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WalletPrep worksheet · Debt

Should you refinance your student loans?

Name ____________________ Date __________

Key ideas

  1. Refinancing federal loans can't be reversed. Once a private loan pays them off, income-driven plans, federal deferment, forbearance and forgiveness programs are gone for those loans.
  2. Private loans have the least to lose. Alex refinanced $40,000 from 9% to 6.5% over 10 years. His payment fell $53 and interest fell $6,301.
  3. Compare APR, term and rate type. A lower payment can come from a longer term, not a lower rate. A variable rate can rise later.

Vocabulary

Refinancing
Replacing an existing loan with a new one, usually to get a lower interest rate, a lower payment or a different term.
Credit union
A not-for-profit financial cooperative owned by its members, offering checking, savings and loans much like a bank.
Income-driven repayment
A federal student loan repayment plan that sets your monthly payment from your income and family size instead of from what you owe.
Direct Consolidation Loan
A federal loan that combines several federal student loans into one, at the weighted average of their rates rounded up to the nearest one-eighth of a percent.
Repayment Assistance Plan
The newest federal income-driven student loan plan: 1% to 10% of your adjusted gross income, minus $50 a month per dependent, with a $10 minimum.
Tiered Standard Plan
A fixed-payment federal student loan plan whose length, 10 to 25 years, depends on how much you owe.

Work it out

Alex owes $40,000 in private student loans at an assumed 9% fixed, with 10 years left. A lender offers 6.5% fixed for the same 10 years.

  1. Payment at 9%, 10 years
  2. Payment at 6.5%, 10 years
  3. Lower payment each month
  4. Interest at 9% over 10 years
  5. Interest at 6.5% over 10 years
  6. Interest saved

Check yourself

  1. Which is true of a federal Direct Consolidation Loan?

    • A. It always lowers your interest rate
    • B. It keeps your loans federal
    • C. It comes from a private lender
    • D. It can be undone later

  2. A $40,000 loan costs $20,804 in interest at 9% and $14,503 at 6.5% over 10 years. How much does refinancing save?

    • A. $5,301
    • B. $14,503
    • C. $6,301
    • D. $20,804

  3. Which borrower has the most to lose by refinancing federal loans?

    • A. A nurse at a nonprofit hospital working toward PSLF
    • B. Someone with only private loans
    • C. Someone paying off a loan in one year
    • D. Someone with a cosigned private loan

Your turn

List every student loan with its balance, rate and whether it is federal or private. StudentAid.gov shows federal loans, and your credit report shows private ones. For private loans with rates above current offers, get two or three prequalified quotes with the same term.

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Answer key

Should you refinance your student loans?

Work it out

  1. Payment at 9%, 10 years$507
  2. Payment at 6.5%, 10 years− $454
  3. Lower payment each month= $53
  4. Interest at 9% over 10 years$20,804
  5. Interest at 6.5% over 10 years− $14,503
  6. Interest saved= $6,301
  1. At 9%, 120 payments of $506.71 repay $40,000 with $20,804 in interest. At 6.5%, 120 payments of $454.20 cost $14,503 in interest.
  2. The payment drops by about $53 a month, and total interest falls by $20,804 − $14,503 = $6,301.
  3. These are private loans, so Alex gives up no federal plans. He checks the new loan for fees and confirms the rate is fixed before signing.

Check yourself

  1. B. It keeps your loans federal A Direct Consolidation Loan is federal. Its rate is a weighted average of your old rates, rounded up, and it can't be reversed.
  2. C. $6,301 $20,804 − $14,503 = $6,301 in interest saved, as long as the term stays at 10 years.
  3. A. A nurse at a nonprofit hospital working toward PSLF Public Service Loan Forgiveness only applies to federal Direct Loans. Refinancing them privately ends that path.