan APR and the interest rate, and then check with the lender to see if there are fees or charges that may not be readily apparent.

    And remember, cost is only one factor in the loan consideration process. You’ll also want to look at the potential benefits that come with the loan.

    For example, if you’re going to grad school to get a teaching degree or work toward a career in public service, you might be okay with paying a premium for a federal PLUS loan, because you know you’ll take advantage of federal loan benefits, such as a government forgiveness program. If that’s not the case, your priority is keeping costs low, so going through a private lender might make more sense financially.


    The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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    Pay As You Earn: The True Cost of Student Loan Forgiveness

    When you’re struggling under the burden of federal student loans, the possibility of loan forgiveness sounds like a fantasy. But thanks to the expansion of the government’s income-driven student loan repayment plan called Pay As You Earn (PAYE), more borrowers are inching close to student loan forgiveness than ever before.

    PAYE was previously only available to people who took out loans after October 2007, but last year, the Department of Education launched the Revised Pay As You Earn (REPAYE) plan, which expanded the program to all eligible borrowers regardless of when their loans were disbursed.

    A leg up for those borrowers who have trouble making ends meet, PAYE and REPAYE limit monthly student loan payments to 10% of their discretionary income and, after 20-25 years (10 years if you work in public service), forgives the remaining loan balance.

    How Does PAYE Work?

    For those who qualify and sign on for PAYE, payments are generally around 10% of your discretionary income. If your income increases and your monthly payments get recalculated, your payments will never exceed what you would be paying under the standard repayment plan, as long as your income is still under the qualifying threshold.

    So what’s the catch? For one thing, lower monthly payments will, of course, mean a higher accumulation of interest. And while your loan balance could be eligible to be forgiven in 20 years, that forgiveness in many circumstances is seen as income in the eyes of the IRS.

    So if in 20 years you still owe, say, $20,000, even if the total balance is forgiven, you might have to pay taxes on that $20,000 the same year its forgiven.

    Am I Eligible for a PAYE Plan?

    Not everyone is eligible for the PAYE program. First off, PAYE only works for federal direct loans. And because PAYE was created for those struggling to meet loan payments, PAYE is only available to those who can demonstrate economic hardship. This makes sense, of course, because 10% of a high discretionary income would be a high monthly payment and over the payments of a federal standard plan.

    PAYE plans are given to those whose monthly payments are lower than they would be on the standard 10-year payment plan.

    Right about now you’re probably thinking, Lower payments and eventual loan forgiveness—where do I sign?

    But there’s a catch. There’s almost always a catch.

    While the idea of loan forgiveness may sound like the ultimate ‘get out of loan-jail free’ card, income-driven plans like REPAYE, PAYE and their predecessor, Income-Based Repayment (IBR), come with some less-than-obvious costs.

    Costs Associated with PAYE and Income-Driven Repayment

    In some cases, those costs outweigh the potential benefits—even the benefit of ultimate loan forgiveness. What costs should you be aware of when it comes to income-based repayment plans? Here are the big three:

    1. The Straight Costs

    Under an income-driven plan, lower student loan payments are primarily a result of lengthening your loan’s term from the standard 10 years to 20 or 25 years, depending on the plan. You still owe the same amount in terms of principal, but you’ll pay it off much more slowly and make a smaller dent—if any dent at all—in the principal with each payment.

    In other words, an income-driven plan is a recipe for significantly higher interest costs than you would incur with a 10-year repayment plan. Plus, any loan balance forgiven at the end is taxed as income by the IRS.

    How much do these costs matter? Let’s say you’re a single California resident with a $100,000 direct subsidized 10-year loan at a 4% APR, and you make $50,000 per year with a projected 5% annual salary bump.

    On the standard repayment plan, you’d spend $121,494 total on principal and interest over 10 years. But on REPAYE, you’d spend $173,225 total—and you’d pay off your loan just a few months shy of the 25-year forgiveness mark.

    Of course, your own income and loan details will make a difference in the outcome here, so find out how different repayment plans would affect you, check out our Student Loan Navigator tool, which can help personalize options to your situation.

    2. The Surprise Costs (and Administrative Burden)

    Under any income-driven repayment plan, you have to “recertify” your income and “family size” annually. Recertification can be a cumbersome process, and if you miss the deadline, which happens over 50% of the time, according to the Department of Education, things can get messy.

    For one thing, if your payments are so low they don’t cover your monthly interest cost, the interest builds. Miss the recertification deadline, and you risk having accrued interest capitalized, or added to your loan’s principal.

    Paying interest on your interest can cost you thousands more over the life of the loan.

    Late recertification can also delay the date your loan is eligible to be forgiven, since you are automatically removed from the plan each time your certification lapses, and then put back on once you’ve completed the process.

    Since time spent off the plan doesn’t count toward the 20-year forgiveness requirement, this could mean making some extra monthly payments before forgiveness can occur.

    Additionally, if your income steadily increases and you’d like to switch to a standard plan to save money and be done with debt sooner, you may want to think twice. If you leave REPAYE all your accrued interest is capitalized, which means the longer you’ve been using the plan, the more the amount you owe has increased.

    3. The Emotional Cost

    Imagine for a moment that you do make it to the promised land of student loan forgiveness under an income-based repayment plan.

    That means you’ve spent 20 years experiencing some level of financial hardship to make monthly payments toward a balance that might have grown exponentially with each passing year (if your payments were so low they didn’t effect the principal).

    In other words, there’s an emotional tax attached, and that’s probably not what you pictured when you signed up.

    The more common scenario (and frankly, the more desirable path) is that your financial picture will improve over time—you’ll get job offers, raises, and maybe even an inheritance or a bonus or two. And if that means becoming ineligible for eventual loan forgiveness, you’re probably going to be okay with the trade-off.

    The Big Picture

    Despite its downsides, an income-based repayment plan can be a useful tool for some borrowers. If you have a large amount of student loan debt, a low-to-modest salary, and, most importantly, don’t anticipate your income increasing much over the next couple of decades, you should give it serious consideration.

    If, on the other hand, you expect your salary to moderately increase at some point, an income-driven plan could cost you more money in the long run.

    The Main Income-Driven Repayment Options

    If PAYE isn’t right for you, there are plenty of other options offered by the federal government or by private lenders. If you have federal loans, there are three other income-driven repayment options:

    • Income-contingent repayment (ICR)<, which asks for generally 20% of your discretionary income. Your loans are eligible to be forgiven after 25 years. And just like the PAYE loan forgiveness option, you could be taxed on the amount that’s forgiven. • Revised Pay As You Earn (REPAYE), which takes generally 10% of your discretionary income. There is a forgiveness option after 20 years if you’re paying off your undergrad degree, or 25 years if you’re paying off undergrad and grad school loans. • Income-based repayment (IBR), which takes generally 10% to 15% of your discretionary income. Your loans are forgiven after 20-25 years, though you could get taxed on the amount that’s forgiven.If lowering your monthly loan payments is the goal, but you don't want the costs and headaches associated with REPAYE, consider refinancing your student loans at a lower interest rate instead.

    Refinancing can decrease your payments and cut your total interest costs significantly. You can also shorten your payment term to save even more money, and be done with loans that much sooner.

    For the borrower who bets on eventual loan forgiveness as a panacea for student loan woes, it’s important to take a hard look at the price of that journey. Because, in the end, loan forgiveness is never free. Get more information on forgiveness and other student loan strategies at SoFi’s student loan help center.

    Check out refinancing your student loans with SoFi to see if it is the right decision for you.


    External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
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    SoFi Student Loan Refinance
    IF YOU ARE LOOKING TO REFINANCE FEDERAL STUDENT LOANS PLEASE BE AWARE OF RECENT LEGISLATIVE CHANGES THAT HAVE SUSPENDED ALL FEDERAL STUDENT LOAN PAYMENTS AND WAIVED INTEREST CHARGES ON FEDERALLY HELD LOANS UNTIL THE END OF SEPTEMBER DUE TO COVID-19. PLEASE CAREFULLY CONSIDER THESE CHANGES BEFORE REFINANCING FEDERALLY HELD LOANS WITH SOFI, SINCE IN DOING SO YOU WILL NO LONGER QUALIFY FOR THE FEDERAL LOAN PAYMENT SUSPENSION, INTEREST WAIVER, OR ANY OTHER CURRENT OR FUTURE BENEFITS APPLICABLE TO FEDERAL LOANS. CLICK HERE
    FOR MORE INFORMATION.
    Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.

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