Oct
04
2023
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Should I Consolidate My Student Loans?

By | Debt Payoff, Fresh Out of School, Student Loans, student_loan | Comments Off on Should I Consolidate My Student Loans?

In 2023, more than 43 million Americans collectively have over $1.76 trillion in student loan debt. If you are one of the millions with some form of student debt, you may have considered student loan consolidation, which allows you to combine all of your student loans into one loan with one monthly payment.

Simplifying the student loan repayment process might seem like a good idea, but there are a few things to consider before you consolidate your loans. In some cases, consolidating your loans may disqualify you from certain federal student loan repayment programs and forgiveness. But other times, consolidation can allow you to lower your interest rates or shorten the amount of time it takes you to pay off your loan.

Ahead, we review how student loan consolidation works and the pros and cons of the process.

Student Loan Consolidation Explained

Student loan consolidation is designed to combine some or all of your student loans and make repayment more manageable. There are both federal and private options when it comes to consolidating your student loans.

Private Student Loan Consolidation

Private student loan consolidation is when a lender pays off all or some of your student loan debt and creates a new loan, which you will then make payments on. This process is also known as student loan refinancing. If you consolidate or refinance through a private lender, the new loan will ideally have a lower interest rate and better terms than your previous student loans.

With a private lender, you can consolidate both federal and private loans. But if you refinance your federal loans with a private lender you will you lose access to federal student loan forgiveness programs, such as income-driven repayment plans. If you plan on using one of these programs now or at some point in the future, it’s best to hold off on consolidating federal loans through a private lender.

Federal Student Loan Consolidation

If you are hoping to consolidate federal loans only and want to keep access to federal forgiveness programs, you can consolidate with a Direct Consolidation Loan through the U.S. Department of Education.

Recommended: Types of Federal Student Loans

Consolidating through the federal student loan system doesn’t usually save you money; it simply combines multiple loans into one. Your new interest rate is a weighted average of all your loans’ interest rates, rounded up to the nearest eighth of a percentage point. Any unpaid interest on the loans you’re consolidating will be capitalized — that is, added to the principal of the new loan. There are no application fees for Direct Consolidation Loans, and the loans remain federal loans.

Consolidation may be particularly useful for borrowers who are pursuing federal student loan forgiveness or who are enrolled in one of the more flexible federal student loan repayment plans, such as an income-driven repayment plan.

You can also choose to just refinance your private loans and not consolidate both private and federal into a new private loan. If you go this route, you may be able to get the benefits of refinancing (lower interest rates, better terms) without losing the perks of having federal loans.

Before you consolidate or refinance your loans, you should consider the pros and cons of the process. Getting clarity on whether consolidation is right for you will help you make the right decision for your financial needs.


💡 Quick Tip: Get flexible terms and competitive rates when you refinance your student loan with SoFi.

Benefits of Consolidating Student Loans

There are a few reasons to consider student loan consolidation either with a Direct Consolidation Loan or refinancing through a private lender.

Simplified Repayment

Whether you choose a Direct Consolidation Loan or choose to refinance through a private lender, your loan repayment may be simplified. Managing multiple student loan payments may increase your chances of missing a payment. If you miss even one payment, you may risk damaging your credit score. Late payments may also stay on your credit profile for up to seven years.

Consolidating multiple loans into one may help eliminate some of the stress of juggling multiple loan payments and may make repayment more manageable.

Fixed Interest Rate

When you refinance your loans through a private lender, your interest rate and terms will be based on your credit score, payment history, type of loan you’re seeking, and other financial factors. While requirements may vary by lender, applicants who meet or exceed the lender’s criteria may qualify for better interest rates and terms, thus saving money over the life of the loan. Borrowers can also switch from a variable to a fixed interest rate when refinancing through a private lender.

With federal Direct Loan Consolidation, as mentioned earlier, a borrower’s interest rate is a weighted average of current loan rates rounded up to the nearest one-eighth of a percentage point, which means this doesn’t typically result in savings for the borrower. The borrower does, however, keep their access to federal loan forgiveness programs.

Flexible Loan Terms

Student loan consolidation may allow you to change the duration of your loan. If you currently have a 10-year repayment plan, for example, when you consolidate or refinance, you may choose to shorten or lengthen the term of your loan. Typically, lengthening the term of your loan will reduce your monthly student loan payment but add up to more total interest in the long run.

Drawbacks of Student Loan Consolidation

Even though there are benefits of student loan consolidation, there are also drawbacks. Here are a few considerations to be aware of before consolidating student loans.

You Can’t Lower Interest Rates on Federal Student Loans When Consolidating

If you choose the Direct Consolidation Loan, generally you won’t see any savings. Because your new interest rate is a weighted average of your current loans rounded up to the nearest one-eighth of a percentage point, you will probably pay around the same amount you would have paid if you didn’t consolidate. Further, any unpaid interest on the loan you’re consolidating will be capitalized — that is added to the loan principal.

If you extend your term, you may see your monthly payment decrease, but your total interest payments will increase.

On the other hand, if borrowers choose to refinance with a private lender, they may qualify for a lower interest rate, thus saving money over the term of the loan. They could also opt for lower monthly payments by extending their loan term. But as mentioned above, you may pay more interest over the life of the loan if you refinance with an extended term.

Possible Disqualification from Federal Repayment Programs

Refinancing federal student loans with a private lender disqualifies you from federal repayment programs, including the Public Service Loan Forgiveness Program (PSLF) and income-driven repayment plans.

Borrowers will also be disqualified from federal benefits such as forbearance and deferment options, which allow qualifying borrowers to pause payments in the event of financial hardship.

Some private lenders may have hardship programs in place, but policies are determined by individual lenders.

Private Lenders May Charge Refinancing Fees

While there is no application fee for the federal Direct Consolidation Loan, private lenders may charge a fee to refinance loans. Fees associated with refinancing student loans are determined by the lender.


💡 Quick Tip: Refinancing could be a great choice for working graduates who have higher-interest graduate PLUS loans, Direct Unsubsidized Loans, and/or private loans.

Refinancing vs Consolidation

Consolidating or refinancing student loans are terms that are thrown around interchangeably, but they actually apply to two different types of loans. A federal student loan consolidation is when you combine federal loans through a Direct Consolidation Loan. This is done by the U.S. Department of Education only. A student loan refinance, on the other hand, allows you to combine private and/or federal loans into one new loan and is done by a private lender; while this does effectively “consolidate” your loans, it’s different in some key ways from federal student loan consolidation. Below are some differences and similarities between refinancing and consolidating student loans.

Student Loan Refinancing vs Consolidation
Refinance

 Consolidation
Combines multiple loans into one Combines multiple loans into one
Can refinance federal and private loans Can consolidate federal loans only
Private refinance lenders may charge a fee No fees charged
Credit check required No credit check needed
Interest rate could be lowered Interest rate is a weighted average of prior loan rates, rounded up to nearest one-eighth of a percent
Term can be lengthened or shortened Term can be lengthened or shortened
Will no longer qualify for federal forgiveness or repayment programs Remain eligible for federal forgiveness and repayment programs
Saves money if interest rate is lowered Typically not a money-saving option

Key Takeaways

Understanding the benefits and drawbacks of student loan consolidation — as well as the difference between federal student loan consolidation and private refinancing — can help you make an informed decision about repaying student loans.

If you decide to consolidate your loans via private student loan consolidation, you might want to consider evaluating a few options from different lenders, because requirements — as well as interest rates and loan terms — can vary from lender to lender.

Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.


With SoFi, refinancing is fast, easy, and all online. We offer competitive fixed and variable rates.

FAQ

Can your student loans still be forgiven if you consolidate them?

Possibly. If you consolidate your federal student loans with a Direct Loan Consolidation, you are still eligible for federal loan forgiveness programs. However, if you choose to consolidate your loans through a private lender, which is also known as refinancing, you will no longer be eligible for forgiveness programs and other federal student loan benefits.

When is consolidating student loans worth it?

Consolidating student loans is worth it if you’re looking to combine multiple student loan payments into one, or you’re looking to lower your interest rate. You can use a Direct Consolidation Loan for your federal loans and keep your access to federal benefits like income-based repayment programs or forgiveness. Another option is to refinance through a private lender, which may give you a lower interest rate and lower monthly payment, but you do lose access to federal loan benefits like forgiveness and income-driven repayment plans.

What are some advantages of consolidating student loans?

The biggest advantage of consolidating your student loans is that you combine them into one loan so you only have one payment every month. This makes it easier to track your loans. If you choose to refinance your loans with a private lender, you may also receive a lower interest rate, which can help you save money. But if you refinance federal loans with a private lender, you lose access to federal programs like forgiveness and forbearance. While people use the terms “consolidation” and “refinance” interchangeably, they are not the same thing.

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.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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.

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 .

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

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Oct
04
2023
What Are Cyclical Stocks?

What Are Cyclical Stocks?

By | Financial Independence, Growing Wealth, invest, Investing | Comments Off on What Are Cyclical Stocks?

Cyclical stocks are stocks that tend to follow trends in the broader economic cycle, with returns fluctuating as the market moves through upturns and downturns. A cyclical stock is the opposite of a defensive stock, which tends to offer more consistent returns regardless of macroeconomic trends.

Investing in cyclical stocks could be rewarding during periods of economic prosperity. During a recession, however, certain types of cyclical stocks may suffer if consumers are spending less.

What Is a Cyclical Stock?

The stock market is not static; it moves in cycles that often mirror the broader economy. To understand cyclical stocks, it helps to understand how the market changes over time, with the understanding that this has a different impact on different types of stocks.

A single stock market cycle involves four phases:

Accumulation (trough)

After reaching a bottom, the accumulation phase signals the start of a bull market and increased buying activity among investors.

Markup (expansion)

During the markup phase more investors may begin pouring money into the market, pushing stock valuations up.

Distribution (peak)

During this phase, investors begin to sell the securities they’ve accumulated, and market sentiment may begin to turn neutral or bearish.

Markdown (contraction)

The final phase of the cycle stock is a market downturn, when prices begin to significantly decline until reaching a bottom, at which point a new market cycle begins.


💡 Quick Tip: The best stock trading app? That’s a personal preference, of course. Generally speaking, though, a great app is one with an intuitive interface and powerful features to help make trades quickly and easily.

Cyclical Stocks Examples

The cyclicality of a stock depends on how they react to economic changes. The more sensitive a stock is to shifting economic trends, the more likely investors would consider it cyclical. Some of the most common cyclical stock examples include companies representing these industries:

•   Travel and tourism, including airlines

•   Hotels and hospitality

•   Restaurants and food service

•   Manufacturing (i.e. vehicles, appliances, furniture, etc.)

•   Retail

•   Entertainment

•   Construction

Generally, consumer cyclical stocks represent “wants” versus “needs” when it comes to how everyday people spend. That’s because when the economy is going strong, consumers may spend more freely on discretionary purchases. When the economy struggles, consumers may begin to cut back on spending in those areas.

Cyclical Stocks vs Noncyclical Stocks

Cyclical stocks are the opposite of non cyclical or defensive stocks. Noncyclical stocks don’t necessarily follow the movements of the market. While economic upturns or downturns can impact them, they may be more insulated against negative impacts, such as steep price drops.

Non Cyclical stocks examples may include companies from these sectors or industries:

•   Utilities, such as electric, gas and water

•   Consumer staples

•   Healthcare

Defensive or non cyclical stocks represent things consumers are likely to spend money on, regardless of whether the economy is up or down. So that includes essential purchases like groceries, personal hygiene items, doctor visits, utility bills, and gas. Real estate investment trusts that invest in rental properties may also fall into this category, as recessions generally don’t diminish demand for housing.

Cyclical stocks may see returns shrink during periods of reduced consumer spending. Defensive stocks, on the other hand, may continue to post the same, stable returns or even experience a temporary increase in returns as consumers focus more of their spending dollars on essential purchases.

Dive deeper: Cyclical vs Non-Cyclical Stocks: Investing Around Economic Cycles

Pros and Cons of Investing in Cyclical Stocks

There are several reasons to consider investing in cyclical stocks, though whether it makes sense to do so depends on your broader investment strategy. Cyclical stocks are often value stocks, rather than growth stocks. Value stocks are undervalued by the market and have the potential for significant appreciation over time. Growth stocks, on the other hand, grow at a rate that outpaces the market average.

If you’re a buy-and-hold investor with a longer time horizon, you may consider value cyclical stocks. But it’s important to consider how comfortable you are with investment risk and riding out market ups and downs to see eventual price appreciation in your investment. When considering cyclical stocks, here are some of the most important advantages and disadvantages to keep in mind.

Recommended: Value Stocks vs. Growth Stocks: Key Differences for Investors

Pros of Cyclical Stocks

•   Return potential. When a cyclical stock experiences a boom cycle in the economy, that can lead to higher returns. The more money consumers pour into discretionary purchases, the more cyclical stock prices may rise.

•   Predictability. Cyclical stocks often follow market trends, making it easier to forecast how they may react under different economic conditions. This could be helpful in deciding when to buy or sell cyclical stocks in a portfolio.

•   Value. Cyclical stocks may be value stocks, which can create long-term opportunities for appreciation. This assumes, of course, that you’re comfortable holding cyclical stocks for longer periods of time.

Cons of Cyclical Stocks

•   Volatility. Cyclical stocks are by nature more volatile than defensive stocks. That means they could post greater losses if an unexpected market downturn occurs.

•   Difficult to time. While cyclical stocks may establish their own pricing patterns based on market movements, it can still be difficult to determine how long to hold stocks. If you trade cyclical stocks too early or too late in the market cycle, you could risk losing money or missing out on gains.

•   Uneven returns. Since cyclical stocks move in tandem with market cycles, your return history may look more like a rollercoaster than a straight line. If you’re looking for more stable returns, defensive stocks could be a better fit.


💡 Quick Tip: Distributing your money across a range of assets — also known as diversification — can be beneficial for long-term investors. When you put your eggs in many baskets, it may be beneficial if a single asset class goes down.

How to Invest in Cyclical Stocks

When considering cyclical stocks, it’s important to do the research before deciding which ones to buy. Having a basic understanding of fundamental analysis and technical analysis can help.

Fundamental analysis means taking a look under a company’s hood, so to speak, to measure its financial health. That can include looking at things like:

•   Assets

•   Liabilities

•   Price to earnings (P/E) ratio

•   Earnings per share (EPS)

•   Price to earnings growth (PEG)

•   Book to value ratio

•   Cash flows

Fundamental analysis looks at how financially stable a company is and how likely it is to remain so during a changing economic environment.

Technical analysis, on the other hand, is more concerned with how things like momentum can affect a stock’s prices day to day or even hour to hour. This type of analysis considers how likely a particular trend is to continue.

Considering both can help you decide which cyclical stocks may be beneficial for achieving your short- or long-term investment goals.

The Takeaway

Cyclical stocks are stocks that tend to follow trends in the broader economic cycle, with returns fluctuating as the market moves. Cyclical stocks could be a good addition to your portfolio if you’re interested in value stocks, or you want to diversify with companies that may offer higher returns in a strong economy.

Investing in cyclical stocks does have its pros and cons, however, like investing in just about any other type or subset of securities. Investors should make sure they know the risks, and consider talking to a financial professional before making a decision.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

SoFi Invest®
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SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

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.

Claw Promotion: Customer must fund their Active Invest account with at least $25 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.

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Oct
03
2023
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What Is Student Loan Forbearance?

By | Fresh Out of School, Student Loans, student_loan, Terminology | No Comments
Editor's Note: For the latest developments regarding federal student loan debt repayment, check out our student debt guide.

If you’re facing a financial squeeze, you may be able to get a temporary break on repaying a student loan with student loan forbearance. The catch is you could end up owing more.

That’s because interest accrues on nearly all federal student loans in forbearance and on all private student loans, if the private lender offers such a program. (Note: Previously, this accrued interest would be added to the loan principal following the period of forbearance — a process known as interest capitalization — but new rules issued by the Department of Education in July 2023 eliminated capitalization in this scenario.)

Even though a payment reprieve through forbearance can bring short-term relief, it might be worth exploring alternatives. Read on to learn how student loan forbearance works — and other options you may want to consider.

What Does Student Loan Forbearance Mean?

What is forbearance? It’s an approved period during which a borrower is allowed to temporarily suspend loan payments.

There are two main types of federal student loan forbearance: general and mandatory.

General Forbearance

With general forbearance, sometimes called discretionary forbearance, your loan servicer will decide whether or not to grant your request for forbearance if you are unable to afford your loan payments.

General forbearance is available for Direct Loans, Federal Family Education Loan (FFEL) Program loans, and Perkins Loans for up to 12 months at a time. Borrowers still experiencing hardship when the forbearance period expires can reapply and request another general forbearance.

Mandatory Forbearance

Your loan servicer is required to grant you forbearance if you meet certain criteria including:

•   You are serving in a medical or dental internship or residency program, and you meet certain requirements.

•   The total amount you owe each month for all federal student loans is 20% or more of your total monthly gross income, for up to three years.

•   You are serving in an AmeriCorps position for which you received a national service award.

•   You are performing a teaching service that would qualify you for teacher loan forgiveness.

•   You qualify for partial repayment of your loans under the Department of Defense Student Loan Repayment Program.

•   You are a member of the National Guard and have been activated by a governor, but you are not eligible for a military deferment.

Direct and FFEL loans qualify for mandatory forbearance for any of the above reasons. Perkins Loans also qualify if a borrower has a heavy student loan debt burden.

Mandatory forbearance is to be granted for no more than 12 months at a time, but it can be extended if you continue to meet eligibility requirements.


💡 Quick Tip: Get flexible terms and competitive rates when you refinance your student loan with SoFi.

Private Student Loan Forbearance

What is forbearance for private student loans? Some private lenders offer this option.

If you’re having trouble making private student loans payments, contact your loan holder immediately. They might offer you interest-only payments, interest-free payments, or a change in interest rate. It’s important to get in touch with your loan provider before you miss a payment and risk your loan going into default.

Who Should Use Student Loan Forbearance?

Forbearance on federal student loans may be a good choice if you don’t qualify for deferment or an income-driven repayment plan, and your hardship is temporary.

What is student loan deferment? While both student loan deferment and forbearance offer the opportunity to press pause on your student loan payments, there’s a key difference: During deferment, you may not have to pay the interest that accrues on Direct Subsidized Loans, Federal Perkins Loans, and the subsidized portion of Direct Consolidation Loans or FFEL Consolidation Loans.

With private student loans, borrowers anticipating trouble making payments would be wise to contact their loan servicer to seek a solution. Whether the lender calls it deferment or forbearance, interest typically accrues and it is the borrower’s responsibility.

Is Student Loan Forbearance Bad?

As a stopgap measure, no.

Student loan forbearance certainly beats having late payments or a loan default on your credit reports. Most federal student loans enter default when payments are 270 days past due, but federal Perkins Loans and private student loans can go into default after just one missed payment.

If you default on a student loan, the entire balance of a federal student loan (principal and interest) becomes immediately due. (Note that federal borrowers are protected from default during the on-ramp period from October 2023 to September 2024.)

If your federal student loan is in collections, and you do not enter into a repayment agreement or you renege on the agreement, the collection agency can garnish your wages — up to 15% of your disposable pay.

As if that weren’t enough of a deterrent, borrowers in default can expect to have part or all of their tax refund taken and applied automatically to federal student loan debt.

Private student loans typically go into default after 90 days. The lender may hire a collection agency or file a lawsuit. Any collection fees are stated in the loan agreement.

Recommended: Private Student Loans Guide

Pros and Cons of Student Loan Forbearance

Postponing your student loan payments has its advantages and disadvantages.

Pros

•   Forbearance can help you avoid the negative financial impact of going into default, including the risk of having your wages garnished.

•   It does not affect your credit scores because the missed payments are not reported on your credit reports.

•   It can give you a chance to catch your breath when money is tight.

Cons

•   Interest will accrue during forbearance, which means you’ll likely have a larger loan balance waiting for you when you resume repayment.

•   If you’re pursuing federal student loan forgiveness, any period of forbearance probably will not count toward your forgiveness requirements.

•   It’s a short-term solution, typically 12 months, though you can renew if you’re still struggling to pay your loans.

Alternatives to Forbearance

Income-Driven Repayment Plans

If you’re having trouble making student loan payments because of circumstances that may continue for an extended period, or if you’re unsure when you’ll be able to afford to resume payments, one option is an income-based repayment plan.

Monthly payments are determined by your income and family size. After 20 or 25 years on regular, on-time payments, any remaining loan balance may be forgiven depending on the type of loan you have.

The Department of Education recently introduced the SAVE plan, a new income-driven repayment plan. Depending on your financial circumstances, if you qualify, your monthly payments could be as low as $0, and interest does not accrue. If you’re eligible, this is a better option than forbearance.

Student Loan Refinancing

Refinancing student loans with a private lender is another option to consider. You take out one new loan, hopefully with a lower interest rate, to pay off one or more old loans.

One of the other advantages of refinancing student loans is that you may also be able to change the length of the loan.

Borrowers eligible for student loan refinancing typically have a solid financial history, including a good credit score. It’s important to note that if you refinance federal student loans with a private lender, you give up federal benefits like income-driven repayment, loan forgiveness, and federal forbearance.

Recommended: Student Loan Refinancing Calculator

The Takeaway

What is student loan forbearance? Student loan forbearance is an option to temporarily suspend loan payments when you’re struggling to make them. But in almost all cases, interest will accrue and be added to the loan. Student loan deferment, income-driven repayment, or refinancing could make more sense for you.

Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.


With SoFi, refinancing is fast, easy, and all online. We offer competitive fixed and variable rates.

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.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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.

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Oct
03
2023
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Tips to Lower Your Student Loan Payments

By | Fresh Out of School, Student Loans, student_loan | No Comments

Staying on top of student loan repayments is an important part of your overall financial health. If you’re concerned about making payments on time, or if you’re just reevaluating your budget, you may be wondering how to lower student loan payments.

Many borrowers may be eligible for options that can lower their student loan payments, from changing your repayment term (which may result in paying more interest over the life of the loan) to signing up for an income-driven repayment plan. Here are some tips you might want to consider if you’re looking to lower your loan repayment costs.

Can I Lower My Student Loan Payments?

While there’s no magic wand that can wipe away your student loans, there are some ways you may be able to lower your monthly payments. The Department of Education offers a number of income-driven repayment (IDR) plans. With an IDR plan, the amount you pay will be determined by your income, the size of your family, and where you live, and it won’t be more than 10 to 15% of your income.

You may also have the option to refinance your loans at a lower interest rate or with a longer loan term, both which may lower your monthly payments. (Note: You may pay more interest over the life of the loan if you refinance with an extended term.) There are many factors to consider before refinancing, but if you’re struggling with your monthly payments, it’s worth doing the research to see if it works for you.

Understanding Your Current Student Loan Payments

Before you can determine if you can lower your student loan payments, it’s important to know the type of loans you have since this can affect your repayment options.

If you have federal student loans from the U.S. Department of Education, you may be able to apply for federal plans that can help lower your monthly student loan payments. You can find all of your federal student loans and the individual loan servicers, by logging into My Federal Student Aid . If you have private student loans from a bank or another financial institution, there are fewer options available to lower your monthly payments.

Federal loans are placed by default in the Standard Repayment Plan, which sets your monthly payments at a static amount so you will have your loans paid off in 10 years, if not less. Some private loans also follow the 10-year repayment timeline, but it varies depending on your lender.

The next step is to assess how much debt you have in total. By calculating what you owe, you can get a better understanding of your current repayment plan and whether you want to consider changing it.

Once you have all of your loan information, you can use a student loan payoff calculator or contact your servicer to find your current payoff dates for your student loans. The calculator can also help you determine which repayment plans you qualify for. Keep in mind that if you change to a longer term to lower monthly student loan payments, you’ll need to take more time to pay off your loans, and you may end up paying more over the life of the loan, since interest will continue to accumulate.

If you only need temporary relief, consider contacting your loan servicer to see if you are eligible for student loan deferment or forbearance. Both options let borrowers temporarily pause or lower loan payments for reasons such as unemployment or being enrolled as a student. Depending on the type of loan you have, interest may still accrue during this time.

Recommended: What Student Loan Repayment Plan Should You Choose? Take the Quiz

How to Lower Student Loan Payments

1. Sign up for Automatic Payments to Stay on Time

Some student loan servicers offer incentives if you elect to make automatic payments, such as a 0.25 percent interest rate reduction. Auto payments can also help you incorporate your student loan payments into your budget as a fixed expense that must be accounted for every month. On-time payments may also help your overall credit score.

2. Contact Your Loan Servicer About Your Repayment Plan

If you’re interested in changing federal repayment plans to help lower student loan payments, contact your loan servicer to learn more about your options.

One option is the Graduated Repayment Plan, which can keep your payment timeline to 10 years (depending on how much you owe), but starts out with lower payments and then increases the payment amount over time (usually every two years).

If you have more than $30,000 in eligible outstanding student debt on most loans, you can also ask about the Extended Repayment Plan, which extends your loan repayment timeline to 25 years.


💡 Quick Tip: Get flexible terms and competitive rates when you refinance your student loan with SoFi.

3. Apply for Income-Driven Repayment for Federal Loans

Most federal student loans are eligible for at least one income-driven repayment plan. If you’re on an income-driven repayment plan, and you need to defer your loans because of economic hardship or if you make so little you qualify to pay nothing toward your loans each month, the months when you’re in deferment or paying $0 still count toward your total repayment period.

On an IDR plan, how much you owe each month is based on your discretionary income, which the federal government defines as “the difference between your annual income and 150% of the poverty guideline for your family size and state of residence.” You can use the Department of Education’s Loan Simulator to get a better sense of how much you would owe with one of these plans and how long it will take you to pay them off.

All of the IDR options offer loan forgiveness after borrowers make consistent payments for a certain number of years, ranging from 10 to 25, depending on the type of program you qualify for. You may have to pay income tax on the amount that’s forgiven, though there’s a temporary tax rule that exempts any forgiven debt from federal income taxes through 2025.

Here are the four IDR plans offered by the Department of Education:

•   Income-Based: Payments are generally 10% or 15% of your discretionary income, depending on when you first received your student loans. Any outstanding balance is forgiven after 20 or 25 years, but you may have to pay income tax on the amount that’s forgiven. You must have a high federal student loan debt relative to your income to qualify.

•   Income-Contingent: Payments will be either 20% of your discretionary income, or the amount you would pay on a fixed 12-year repayment plan adjusted to your income, whichever is less. Many borrowers can qualify for this plan, including parents, who can access this option by consolidating their Parent PLUS loans into a Direct Consolidation Loan. Outstanding balances may be forgiven after 25 years.

•   Saving on a Valuable Education (SAVE) Plan: The SAVE Plan is the new name of the Revised Pay As You Earn (REPAYE) Repayment Plan. Payments are generally 10% of your discretionary income. (It will be dropping to 5% in July 2024.) Outstanding balances may be forgiven after 20 to 25 years, depending on whether the loans were for undergraduate or graduate study. There is no income requirement to qualify for the SAVE plan, and it’s available to all Direct Loan borrowers with eligible loan types.

•   Pay As You Earn: Also generally sets payments at 10% of your discretionary income and caps at 20 years for forgiveness, but never more than what you’d pay on the Standard 10-year plan. You must be a new borrower on or after Oct. 1, 2007 to qualify.

•   Income-Sensitive: This repayment plan is open to low-income borrowers who have Federal Family Education Loan (FFEL) Program loans. If you qualify for this program, your monthly loan payment will go up or down based on your annual income and will be discharged after 10 years.

These plans require borrowers to reapply every year. If you are employed by certain government agencies or a qualifying not-for-profit and are seeking Public Service Loan Forgiveness (PSLF) , you must repay your student loans under one of these income-driven repayment plans (there are other qualifying factors, too). Keep in mind, it’s always free to apply for these federal student loan assistance programs, and they are the easiest and best way to lower your monthly federal loan payments if you qualify.

4. Learn About Loan Repayment Assistance Programs

If you’re eligible, a Loan Repayment Assistance Program (LRAP) can provide funds to help you lower student loan payments. Since private loans are not eligible for the federal income-based repayment plans mentioned above, an LRAP could be helpful for those with private student loans.

LRAPs also often include a requirement that you work in your eligible job for a certain number of years, typically in public service — and the assistance may or may not count as taxable income. If your income after graduation is modest, an LRAP can help to repay loans, whether federal, private, or parent PLUS.

You may want to investigate limitations such as which of your loans are eligible and income caps. You can also research private grants that can help cover the cost of your student loans and lower loan payments after graduation.

5. Refinance Your Student Loans with a Private Lender

Refinancing is an option that may be most helpful if you have student loans with high interest rates or private student loans.

When you refinance a student loan, a lender pays off your existing loans and gives you a new loan with new terms. So you will have one private refinanced loan to pay back.

Refinancing could save you money in the long run if you get a lower interest rate, or you could change your term to get more time to pay off your loan and lower the cost of your monthly student loan payments (though you may pay more in interest in the long run).

Keep in mind, however, that if you refinance a federal student loan, you’ll lose access to federal benefits and protections, such as income-driven repayment plans or Public Service Loan Forgiveness.

You can choose to refinance just your private loans while putting your federal loans into an income-based repayment plan to get the best of all options.

What Happens if You Can’t Pay Your Student Loans

With most federal student loans, if you don’t make a payment in more than 270 days, you’ll default on the loan. Private loans are often placed in default as soon as after 90 days.

Defaulting can impact your credit score, and have other negative consequences, including losing eligibility for deferment, forbearance, and other valuable repayment options. Another consequence of default is loan acceleration, when the unpaid balance on your loan immediately comes due.

With the end of the student loan pause, the Department of Education is giving those whose loans are in default a chance at getting back on track with the Fresh Start program. Borrowers in default must apply for the Fresh Start program and then enroll in an income-based repayment plan. Their loans will be removed from “defaulted status” and the record of the default will be removed from their credit report.

Refinancing Student Loans With SoFi

Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.


With SoFi, refinancing is fast, easy, and all online. We offer competitive fixed and variable rates.

FAQ

Can you negotiate student loans down?

You generally can’t negotiate student loans unless you’ve stopped making payments and your loans are delinquent or in default, a situation which has serious financial consequences, such as potentially damaging your credit score or having your wages garnished. There are other options to lower student loan payments, however. If you only need temporary relief, you can contact your loan servicer to see if you’re eligible for deferment or forbearance. If you have federal loans, you may be able to change your loan term or enroll in an income-driven repayment plan. Borrowers with private loans can explore refinancing student loans with a private lender.

How do I negotiate student loan payoff?

If your student loans are delinquent or in default, you may be able to negotiate a settlement for a lower amount, but this is generally seen as a last resort because of the negative financial consequences. Contact your lender to see what other options may be available to you.

What is average student loan debt?

The average student borrower has $37,338 in student loans to pay off, according to The Education Data Initiative.

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.

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.

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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03
2023
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Can Parents Pay Off Their Children’s Student Loans?

By | Debt Payoff, Student Loans, student_loan | No Comments

College is expensive, and for many families, it’s a group effort to pay tuition, fees, and other expenses. Both parents and children may choose to take out student loans. And in some cases, parents might also help pay off their child’s student loan debt after graduation. But before you take out your checkbook, there are some things to be considered.

Ahead, we look at ways parents can help their children pay off their loans as well as pros and cons of helping with such a big financial expense.

Things to Consider Before Paying Off Your Children’s Student Loans

While there are no rules restricting parents from paying back their children’s student loans, there are a few things to think about before you do.

1. Gift Taxes

If you choose to pay off your child’s student loan in a lump sum, you may need to file a gift tax return and pay any applicable gift tax . The person who makes the payment as a gift pays the tax, not the recipient, according to IRS guidelines. In 2023, a parent may gift their child up to $17,000 before the gift tax comes into play (or two parents could gift one child up to $34,000). Even once that threshold is reached however, a tax is not immediately triggered; rather, the excess gift is added to the lifetime gift tax exclusion, which in 2023 is set at $12.92 million. In other words, paying off your children’s student loans is unlikely to lead to tax liability on its own.

2. Retirement

Parents should consider how helping their child (or children) pay off student loans might affect their retirement plans. Because parents are closer to retirement age than their adult children, it is often difficult for parents to build back up their nest egg if they deplete some or all of it helping pay back their children’s student loans.

3. Home Equity

Some parents decide to avoid using their retirement funds by tapping their home equity line of credit instead. But before you sign on the dotted line, you might want to consider the repercussions. You will want to make sure you have the necessary time to pay back that line of credit. Many borrowers opt for a 10- or 15- year home equity loan, but that may be risky if you are only 10 years from retirement.


💡 Quick Tip: Enjoy no hidden fees and special member benefits when you refinance student loans with SoFi.

How Parents Can Help Their Children Pay Off Their Student Loans

There’s a lot of factors to consider if you want to help pay off your child’s college loans, especially if you’re nearing retirement. Here are several ways you may want to help your child repay their loan.

1. Making Small Payments During College

Although most student loans don’t need to be repaid until afer your child graduates, making small monthly payments — even as little as $25 a month — while your child is still in college may lower their debt by a few thousand dollars.

2. Making an Occasional Loan Payment as a Gift

When holidays and birthdays come around, instead of buying your child tickets to a concert or the shoes they’ve been coveting, consider making an extra payment on their student loan.

You can ask grandparents and aunts and uncles to do the same, if they are so inclined or have no idea what to give your child for their birthday or the holidays.

Any extra payments beyond the minimum monthly payment should be applied to the principal, not to their next monthly payment. By applying the payment to the loan’s principal balance, they may be able to save on interest payments in the long run. Most loan providers will allow you to make extra principal-only payments.

3. Paying Off Private Loans First

If your child has a mix of private and federal loans, you could offer to pay off the private loan while they continue to make monthly payments on their federal loan. Since private loans typically have higher interest rates, paying that loan off first might go a long way to helping your child pay back their loans quicker.

Not sure what your child’s monthly student loan payments will be? You can use our student loan calculator to estimate how much they could be paying each month. You can then decide if you want to give them money each month to go toward their payments, which in turn can help them pay off their student loans faster.

Furthermore, your child’s federal loans come with certain federal benefits such as income-driven repayment plans, deferment, forbearance, and access to certain loan forgiveness programs. Private loans don’t enjoy those same federal benefits, which may be another argument for paying off private loans first.

4. Helping with Other Expenses

If paying off your child’s student loans is too expensive, consider helping them with some of their other monthly expenses that aren’t as steep. Perhaps pay an unexpected medical bill for them, offer to buy a week’s worth of groceries, or maybe surprise them with dinner and a movie once a month.

5. Considering a Parent PLUS Loan

If your child is still in school, and you want to help them with tuition, you may want to consider a Parent PLUS loan, which is a federal student loan that is available to the parents of a dependent undergraduate student. The interest rate is 8.05% for a Parent PLUS loan disbursed between July 1, 2023, and before July 1, 2024.

While credit scores aren’t considered when determining eligibility for federal student loans, parents cannot typically qualify for these loans with “adverse credit history.”


💡 Quick Tip: Refinancing could be a great choice for working graduates who have higher-interest graduate PLUS loans, Direct Unsubsidized Loans, and/or private loans.

6. Applying for a Private Parent Loan

If you don’t qualify for a federal loan for parents, you may want to consider taking out a private loan to help fund your child’s education. Keep in mind that you will be the only borrower. This is very different from having your child named as the borrower, and you named as the cosigner.

Parents who take out loans need to be careful they aren’t taking on more debt than they can pay back in their lifetime.

7. Refinancing the Student Loans

If you have a Federal Parent PLUS loan, you might be able to save money and simplify your payments by refinancing your Parent PLUS loan.

Or you can help your child refinance their student loans by cosigning and potentially save them money over the life of the loan if you qualify for a lower interest rate. (This is usually true provided you do not extend the loan term.) Borrowers should keep in mind that refinancing their federal loans will disqualify them from all federal benefits, including income-based repayment plans and potential forgiveness.

Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.


With SoFi, refinancing is fast, easy, and all online. We offer competitive fixed and variable rates.

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.

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.

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