Understanding Student Loan Repayment: Consolidate or Refinance?

Summary: Looking to refinance your student loans? Financial Advisor Tim offers some insights and advice on consolidation vs. refinancing and government protections. Contact him for more information.

In a perfect world, the government would allow students to refinance their public and private student loans into one loan at a low rate while the borrowers continue to receive government loan protections and forgiveness programs. Until then, borrow wisely, and refinance cautiously.

Harvard Law School recently invited me to talk with some students about their personal financial planning. During those meetings, I learned that students have a combination of government and private student loans.

I wasn’t able to offer them much guidance, as I didn’t know a lot about the student loan re-payment process. So, I figured, if I’m ever invited back, I’d better read up on how this $1.23 trillion of student loans is going to get paid.

To Consolidate, or to Refinance?

The federal government allows students to combine their government student loans. This provides the student with one monthly payment. But their interest rates remain the same, so the total amounts paid back also remain the same.

To pay less back, the interest rate on the new loan must be lower than what students are paying on their current loans. Some private lenders allow students to combine their government and private loans into a new loan with a new interest rate.

The new rate is based on the student’s credit history, salary, and earnings potential. So even with today’s record low interest rates there is no guarantee that the refinancing rate will be lower than the student’s current one.

Government Protections

Government loans provide protections, as well as forgiveness options, that private loans don’t:

  1. Income-driven Plans. For example, the government offers four types of plans that allow borrowers with government student loans to cap their monthly payments to a percentage of their discretionary income. Usually no more than 10% to 20% of their discretionary income is required for payments.
  1. If you fall on severe financial hardship, postponing your payments through deferment or forbearance can help. However, if you refinance, you may have limited options for payment postponement.
  1. Loan forgiveness. Borrowers who work for an eligible employer can get a certain percentage of their federal loans forgiven.

Loan Forgiveness For Public School Teachers

 There are two programs:

  1. Federal Teacher Cancellation (Perkins Loans):
  • You can have up to 100% of your Perkins Loan forgiven years
  • The teacher must teach in either:
  • a low-income school;
  • a special-ed program
  • math, science, or a foreign language;
  • or a field that your state considers to be in short supply
  1. Teacher Loan Forgiveness (Direct or loans)

Public Service Loan Forgiveness (PSLF)

Teachers and individuals who work full-time in the public sector or for an eligible not-for-profit can get a percentage of their federal loans forgiven. The amount of forgiveness varies based on the balance left after a borrower has made loan payments for ten years.

Loan forgiveness works well with one of the Income Driven Plans—that way, a borrower pays as little as possible for ten years, thus leaving the biggest possible balance for forgiveness.

These are the opinions of Financial Advisor Tim Hayes and not necessarily those of Cambridge Investment Research. They are for informational purposes only and should not be construed or acted upon as individualized investment advice. Content provided via links to third party sites should not be considered an endorsement of content, which we cannot verify completeness or accuracy of.

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Financial Advisor Tim Hayes

I’ve held an industry securities registration for 30+ years and am subject to SEC and FINRA oversight.

Most clients pay fee-only or an hourly rate. The size and complexity of the client’s wealth management and financial and retirement planning determine that fee.

Some clients pay a commission, mainly those with smaller accounts, i.e., Roth IRAs, some public-school teachers with 403b retirement accounts, or parents or grandparents who set up a 529 college savings plan.

The first introductory and fact-finding appointment can be in-person or by phone. The next meeting where I provide my recommendations should be in-person. (For the time being, telephone, Zoom, and email are replacing some in-person meetings.)

Subsequent meetings during which we monitor your progress and investments can be done in-person or by phone, email, Zoom, or Skype – or, more likely, a combination of these meeting types.

Contact Tim

Tim has offices in Boston and South Dartmouth, Massachusetts. He’s licensed to handle securities in 8 states: Massachusetts, Rhode Island, New Hampshire, New York, New Jersey, Connecticut, Maine, and Florida.

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