It’s no secret that most college graduates will spend a large portion of their early careers paying back their student loans. Many borrowers do not graduate with just one student loan, but with multiple loans each with its own interest rate, repayment period, and fine print. Understanding the types of loans you have and comparing them against other available options is just as important as paying your bill each month. Staying proactive and being mindful of your debt can potentially save you thousands of dollars in the long run.
At Credible, we help thousands of graduates each week looking for ways to save on their loans. We have put together a few consideration points so you have a better idea of where your money is going each month and help achieve your repayment goals.
Fixed vs. Variable Rates
Student loan interest rates are dictated by market conditions, and as a result they can vary from year to year. This is the reason why you likely have several interest rates associated with your student loans.
Federal loan have fixed interest rates. These loans have a static interest that doesn’t change during the entire duration of the loan. The interest rate is often higher than a variable rate, but is often preferred because borrowers feel secure knowing their monthly payment amount won’t change throughout the life of their loan.
Variable interest rate loans are loans with a fluctuating interest rate that changes every month or quarter, depending on the lender. This interest rate is charged on the outstanding balance of the loan and monthly payments vary with changes in the interest rate. Depending on the market, it’s possible for variable rates to be lower than fixed rates, but that is subject to change at any point during loan repayment.
Short vs. Long-Term Repayment
Although your repayment terms on your loans are set, it is important to realize the impact of shortening the length of your student loan repayment. To this point, all student loans, federal or private all allow penalty-free prepayment — meaning if you add an extra $200 dollars each month, this balance will go directly to principle. This is a very effective strategy to lower the amount of interest paid over the life of your loan if you are in the financial situation to do so.
If you are considering adjusting your repayment terms, shorter-term loans tend to have lower interest rates, but your monthly payment could be significantly higher. Depending on your total loan balance, the difference between a 15-year and 5-year loan could be well over $10,000 in interest payments despite having a lower monthly payment with the 15-year loan. If you are currently on a standard repayment plan and are happy with your loan terms, consider prepaying on your loans if you want to pay them off faster.
Federal vs. Private Loans
Depending on your finances and which options were available to you as part of your financial aid, you may have a mix of both federal and private loans. Repaying a private loan is no different than repaying a federal loan. The major difference is that if you are interested in forgiveness options, only your federal loans can be forgiven through a public service loan forgiveness program. Federal loans also have deferment and forbearance options in case you are looking to return to school or are struggling to make payments. Some private loans offer these same benefits so be sure to contact your lender to learn more about your options.
Consolidation vs. Refinancing
If you only have federal loans, a Federal consolidation can allow you to adjust the term length of your loans to a better suited option. However, this process will only take a weighted average of your current loans, so if you wanted a lower interest rate or to switch to a variable rate loan this will only consolidate your loans to one payment. On the other hand, private consolidation is effectively refinancing and will consolidate both federal and private loans to a new negotiated interest rate based on your financial and credit history.
If you are interested in seeing how much you could save with new repayment conditions by refinancing, visit Credible to explore your options.