Over the last decade, student loan debt in the United States has grown significantly, with one in five Americans holding some form of student debt. The average amount per borrower currently stands around $37,645, but for nearly 10% of borrowers, that amount can be more than $100,000.

As of 2023, Americans owe more than $1.73 trillion in student loan debt, both for federal and private loans. While most see their student loans as an investment in their future career, many struggle to pay these debts off several years into employment. 

However, with student loan refinancing, you can potentially save money over the lifetime of your loans and pay off your debt faster, finally eliminating your student loans forever.

What Types of Student Loans Are Available?

Federal

For many student loan borrowers, federal loans are their first choice. The most common are standard loans that are applied for through FAFSA, or the Free Application for Federal Student Aid. These loans are borrowed money that must be repaid with interest. The standard federal loan types are Direct Subsidized Loans, Direct Unsubsidized Loans, Direct PLUS Loans (for parents and graduate students), and Direct Consolidation Loans.

Some grants may also be available for student loan borrowers, which do not need to be repaid. The Pell Grant, Federal Supplemental Education Opportunity Grant (FSEOG), and Teacher Education Assistance for College and Higher Education (TEACH) Grant are all funding options that can help you take out fewer student loans.

Some work-study programs also allow students to work part-time as undergraduates and graduate students while receiving financial aid. Some of this money can be used to pay for educational expenses rather than taking out further loans.

Private

Undergraduate private loans are specifically designed to help students cover tuition expenses, room and board, and other educational-related costs they may face. Interest rates and terms for these loans will vary by lender, so it’s a good idea to look around before making a decision. For most borrowers, private loans are used to supplement federal loans rather than cover the entire cost of education.

Graduate students also have private loan options that are tailored to those pursuing advanced degrees. These loans typically have higher borrowing limits than undergraduate loans, as many graduates don’t qualify for federal aid as graduate students.

There are also a number of career training programs that private loans can cover. These loans are intended for those attending trade schools or specific career training programs that are necessary for qualifications in a specific field or industry.

Some private loan providers also offer parent loans that allow the parent or guardian of a student to take out funds for their child’s education. These are similar to the federal PLUS loans but are instead offered by private providers.

Challenges Faced by Student Loan Borrowers

High Interest Rates

Whether you’ve taken private or federal loans, but especially with private loans, money borrowed for college education can often come with high interest rates. This can make the total amount that you pay back over the lifetime of your loan much higher. 

High interest rates can make it more difficult to reduce the original loan amount, and with private loans, you won’t be eligible for any of the federal loan forgiveness programs that are on offer to those working in certain industries or below specific income levels.

For private loans with high variable rates, refinancing is often a better option than continuing to pay the standard repayments that these loans require.

Long Repayment Periods

The standard repayment term for a federal loan is 10 years, but many borrowers extend this using income-based repayment plans or debt consolidation. This results in longer terms and more interest paid overall.

If your finances have improved due to promotions or other career moves, you may want to consider refinancing to a shorter-term loan with a more favorable interest rate. This will allow you to pay off your loan faster with less interest paid.

Loan Default and Impact on Credit Score

Defaulting on a student loan can be a significant problem, particularly for your credit score. If your score decreases, this can have a lasting impact on your ability to take out future loans, like federal aid for additional education, mortgages, or auto loans.

If you default on your loan, you have stopped making the required monthly payments. Instead of taking this option, look at your budget to see where you can cut back on your payments or consider refinancing to a better student loan that allows you to pay less each month.

Complex Repayment Options

There are a number of different repayment options for federal student loans, including income-driven options. This can be confusing for borrowers, which means you could make a less-than-ideal choice about the best repayment plan for you and face additional financial stress when it comes to paying back your debt.

Economic Hardships

It’s not uncommon for borrowers to deal with financial difficulties like unemployment or underemployment, making it difficult to keep up with loan payments. While income-driven repayment plans can help, they also extend the period that you’ll be paying your loan for. This means that, over the lifetime of your loan, you’ll be paying back a larger amount than you initially borrowed.

When to Consider Refinancing

If you’re thinking about refinancing your student loans, there are several factors to consider when shopping around for a better option. Look to see if interest rates on new loans are lower than your original student loan. Refinancing for a lower rate is one of the best reasons to consider switching, as this can reduce the overall cost of the loan.

You can also simplify your monthly payments if you consolidate multiple student loans into a single, new loan. While this likely means you’ll be taking out a private loan, a fixed interest rate on these can still result in potential savings over the life of the loan.

Ideal Time for Refinancing

Assess your post-graduate employment status before you refinance your loan. Stable employment after your graduation can make refinancing more favorable, particularly if you have a high starting salary. This consistent income and your more manageable monthly expenses often make it easier for you to think about refinancing.

Once you’ve been employed for several years, your credit score is likely to have significantly improved over what it was when you were heading off to college as a young adult. A better credit score means that you can often secure lower interest rates upfront.

Situations Where Refinancing Might Not Be the Best Option

Although refinancing student loans is often a great option for lowering your monthly costs, there are certain situations where this might not be the right choice for you. If you’re eligible for federal loan benefits, refinancing your federal loans into private loans could result in the loss of these benefits, like income-based repayments or forgiveness options.

If you’re experiencing financial instability or uncertainty regarding your employment status, refinancing may not be a good option for you right now.

Refinance Your Student Loans with Flanagan

When you’re thinking about student loan refinancing, talk to the experts at Flanagan State Bank. We’ll work with you to find the best solution for your financial situation, so stop in at a convenient location or apply online for your new loan.