Oct
22
2020
What Are Alternative Funds?
You may be familiar with investing in stocks and bonds. Learn how to diversify your portfolio with alternative investment funds.
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SoFi
Student Loan Consolidation and Refinancing
Aug
13
2020
What Is the Student Loan Forgiveness Act?
Editor's Note: For the latest developments regarding federal student loan debt repayment, check out our student debt guide.
Check out SoFi to see how refinancing your student loans can help 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.
SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.
With Americans facing over $1.6 trillion in combined student loan balances, many borrowers are on the hunt for ways to ease their debt burden. One option you may have seen was called the Obama Student Loan Forgiveness Plan, which according to some websites, was a way for some borrowers to escape their debt for a small fee.
This offer might sound appealing, but there’s one problem: It’s fake. It’s just one example of real ads that scammers have used to target and bilk borrowers.
Fraudsters have used lines like this to lure in their marks, then charged them hefty fees to fill out forms they could’ve filled out themselves for free. In the worst cases, people end up paying for nonexistent services.
Here are some answers to your burning questions on student loan forgiveness, so you can get a better idea of how the program works:
Does Any Student Loan Forgiveness Act Exist?
Yes. The Student Loan Forgiveness Act (SLFA) was a congressional bill introduced in 2012 intended to help borrowers with paying down their student debt.
In addition to capping interest rates for all federal loans, the proposed law would have introduced a repayment plan that allows borrowers to have their loans forgiven after 10 years if they made monthly payments equivalent to 10% of their adjusted gross income. The bill also would have made borrowers in public service jobs eligible for loan forgiveness after five years, instead of 10.
Sound too good to be true? It was. The bill never made it out of committee.
So, What is Obama’s New Student Loan Forgiveness Program?
Even though you may have heard about it, “Obama’s new student loan forgiveness program” doesn’t exist. During his tenure, President Obama did expand the reach of federal loan forgiveness programs. A bill he signed in 2010 allowed students who took out certain federal loans to have their balances forgiven in 20 years, rather than 25.
The same bill capped annual payments at 10% of adjusted gross income, rather than 15%. It also ushered in loan forgiveness after 10 years for borrowers working in qualified public service jobs.
Those changes preceded the introduction of the Student Loan Forgiveness Act (SLFA), and was never officially called “Obama’s Student Loan Forgiveness Program.” Likewise, there is no “new” student loan forgiveness program in Obama’s name, either, obviously.
Then Why Have I Read About Obama’s New Student Loan Forgiveness Program?
Because it’s a term that debt relief companies use to confuse student loan borrowers. The name seems convincing since President Obama did take action on federal student loans and legitimate federal loan forgiveness programs exist. That’s why some borrowers have been duped into paying high fees for pointless—or nonexistent—services. Don’t be fooled: The program isn’t real!
Debt relief companies advertising the “Student Loan Forgiveness Act” or “Obama’s New Student Loan Forgiveness Program” are bad news. Understanding which programs are real and which are fake can help you avoid being scammed—and find legitimate ways to actually have some of your student loans forgiven.
What Are Some Legitimate Options for Student Loan Forgiveness?
No, Obama’s Student Loan Forgiveness Act never passed. However, there are several real options for having federal student loans forgiven.
In fact, in response to the coronavirus epidemic, the CARES Act suspended federal student loan interest and payment suspension through September 2020. (Update: The pause on federal student loan repayment has been extended through Dec. 31, 2022)
The pending HEROES Act (narrowly passed by the House in mid-May, 2020) proposed $10,000 each of federal student loan AND private student loans forgiveness initially but may have more stringent eligibility requirements if passed by the Senate. While it’s definitely something to keep an eye on, here are some existing programs that may be helpful.
Income-Driven Repayment Plans
The government currently offers four income-driven repayment plans for federal student loans that can forgive borrowers’ balances after 20 or 25 years.
There are eligibility requirements, like making required monthly payments for a designated period of time, which are tied to a person’s income. The plans a borrower qualifies for will depend on the types of loans they have and when they took them out.
These student loan repayment plans are based on borrowers’ discretionary income, or the amount they earn after subtracting necessary expenses like taxes, shelter, and food. Here is a brief overview of each one:
• Revised Pay As You Earn Repayment Plan (REPAYE): Borrowers’ monthly payment is typically 10% of their income. If all loans were taken out for undergraduate studies, they’ll make payments for 20 years; if they also took out loans for graduate or professional studies, they’ll make payments for 25 years. At the end of 20 or 25 years, the remaining amount will be forgiven.
• Pay As You Earn Repayment Plan (PAYE): People pay up to 10% of their discretionary income each month, but they never pay more than they would under the 10-year Standard Repayment Plan. After 20 years, the remaining debt will be forgiven.
• Income-Based Repayment Plan (IBR): People will pay 10% of their discretionary income for 20 years if they became a new borrower on or after July 1, 2014, and 15% for 25 years if they were a borrower before July 1, 2014. They will never pay more than they would under the 10-year Standard Repayment Plan. Borrowers’ debt will be forgiven after either 20 or 25 years.
• Income-Contingent Repayment Plan (ICR): Borrowers choose whichever repayment plan is cheaper—20% of their discretionary income or what they would pay if they spread their payments out equally over 12 years. Any remaining balance will be forgiven after 25 years.
These four plans are designed to help borrowers make monthly payments they can actually afford. Some people may assume that an income-driven repayment plan that results in forgiveness is best for them, when in reality, this might not be the case.
Note that if the remaining balance of your loan is forgiven, you may be responsible for paying income taxes on that amount.
A repayment calculator can be a useful tool to help determine enrolling in an income-based forgiveness program that would be beneficial. After a borrower plugs in their information, they could discover that they would pay less, in the long run, should they enroll in, say, the government’s Standard Repayment Plan.
Public Service Loan Forgiveness
Borrowers can have their loans forgiven in 10 years under the Public Service Loan Forgiveness (PSLF) program. To potentially qualify, they must work full-time for a qualified government organization, nonprofit, or certain public-interest employers, such as a public interest law firm, public library, or public health provider.
Over those 10 years, borrowers must make 120 qualifying monthly payments, and the payment amount is based on their income. Those 120 payments don’t necessarily have to be consecutive. For example, let’s say a borrower works for the local government for three years, then switches to the private sector for a year.
If they decide to go back into public service after that year, they can pick up where they left off with payments rather than start all over.
The PSLF program can be difficult to qualify for, but some people have successfully enrolled. As of March 2020, 145,758 borrowers had applied for the program. Only 3,174 applications were accepted. 171,321 applications had been rejected, and the remaining applications were still processing.
Teacher Loan Forgiveness Program
Qualifying teachers can also get up to $17,500 of their federal loans forgiven after five years teaching full-time under the Teacher Loan Forgiveness Program. The American Federation of Teachers has a searchable database of state and local loan forgiveness programs.
To qualify for the full amount, teachers must either teach math or science at the secondary level, or teach special education at the elementary or secondary level. Otherwise, borrowers can have up to $5,000 forgiven if they are a full-time teacher at the elementary or secondary level.
NURSE Corps Loan Repayment Program
Health professionals have access to other loan assistance programs. The federal government’s NURSE Corps Loan Repayment Program pays up to 85% of eligible nurses’ unpaid debt for nursing school.
To receive loan forgiveness, borrowers must serve for two years in a Critical Shortage Facility or work as nurse faculty in an accredited school of nursing.
After two years, 60% of their nursing loans will be forgiven. If a borrower applies and is accepted for a third year, an additional 25% of their original loan amount will be forgiven, coming to a total of 85%.
Borrowers interested in the NURSE Corps Loan Repayment Program can read about what qualifies as a Critical Shortage Facility or an eligible school of nursing before applying.
Indian Health Services’ Loan Repayment Program
The Indian Health Services’ Loan Repayment Program will repay up to $40,000 in qualifying loans for doctors, nurses, psychologists, dentists, and other professionals who spend two years working in health facilities serving American Indian or Alaska Native communities.
Once a borrower completes their initial two years, they may choose to extend their contract each year until their student loans are completely forgiven.
In 2019, the Indian Health Service’s budget allows for up to 384 new awards for two-year contracts, and around 392 awards for one-year contract extensions. The average award for a one-year extension is $24,840 in 2019.
Even those who aren’t typical medical professionals, like doctors or nurses, may still qualify. The IHS has also provided awards to people in other fields, such as social work, dietetics, and environmental engineering.
The National Health Service Corps
The National Health Service Corps offers up to $50,000 for loan repayment to medical, dental, and mental health practitioners who spend two years working in underserved areas.
Loan forgiveness programs are generally available for federal loans, as opposed to private ones. In rare cases, such as school closure while a student is enrolled or soon after, they could qualify to have their loan discharged or canceled.
Health Professional Shortage Areas (HPSAs) include facilities such as correctional facilities, state mental hospitals, federally qualified health centers, and Indian health facilities, just to name a few. Each HPSA receives a score depending on how great the site’s need is.
Scores range from 0 to 25 for primary care and mental health, and 0 to 26 for dental care. The higher the score, the greater the need.
Borrowers have the option to enroll in either a full-time or part-time position, but people working in private practice must work full-time. Full-time health professionals may receive awards up to $50,000 if they work at a site with a score of at least 14, and up to $30,000 if the site’s score is 13 or below. Half-time employees will receive up to $25,000 if their site’s score is at least 14, and up to $15,000 if the score is 13 or lower.
Interested in learning more about your options for student loan repayment? Check out SoFi’s student loan help center to get the answers you need about your student debt. The help center explains student loan jargon in terms people can understand, provides loan calculators, and even offers student loan refinancing to hopefully land borrowers lower rates.
Refinancing student loans through a private lender can disqualify people from enrolling in federal loan forgiveness programs and loan forgiveness programs, and disqualifies them from CARES Act forbearance and interest rate benefits.
SoFi Student Loan Refinance
If you are a federal student loan borrower, you should consider all of your repayment opportunities including the opportunity to refinance your student loan debt at a lower APR or to extend your term to achieve a lower monthly payment. Please note that once you refinance federal student loans you will no longer be eligible for current or future flexible payment options available to federal loan borrowers, including but not limited to income-based repayment plans or extended repayment plans.
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.
SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.
SLR17149
Aug
04
2020
Understanding Student Loan Amortization
When deciding on a student loan repayment schedule, some folks might think the one with the lowest possible monthly payment is best.
What these same folks might not realize is that often the lowest monthly payment means the loan is stretched out over a longer time frame, which results in the borrower paying more in interest than they otherwise would have with a shorter loan term and a higher monthly payment.
Why does this happen? Because of a process called amortization. Amortization is the process of paying back a loan on a fixed payment schedule over a period of time.
With a loan, such as a student loan, each monthly payment is the same, but a calculation is done to determine what proportion of each payment is allocated to a loan’s interest and to its principal balance. This schedule of payments is called a student loan amortization schedule.
You may have heard people complain about how much of a loan payment goes toward interest during the beginning stages of a loan. This is what they’re referring to; the process by which interest is spread out over the life of the loan according to an amortization schedule.
Over the course of making monthly payments on your student loans, the payments are often applied primarily to the interest especially toward the beginning of your repayment timeline.
We’re going to get into some of the nitty-gritty amortization info, but before we go there, we just want to be straight with you: This is an incredibly complex topic.
We’re going to try to break it down the best we can, but please understand that this info is general in nature and does not take into account your specific objectives, financial situation, and needs; it should not be considered advice. SoFi always recommends that you speak to a professional about your unique situation.
Below we’ll do our best to cover how and which loans amortize, take a closer look at student loan amortization, and explore some ways a student loan borrower might be able to lower the amount that they’ll pay in interest over the course of their loan.
Exploring Amortization
First, it’s important to understand how to calculate the cost of a loan. You’ll need to know these three variables:
1. The value of the loan, also known as the principal
2. The interest rate and annual percentage rate (APR)
3. The duration, or term, of the loan (usually given in months or years)
Using this information, it is possible to determine both the monthly payment on the loan and the total interest paid on the loan. An online student loan interest calculator can help you figure this out.
The next step is to determine how much of each monthly payment is going toward both interest and principal. That’s when the amortization schedule comes into play. You can calculate amortization using this calculator to get an idea. But we want to understand what’s going on behind the calculator, and it helps to understand that amortization happens only on “installment” loans—and all student loans are installment loans.
There are two types of loans: installment loans and revolving credit. A mortgage, student loan, or car loan are all examples of installment loans. With an installment loan, the borrower is loaned an amount of money (called the principal) to be paid back over a designated amount of time, with interest.
Revolving credit, on the other hand, is not a loan disbursed in one lump sum, but is a certain amount of credit to be used as the borrower pleases, up to a designated limit. A credit card and a line of credit are forms of revolving credit. A borrower’s monthly payment is determined by how much of the available credit they are using at any given time; therefore, minimum payments can change from month to month.
Student Loan Amortization Examples
Because student loans are an installment loan—meaning a specific amount of money is disbursed to the borrower—student loans are amortized. Parts of each payment are applied to both the loan’s principal and its interest. But at the beginning of the loan, a much larger proportion is typically allocated to interest on student loans, per the lender’s requirements.
Due to the way compounding works, the effect is more dramatic the longer the length of the loan. Take, for example, a $30,000 loan at 7% interest rate amortized over a 10-year repayment period.
The borrower’s monthly payment should be around $348. Each year, the borrower will pay $4,180 total towards their loan. This doesn’t change, although the proportion that is allocated towards principal and interest does change.
(All examples calculated above were from using this student loan calculator. Example calculations below are from Bankrate’s calculator .)
Example Amortization Schedule Student Loan $30,000, 7% interest over 10 years starting January 2019
| Date | Interest Paid | Principal Paid | Balance |
|---|---|---|---|
| Jan, 2019 | $175 | $173 | $29,827 |
| Feb, 2019 | $174 | $174 | $29,652 |
| Mar, 2019 | $173 | $175 | $29,477 |
| Apr, 2019 | $172 | $176 | $29,301 |
| May, 2019 | $171 | $177 | $29,123 |
| Jun, 2019 | $170 | $178 | $28,945 |
| Jul, 2019 | $169 | $179 | $28,765 |
| Aug, 2019 | $168 | $181 | $28,585 |
| Sep, 2019 | $167 | $182 | $28,403 |
| Oct, 2019 | $166 | $183 | $28,221 |
| Nov, 2019 | $165 | $184 | $28,037 |
| Dec, 2019 | $164 | $185 | $27,852 |
2019
| $2,032 |
$2,148 |
$27,852 |
|
| 2020 | $1,877 | $2,303 | $25,852 |
| 2021 | $1,710 | $2,470 | $23,079 |
| 2022 | $1,532 | $2,648 | $20,431 |
| 2023 | $1,340 | $2,840 | $17,591 |
2024
| $1,135 |
$3,045
| $14,546 |
|
2025
| $915 |
$3,265
| $11,281 |
|
2026
| $679 |
$3,501
| $7,780 |
|
2027
| $426 |
$3,754
| $4,026 |
|
| Jan, 2028 | $23 | $325 | $3,701 |
| Feb, 2028 | $22 | $327 | $3,374 |
| Mar, 2028 | $20 | $329 | $3,045 |
| Apr, 2028 | $18 | $331 | $2,715 |
| May, 2028 | $16 | $332 | $2,382 |
| Jun, 2028 | $14 | $334 | $2,048 |
| Jul, 2028 | $12 | $336 | $1,712 |
| Aug, 2028 | $10 | $338 | $1,373 |
| Sep, 2028 | $8 | $340 | $1,033 |
| Oct, 2028 | $6 | $342 | $691 |
| Nov, 2028 | $4 | $344 | $346 |
| Dec, 2028 | $2 | $346 | $0 |
| 2028 | $154 | $4,026 | $0 |
Using this estimated example, during the first year, the borrower’s monthly payments would be made up of about half interest and half principal. At the end of the year, the hypothetical borrower has paid $4,180 towards their student loan, and $2,032 of that went to interest, while $2,148 went to paying down the principal. The loan is now valued at $27,852 (that’s $30,000 minus $2,148).
With each passing month and year paying down debt, more of each payment is allocated towards the principal. By the ninth and final year, the imaginary borrower above pays only $154 to interest and $4,026 to principal.
(P.S., we got this rough estimation using the amortization calculator we mentioned above.)
Let’s look at another example of a hypothetical student loan amortization schedule, but along a longer timeline, such as twenty years. It should be noted that a twenty-year payback period isn’t “standard” for federal student loans, but the important takeaway here is the impact of time on amortization calculations.
Here’s a table with the results of a hypothetical $60,000 student loan at a 7% fixed rate, paid back over 20 years.
Amortization Schedule Student Loan $60,000, 7% interest over 20 years:
| Date | Interest | Principal | Balance | Jan, 2019 | $350 | $115 | $59,885 |
|---|---|---|---|
| Feb, 2019 | $349 | $116 | $59,769 |
| Mar, 2019 | $349 | $117 | $59,652 |
| Apr, 2019 | $348 | $117 | $59,535 |
| May, 2019 | $347 | $118 | $59,417 |
| Jun, 2019 | $347 | $119 | $59,299 |
| Jul, 2019 | $346 | $119 | $59,179 |
| Aug, 2019 | $345 | $120 | $59,060 |
| Sep, 2019 | $345 | $121 | $58,939 |
| Oct, 2019 | $344 | $121 | $58,817 |
| Nov, 2019 | $343 | $122 | $58,695 |
| Dec, 2019 | $342 | $123 | $58,573 |
| 2019 | $4,155 | $1,427 | $58,573 |
| Jan, 2038 | $31 | $434 | $4,942 |
| Feb, 2038 | $29 | $436 | $4,506 |
| Mar, 2038 | $26 | $439 | $4,067 |
| Apr, 2038 | $24 | $441 | $3,626 |
| May, 2038 | $21 | $444 | $3,182 | Jun, 2038 | $19 | $447 | $2,735 |
| Jul, 2038 | $16 | $449 | $2,286 |
| Aug, 2038 | $13 | $452 | $1,834 |
| Sep, 2038 | $11 | $454 | $1,379 |
| Oct, 2038 | $8 | $457 | $922 |
| Nov, 2038 | $5 | $460 | $462 |
| Dec, 2038 | $3 | $462 | $0 |
| 2038 | $206 | $5,376 | $0 |
In this example, each monthly payment for the 20-year duration is $465.18 (again, rounded down to $465 for simplicity’s sake above). In January 2019, the first month of the first year of the loan, $350 is paid towards interest, and just $115 is paid towards the principal. That’s less than 25% of the total payment, compared to 50% in the previous example.
By the end of the hypothetical loan, hardly any of the payment is allocated towards interest, and the majority is applied to the principal. In the very last monthly payment in the last year, only $3 goes towards interest and $462 to principal. In the last year, only $206 total goes towards interest versus $4,155 in the first year.
If you’re interested in expediting your loan payoff, it may inspire you to play around with a student loan repayment calculator to get your own estimate of just how much you could save on interest if you shorten your loan term.
Alternative Repayment Plans and Amortization
Some borrowers may be using one of the alternate repayment plans for federal student loans, which are generally referred to as “income-driven repayment plans.” There are several different options, including Pay As You Earn (PAYE) and Income-Driven Repayment (IDR), but all of these similar repayment plans use your monthly income and family size to determine what you’ll owe each month.
Depending on discretionary income and family size, monthly payments are generally lower than with the standard, 10-year repayment plan because repayment is stretched out over 20 or more years.
Not only will you likely pay more in total interest over the course of a longer loan, but it is possible that your payments will dip into what is called negative amortization. Negative amortization happens when your monthly payment is low enough that it doesn’t even cover the interest for that month.
When this happens, it is possible that this unpaid interest will be capitalized, which means that it will be added to the principal balance of the loan. All interest calculations thereafter will be made on the new principal balance, which means that the borrower could be paying interest on top of those previously unpaid interest payments.
This is not ideal, of course, but utilizing an income-driven repayment plan is a much better option than missing payments altogether or defaulting on a federal student loan. Using an income-driven repayment plan is also necessary if the borrower plans on utilizing the Public Service Loan Forgiveness (PSLF) program.
Managing Student Loan Amortization
If an amortized student loan payment seems frustrating to you, that’s because it is. One way to alleviate the pain is to pay your student loans back faster than the stated term.
Making additional payments on your loan can do a lot to lower what you’ll owe in interest because knocking out the interest can prevent it from capitalizing on your loan. Furthermore, paying off the loan before the stated term can allow you to pay less interest over the life of the loan.
If you opt to pay more than your minimum payments or consistently make additional payments on your loans, it’s a good idea to let your lender know that the additional payment is to be applied to the principal of the loan, not the interest, so you can be sure your extra payments are working towards lowering the principal amount you’re paying interest on.
If you are mailing a check, you might want to include a note. If you’re making a payment online, you can call your loan service provider to make sure that they apply for the money correctly.
For borrowers with multiple federal or private student loans who want to expedite their debt repayment, it can be hard to know where to start. If your goal is to reduce the overall amount of interest you owe , you might want to consider the “debt avalanche” method of debt repayment.
Using this method, you would choose the student loan debt with the highest interest rate and work on “attacking” it first. You would do this while making the minimum payment on all other loans or sources of debt. After the highest interest rate loan is paid off, redirect any additional funds you were paying toward the first loan to the loan with the next highest interest rate.
Graduates can also consider refinancing their loans. When you refinance, you’re essentially paying off your old loan or loans with a new loan from a private lender, like SoFi. Ideally, you refinance in order to get a lower rate on the loans than you currently have.
Student loan refinancing companies are generally able to offer a lower interest rate or more favorable loan terms to graduates who have met their lending criteria, which may include having a strong financial history and income among other things.
It’s usually worth checking to see if you qualify for a lower rate than you’re currently paying. With refinancing, you’re also usually able to adjust other aspects of your loans, such as the repayment schedule. You may be able to extend it, if you’re looking for lower monthly payments, or shorten it, if you want to pay less in interest—and outsmart amortization—on your loan.
When deciding to refinance, borrowers should consider their current financial situation and any benefits their federal student loans currently have, such as an income-driven repayment plan or Public Service Loan Forgiveness option. When you refinance with a private lender, you will lose access to these federal programs.
SoFi Student Loan Refinance
If you are a federal student loan borrower, you should consider all of your repayment opportunities including the opportunity to refinance your student loan debt at a lower APR or to extend your term to achieve a lower monthly payment. Please note that once you refinance federal student loans you will no longer be eligible for current or future flexible payment options available to federal loan borrowers, including but not limited to income-based repayment plans or extended repayment plans.
SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.
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.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
SLR8228
Read moreApr
09
2020
Student Loan Options: What Is Refinancing vs. Consolidation?
Student loans can have a way of making you feel like a hamster in a wheel—spinning like crazy but getting nowhere fast. And while knowing that around 44 million Americans carry student loan debt might offer some comfort in a “misery loves company” kind of way, the magical loan-forgiveness fairy is still—as far as we know—a myth.
In the meantime, though, there’s a bit of good news—you may have more control than you think. We are here to help illuminate some options available to student loan holders, so they can make decisions that fit best with their financial goals.
Have you been considering one of those options—choosing whether to consolidate or refinance student loans?
But what is consolidation, what is refinancing, and how do you know which one (if either) may be right for you?
This could be a somewhat complicated question, especially since these terms are sometimes used interchangeably. For example, consolidation simply means combining multiple student loans into one loan, but you have different options and can end up with different results by consolidating with the federal government vs. consolidating with a private lender.
Student loan refinancing is when you receive a loan with new terms and use that loan to pay off one or more existing student loans.
Consolidate vs. Refinance. Let’s break it down.
Here’s a simple overview of the different types of student loan consolidation, how they differ from student loan refinancing, and some tips for evaluating whether one of these options might work for you.
Federal Student Loan Consolidation
Federal student loan consolidation is offered by the government and is available for most types of federal student loans—no private loans allowed. When you consolidate with the government, your existing federal loans are combined into one new loan with a new rate, which is a weighted average of your old loans’ rates (rounded up to the nearest eighth of a percent).
This option may not save you any money, but there are still a few potential benefits:
1. Fewer bills and payments to keep track of each month.
2. The ability to switch out older, variable rate federal loans for one, new, fixed rate loan, which could protect you from having to pay higher rates in the future if interest rates go up. (Note: the last variable rate federal student loans were disbursed in 2006. Since then, all federal student loans have been fixed-rate.)
3. Lower monthly payments. But beware—this is usually the result of lengthening your repayment term, which means you might pay more interest over the life of the loan.
Private Loan Consolidation
Like federal consolidation, a private consolidation loan allows you to combine multiple loans into one, and offers some of the same potential benefits listed above. However, the interest rate on your new, consolidated loan is not a weighted average of your old loans’ rates.
Instead, a private lender will look at your track record of managing credit and other personal financial information when deciding whether to give you a new (ideally lower) interest rate on your new consolidation loan.
Bottom line: when you consolidate student loans with a private lender, you are also in fact refinancing those loans. When federal student loans are consolidated or paid off using a private loan, however, it’s important to know you will lose access to certain benefits such as income-driven repayment plans, forbearance and deferment options, and Public Service Loan Forgiveness (among others).
Student Loan Refinancing
As noted above, student loan refinancing is when a new loan from a private lender is used to pay off one or more existing student loans. If your financial situation has improved since you first signed on the dotted line for your original student loans(s), you may be able to refinance student loans at a lower interest rate and/or a different loan term, which could potentially allow you to do one or more of the following:
1. Lower your monthly payments.
2. Shorten your loan term to pay off debt sooner.
3. Reduce the money you spend in interest over the life of the loan.
4. Choose a variable interest rate loan, which can be a cost-saving option for those who plan to pay off their loan relatively quickly.
5. Enjoy the benefits of consolidation, including one simplified monthly bill.
Unlike federal loan consolidation, student loan refinancing is only available from private lenders. However, SoFi will refinance both private student loans and federal student loans, so well-qualified borrowers can consolidate all of their loans into one with loans and/or terms that work better for them.
Things to Consider
While there are advantages to both consolidation and refinancing, sometimes the answer—depending on timing, your budget, or other outside factors—could be to leave well enough alone. As you research your options, consider asking yourself these questions:
What kind of student loans do you have?
Refinancing federal student loans through a private lender might result in a lower interest rate, but you will also lose access to the benefits that come with federal loans, such as Public Service Loan Forgiveness (PSLF), flexible repayment plans, the ability to pause payments, and an interest rate that’s determined by Congress—not your credit score.
If your loans are private, they were issued based on creditworthiness to begin with, so a refinanced loan will follow similar qualifications, and each private lender will have its own underwriting criteria.
What is the loan payoff amount?
While the amount of a monthly payment is important, especially if a refinance could reduce it, it’s wise to read through all the terms of the loan to understand the big picture.
Are the monthly payments lower because the loan is now on a 20-year term instead of a 10-year term? Are there loan origination fees rolled into the payment? Knowing the full, total repayment amount can help ensure that short-term gains don’t bite you in the long run.
Named a Best Student Loan Refinance Company
by U.S. News and World Report.
What’s the goal?
Consider your reasons for a refinance or consolidation—lowering monthly payments, keeping better track of due dates, or paying off debt as quickly as possible will likely lead to different strategies.
Your monthly budget and what you can (and can’t) afford to put toward your loan repayment will also play a factor here. One way to help ensure the right decision for you is to play with your budget a bit to see which loan options might benefit you most.
What factors do lenders review?
This isn’t typically an issue when it comes to consolidating loans through the federal government. But people interested in refinancing student loans with a private lender will likely need to meet various lender requirements, much like they would for a mortgage or personal loan.
Lenders generally review information like the borrower’s credit history, income, debt-to-income ratio, and other factors to determine what type of interest rate and loan terms they may qualify for.
You may not be able to change the fact that you have student loans, but you can make smart decisions about them. And that’s what ultimately gives you power over your debt. For more information about student loans, you can explore SoFi’s student loan help center to find guidance and gain knowledge to help point you in the right direction.
$500 Student Loan Refinancing Bonus Offer: Terms and conditions apply. Offer is subject to lender approval, and not available to residents of Ohio. The offer is only open to new Student Loan Refinance borrowers. To receive the offer you must: (1) register and apply through the unique link provided by 11:59pm ET 11/30/2021; (2) complete and fund a student loan refinance application with SoFi before 11/14/2021; (3) have or apply for a SoFi Money account within 60 days of starting your Student Loan Refinance application to receive the bonus; and (4) meet SoFi’s underwriting criteria. Once conditions are met and the loan has been disbursed, your welcome bonus will be deposited into your SoFi Money account within 30 calendar days. If you do not qualify for the SoFi Money account, SoFi will offer other payment options. Bonuses that are not redeemed within 180 calendar days of the date they were made available to the recipient may be subject to forfeit. Bonus amounts of $600 or greater in a single calendar year may be reported to the Internal Revenue Service (IRS) as miscellaneous income to the recipient on Form 1099-MISC in the year received as required by applicable law. Recipient is responsible for any applicable federal, state, or local taxes associated with receiving the bonus offer; consult your tax advisor to determine applicable tax consequences. SoFi reserves the right to change or terminate the offer at any time with or without notice.
SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.
SoFi Student Loan Refinance
If you are a federal student loan borrower, you should consider all of your repayment opportunities including the opportunity to refinance your student loan debt at a lower APR or to extend your term to achieve a lower monthly payment. Please note that once you refinance federal student loans you will no longer be eligible for current or future flexible payment options available to federal loan borrowers, including but not limited to income-based repayment plans or extended repayment plans.
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.
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 .
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12
2019
What Is the Difference Between Good and Bad Debt?
The word “debt” is commonly defined as something—usually money—owed by one party to another. In the U.S., consumer debt is typically made up of mortgages , auto loans, credit cards, and student loans.
The overall balance of consumer debt in America has been on the rise since 2012, according to the New York Federal Reserve . But that’s not necessarily a terrible thing, because not all debt is bad. So what is the difference between good debt and bad debt? And how do you avoid the latter? Here are some tips to navigating the world of debt.
1. Debt can help build your credit score.
A credit score is a number determined by a consumer’s credit history . How many credit cards you have, how many loans you have, and the total amount of money you owe help determine your score, as does whether or not you pay your bills on time. Credit scores range from 300 to 850, and the scores are compiled
by credit bureaus such as Equifax, Experian, and TransUnion.
Companies and lenders use your score to calculate risk and what interest they will charge you on a debt. If your score is higher, you will likely be offered a lower interest rate. If your credit score is low, you will probably be presented with a higher interest rate.
To build your credit score, you must establish a positive credit history, and one way consumers can do that is by borrowing responsibly—i.e., having good debt.
2. Good debt pays for things you need, and/or things that might increase your net worth or future value.
Going into debt to pay for your education or a home are considered examples of good debt. That’s because attaining a college degree or buying a house are ways to invest in yourself. A college degree might lead to a better paying job, so it has future value. And purchasing a home not only gives you something you need—a place to live—it’s also an investment that is likely to increase in worth over time. In the past year (as of April 2019), U.S. home values have gone up 7.6% in value according to Zillow. And historically, American home values appreciate over time, barring an economic downturn or crisis.
3. Bad debt pays for things you don’t need, or things you can’t afford.
Using a credit card to purchase unnecessary or extravagant items can build up bad debt. Using a credit card to buy the latest tech gadget or to book a tropical vacation may satisfy you in the moment, but they are probably not things you need and they do not add to your net worth. If you must make such a purchase, it might be wiser to save money up over time and buy them outright, rather than pay with a credit card and risk struggling to pay the bill down.
4. Using a credit card can help establish good credit, but not if you can’t afford to pay your bill and in a timely matter.
An unpaid credit card balance at the end of the month can be considered bad debt, because chances are you’re paying significant interest on that balance. In early 2019, the average credit card interest rate (or annual percentage rate, APR) was above 17 percent .
That rate can lead to a decent amount of extra money being owed. And if you let a chunk of the balance roll over month after month, you’re paying interest on top of interest. It’s easy to imagine how your bill total can climb, making it more and more challenging to eliminate the debt.
Payday loans are another example of bad debt, as the interest rate for these short-term cash advances can be incredibly high. Each state sets its own regulations for these loans. For example, in California , a consumer borrowing the maximum amount of $300 could be charged a fee of up to 15% for the loan, immediately turning their $300 to $255.
5. If you have bad debt or debt that feels unmanageable, don’t ignore it. Lessen (or reorganize) it as best you can.
Different debt challenges call for different measures.
If you find your student loans too big to pay, for example, you could consider refinancing them. In order to lower monthly payments, you might redetermine the terms of your loan so that you can pay them off over a longer period of time. Refinancing also gives you the opportunity to lower your interest rate and therefore the total paid over the life of the loan.
If credit card debt has built up to great heights—and that can happen quickly, if you’ve missed a few payments—it’s time to prioritize in a way that fits you. That might mean the “snowball method”—paying your lowest-balance debt off first, then moving onto the next lowest, thus building momentum. Conversely, you could use the “avalanche method,” paying your highest interest debt off first, then moving onto the next lowest, thus paying your debt off based on the interest rate.
At SoFi, we used our experience serving people like you to develop a proprietary debt paydown strategy called “debt fireball.” It combines the best of the two methods described above. You would separate your debt into two categories—good debt and bad debt. Then you would attack your bad debt starting with the one with the lowest balance. Then you would continue to the next lowest balance and build momentum to quickly blaze through your bad debt.
For some, consolidating credit card debt into a personal loan is a good way to go—especially if you’re feeling overwhelmed by the number of credit card bills you are keeping track of. Consolidating all of your credit card debt into one loan means you make one payment to one lender.
The additional good news is that a personal loan is likely to come with a lower interest rate than your credit card debt. Though credit card payments you are behind on can hurt your credit score, consolidating them into a personal loan that you manage and pay monthly can help build your score back up.
If you think a personal loan is a good option for you, check out personal loans with SoFi. SoFi offers personal loans with low rates and no fees. With a low-interest rate and a fixed monthly payment, an unsecured personal loan to consolidate credit cards or other high-interest debt could help you start tackling your debt.
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.
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 .
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.
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