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- Student loan refinancing, explained
- Consolidation vs. refinancing
- PAYE vs. REPAYE programs
- Other refinancing options
- Best student loan
refinancing companies
What is student loan refinancing?
Student loan refinancing is a great way to pay off student loans faster and reduce your interest rate. It means using a new loan with a lower interest rate to pay off old loans with higher interest rates. Once your old account closes, you are only responsible for the new loan. None of the rates, terms or conditions from the old loan apply to the new one. In fact, you don’t even need to use the same lender to refinance.
The benefits of student loan refinancing are too enticing to ignore. And even more so for doctors, given refinancing is the easiest way to lower your interest rate, but it also allows you to adjust your monthly payment and term length. When done right, refinancing can amount to thousands in savings over time.
What is the difference between student loan consolidation and refinancing?
Student loan consolidation combines multiple loans into a single loan. That means one lender. One interest rate. One monthly payment. Like refinancing, the goal of consolidation is to simplify your financial situation. But they are not the same. To understand the difference between the two, it helps to first know the difference between federal and private student loan consolidation.
Federal student loan consolidation is a program run by the Department of Education. It merges multiple federal education loans into a single direct consolidation loan. But there's a catch. Your new interest rate is the weighted average of rates from your previous loans. It will not decrease. Even with a lower monthly payment, it may require paying more interest over time. However, private student loans do no qualify for a direct consolidation loan. Criteria to qualify varies among private lenders.
The shortcomings of consolidation highlight the advantages of refinancing. For both federal and private loans. You can lower your interest rate based on credit history. You can also adjust your monthly payment and term length based on income. In essence, refinancing and consolidation seek the same end goal. To simplify and improve your financial situation. But refinancing can actually save you money long-term.
What is the difference between the PAYE and REPAYE programs?
Timing. It's the key difference between the PAYE vs. REPAYE programs. Of course, both have their respective pros and cons. But the length of your education may qualify you for one, but not the other.
PAYE (pay-as-you-earn) caters to students who borrowed in 2008, graduated in 2012 and took out additional loans for graduate school. Further narrowing the application pool, only students with federal direct loans qualify for PAYE. However, combining Perkins and Federal Family Education loans also works.
Like the income-based repayment (IBR) plan, PAYE requires proof of partial financial hardship. Your payment must also be lower than what you would pay under the standard 10-year plan. If so, it's 10% of the difference between your monthly income and 150% of the federal poverty line. When your income increases, your adjusted payment caps at what you would pay on the standard plan.
REPAYE (revised-pay-as-you-earn) is the Department of Education’s 2015 update to PAYE. It is an income-driven repayment (IDR) program that depends on your earnings. Although similar to PAYE, it does not contain the same time restrictions to qualify. REPAYE extends PAYE’s 20-year forgiveness for graduate students to 25 years. REPAYE also does not require the borrower to prove the burden of student loan debt.
Under REPAYE, the government picks up unpaid interest on subsidized and unsubsidized direct loans. PAYE lets the government cover unpaid interest on subsidized student loans for three years if the monthly installment didn’t cover all of the interest. REPAYE matches this to expand subsidy to unsubsidized federal loans and unpaid interest on subsidized loans over the designated three years. This makes REPAYE a better choice for low-income borrowers because the 10% cap rarely covers the entire payment.
REPAYE is the more recent, relaxed version of PAYE. But if you qualify for PAYE, this is likely the more beneficial route. These programs best reflect the reality of student loan debt in America today. This makes them the most common ways to refinance.
What other student loan refinancing payment plans are available?
Other income-driven repayment (IDR) plans include income-based (IBR) and income contingent (ICR). Under ICR, payments vary based on income, family size, loan balance and interest rate. Under IBR, payments strictly reflect income and family size. Payment is limited to 10-15% of your discretionary income.
There are also standard and graduated repayment plans. And there’s a reason we saved these for last. With the standard, monthly payments are fixed to pay off all loan principal and interest in 10 years. With the graduated plan, a lower initial payment increases every two years to pay off all loan principal and interest in 10 years. The reason these are less than desirable is simple. They take all the power and leverage away from the borrower.
