student using phone while studying

How is Refinancing Different Than Consolidation?

The average Class of 2016 graduate walked down the commencement aisle with $37,000 in student loan debt . We all know that higher education is expensive, but that’s a big responsibility for a 22-year-old to be saddled with as they start their career. The interest payments on a $37,000 loan alone could afford the average new grad a whole lotta revolutions through the Taco Bell drive-thru and pairs of polyester work slacks. (Or better, the ability to start saving some money!)

If you have student loans, there is a way to reduce the amount of interest you pay over the lifespan of your loan or loans; It’s called student loan refinancing. There are people who have refinanced their loans and saved tens of thousands of dollars—and it’s possible you could too.

You’ll often hear the terms student loan refinancing and student loan consolidation used interchangeably, but they’re technically different. Only student loan refinancing has the potential to reduce how much you pay in interest. If your goal is to reduce what you owe, you’ll need to learn how to refinance student loans. Because it’s important to understand which is right for your situation, let’s hash out the definitions and details of both options.

Student Loan Refinancing Breakdown

Okay, so your current loans are either obtained through the government (that’s the most common route) or a private lender, like a bank (less common). Each loan has an interest rate—likely, a fixed rate of interest—set at the time you took out that loan. (If you have loans issued before 2006, there is a possibility that rates on your loans are variable, which means the interest rate may fluctuate.)

When you refinance one or all of these student loans, you’re basically just swapping out the old loans and replacing them with a fresh, new one in hopes of getting a better rate or more favorable terms.

Quite literally, the new lender pays off your old loan(s) and provides you with a spankin’ new loan. Now, the reason it’s worth it to learn how to refinance student loans is because it can lower your interest rate or term, thereby saving you money. A better interest rate or term can either lower your monthly payments or reduce the time it takes to pay off the loan, respectively.

Getting Started With Refinancing

The first step is to explore whether refinancing is the right option for you. Refinancing has historically only been available for federal loans, but there are a handful of lenders who refinance private loans as well. This is not the case for simple loan consolidation, which can only be done with federal loans.

If you’ve got federal loans and are taking advantage of income-based repayment or the Public Service Loan Forgiveness program, it may not be worth learning how to refinance student loans; Those programs (and other benefits) won’t transfer to your new loan . If you have no plans to take advantage of any federal debt-relief program, it’s time to look into refinancing.

Local banks and credit unions often offer student loan refinancing, but online lenders like SoFi tend to offer more competitive rates. Each lender has its own criteria for determining your rate, but it’s generally based in part off credit score and income.

Student loan refinancing is generally available to folks who are in better financial situations than when they first took out loans, whether through increased salary, improved credit score, or another circumstantial shift, like marriage. Refinancing can also help if you have loans with exceptionally high interest rates.

Even a seemingly small improvement in your loan’s interest rate could save you a lotta scratch in the long run. (Which could amount to hundreds, potentially thousands more T-Bell odysseys! Or some extra money for retirement or a down payment, your call.)

Often, you’re able to get pre-approved for refinancing online in a matter of minutes. After pre-approval, you select the loan you want, fill out a full application, upload or mail in some key financial documents, and voilà! You’ve done your part.

Student Loan RefinancingStudent Loan Refinancing

Here’s the Difference Between Student Loan Refinancing and Consolidation

Consolidation is exactly what it sounds like; You’re consolidating multiple loans into one loan. And that’s it! Because you’re just smushing all of your (federal) loans together without any accompanying re-evaluation of your credit, your interest rate won’t change. The rate on your new consolidated loan will simply be a weighted average of your current loan rates. Your monthly payment would only decrease if your payback period was extended, which would actually cost you more in interest over time.

Loan consolidation is typically done using a Direct Consolidation Loan through the government. This is why you can only consolidate federal loans and not private ones. The benefit to consolidation is creating one payment instead of dealing with multiple loan payments. It is also possible to detach or add cosigners and switch from a variable to a fixed rate.

It’s worth noting that refinancing is sometimes referred to as “private loan consolidation.” And yes, when you refinance multiple loans, you are inherently consolidating them. But for the sake of keeping the two mentally separated, consider consolidation and refinancing as two different actions.

Benefits of Refinancing Student Loans

Ideally, a student loan refinance would benefit you in the following ways:

1. You could pay less in interest over time, which can mean lower monthly payments.

2. It can also shorten your loan term, allowing you to pay debt off sooner.

3. You get to enjoy the benefits of consolidation with one monthly bill.

4. There are both variable and fixed rate loans available. The benefits of having a lower monthly payment or a shorter payback period need no championing, but it is pretty sweet to think about what you could do with all that extra cash. SoFi estimates that the average customer saves $30,069 in interest over the lifetime of their loan.

Additional Refinancing Considerations

When you refinance, not all lenders will give you the same repayment options that federal loans offer. This is important to consider, especially if you work in an industry sensitive to economic cycles. As with any financial decision, refinancing should only be done after considering all of the trade-offs.

If you’re ready to explore student loan refinancing with a lender that offers unemployment protection, competitive refinancing rates, and unmatched customer service, check out what SoFi has to offer. SoFi’s student refinance loan is a private loan and does not have the same repayment options/benefits offered by federal programs. You should explore and compare federal and private loan options, terms, and features to determine what is best for you and your situation.

The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.

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Refinance Federal Student Loans: What to Consider

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

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

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

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

What is federal student loan refinancing?

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

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

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

What is the difference between federal student loan refinancing and student loan consolidation?

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

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

You can consolidate federal loans into a federal Direct Consolidation Loan at no cost. This keeps your loans federal and can give you a longer repayment timeframe, and simplifies the repayment process to help you not miss payments. But it doesn’t necessarily save you money. Generally, the new interest rate on your federal direct consolidation loan is the weighted average of your original loans’ interest rates. For some people, even if it doesn’t save them money, the streamlining of loans is worthwhile.

What are the benefits to federal student loans?

There are a number of benefits to federal loans that aren’t always available for private loans. For example, you may be eligible for the Public Service Student Loan Forgiveness program if you’re working in public service and have made 120 loan payments.

You may also have access to certain income-based repayment plans or protections on your loans if you default or miss payments. However, as with all things, there are pros and cons. Loan forgiveness is great if you qualify, but double-check the requirements before thinking you can just write off all that debt. And income-based repayment plans can be a life-saver if you’re in between jobs or just getting started, but it may mean you pay more over the life of your loans.

Should I refinance my federal student loans?

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

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

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

There are some downsides to income-driven student loan repayment plans, too. You can end up paying more in interest or get hit with a higher tax bill after your loan is forgiven. However, depending on your financial situation, that flexible repayment plan could be a saving grace. It depends on how much you have in federal student loans and how confident you are about your repayment options.

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

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

The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.

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Life After Refi: 6 Things to Do With Your Student Loan Refinance Savings

Student loan refinancing is most likely the first major financial decision you’ve made as a young professional—and it was a smart one. For starters, you’ve achieved an immediate psychological win, and you can breathe easier knowing you’ve taken a strong step toward eliminating your student loan burden.

Plus, by scoring a lower interest rate and more manageable monthly payments, you now have wiggle room to chalk up some other financial

Here’s how to get cracking on achieving major money milestones now that you’ve refinanced your student loans:

1. Track Your Spending

If you haven’t already created a budget, do so and take it seriously. Tracking your income and expenses—and automating monthly loan payments—will give you a sense of where your money goes, and guide you toward spending mindfully.

Budgeting will also help you allocate cash toward your short-term (i.e., home down payment) and long-term (retirement) savings objectives.

2. Pull Out Your Crystal Ball

Now that your student loans are no longer suffocating you, give some thought to what’s next on your personal and career agendas, and how you’ll accomplish those goals. Do you plan on relocating for a new job? Is marriage in your future? Children? Focus on the debt you currently carry and how it influences your long-term financial objectives.

Since student loan refinancing reduced your interest rate, you can save thousands of dollars over the life of the loan. That means you can continue to make minimum payments and redirect those savings toward growing your investment portfolio, reducing bad debt, or saving for a wedding, for example.

Think about it this way: A big drop in loan interest usually means that more of your payment can go toward the principal than before, especially if you’ve been paying the loan for a while. Other factors at play might include a new loan term, so start number-crunching. You’ll likely realize that putting extra funds toward maxing out your 401(k) instead of accelerating your loan payments, for instance, will garner a higher return.

Related: How Student Loans Could Impact Your Taxes

3. Become Conscious of Tradeoffs

In order to complete your money missions, you’ll have to accept that they come with tradeoffs and sacrifices. This mindset will help you avoid falling victim to “lifestyle inflation”—the idea that as you earn more, your needs and desires get more expensive.

So instead of joining another wine club, for example, focus on actions that provide long-term value and happiness, such as strengthening your investment portfolio and saving for a home.

Learning to make sacrifices early in life will keep you on the right track financially. That being said, don’t feel like you have to give up everything you enjoy. Go ahead and celebrate wins, make memories, and treat yourself to nice things—just avoid deviating too far from your big-picture goals.

4. Tackle High-Interest Credit

If you have credit card debt, dealing with it is of the utmost importance. The money you’ll save by eliminating a revolving balance that typically carries an interest rate of 15% or more can go toward building your nest egg or saving for your child’s education.

Consider consolidating your credit cards into a personal loan to secure a lower interest rate. Paying down credit card debt can also improve your credit score, which will help you qualify for more favorable interest rates and terms in the future.

Debt utilization—the amount of debt you have compared to your credit limit—is the second biggest factor that FICO and other scoring models use to calculate your credit score. So if you have a $10,000 credit card limit and owe $7,500, that equates to a 75% debt utilization rate. To maximize your credit score, aim to keep that rate under 30 percent, but as close to zero as possible.

Read Next: Two Couples Open Up About How They Manage Money, Together

5. Save For Your Dream Home

When you’re hoping to buy your first home, coming up with a down payment is probably your biggest obstacle. But the savings from your newly refinanced student loan and—should you choose it—credit card consolidation can get you on track.

If you live in a high-rent city or plan on relocating to one, buying a home could be just as affordable as renting. Plus, you can save for a down payment while still paying down your student loans. The fact is, you might not even have to save as much as you think.

Although conventional wisdom says to put 20% down on a home, you might qualify for a mortgage loan with as little as 10% down, or even just 3.5% if you go with a government-insured FHA mortgage .

To get started, create a home savings account and automate deposits to it each pay period. You’re more likely to stick with it if you never actually have the cash in hand. You might also consider tapping into other assets, such as a Roth IRA, which allows you a one-time, penalty-free withdrawal if you’re using it for a first-time home purchase.

6. Fund and Contribute to Retirement Accounts

Using your student loan refinancing savings to fund your retirement accounts will put you that much ahead of the game. If you have an employer-matching 401(k) that you’re not maxing out, that should be your first move.

If you have savings left over, contribute to an individual retirement account, such as a traditional, Roth, or SEP IRA. For more information on which IRA account you can contribute to, check out SoFi’s IRA calculator. Choose a low-cost investment platform to save on fees while building your savings.

Just be aware that you may be penalized and taxed for early withdrawals, so work with a professional. Investing in retirement while in your 20s and 30s will make a huge difference in the long run, thanks to compound interest, which allows your earnings to also earn interest.

Leveraging the money you save by refinancing to achieve your financial goals takes forethought and determination, but the sooner you get started, the better. Whether it’s buying a home, developing a strong investment portfolio, or finally achieving debt-free status, putting your money to work for you will get you closer to your dreams.

Speak to a SoFi Invest® Advisor today to help put your post-refinance game plan in motion.

SoFi can’t guarantee future financial performance.
This information isn’t financial advice. Investment decisions should be based on specific financial needs, goals and risk appetite. Advisory services offered through SoFi Wealth, LLC, a registered investment advisor.
SoFi doesn’t provide tax or legal advice. Individual circumstances are unique. Consult with a qualified tax advisor or attorney.


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

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

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

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

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

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

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

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

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

2. Which credit scores do lenders use?

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

3. How is my credit score calculated?

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

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

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

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

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

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

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

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

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

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

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

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

6. Will refinancing student loans help my credit?

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

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

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

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

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

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

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

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

Take Care of Your Credit Score

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

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

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

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

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

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

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

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

How Does PAYE Work?

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

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

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

Am I Eligible for a PAYE Plan?

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

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

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

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

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

Costs Associated with PAYE and Income-Driven Repayment

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

1. The Straight Costs

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

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

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

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

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

2. The Surprise Costs (and Administrative Burden)

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

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

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

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

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

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

3. The Emotional Cost

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

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

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

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

The Big Picture

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

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

The Main Income-Driven Repayment Options

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

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

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

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

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

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

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SoFi Student Loan Refinance
If you are 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.


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