Learn how refinancing student loans can save you a small fortune AND pull you out of debt so you can start building wealth sooner.
Student loan debt is a topic many of us would like to avoid.
High monthly payments can overwhelm the best of us, and full repayment sometimes seems impossible.
The good news is that interest rates are the lowest they’ve been in years.
This means if you understand how the system works — you can save a small fortune and pay off your loans years earlier.
In this article, we show you how student loan payments, interest, and refinancing work and offer a strategy to help you pay off debt and start building wealth years earlier than you thought possible.
The State of Student Loans in the U.S.
Collectively, 43 million Americans now owe more than $1.6 trillion in student loan debt, and 2.8 million of them owe more than $100,000 each, according to a report by Credible.com.
With all the people taking loans out for a college education, it would be easy to assume that the debt is easy, or at least possible, to pay off once you’ve graduated college.
Everyone’s taking out student loans, so it must work out okay – eventually. Right?
As many of you already know, student loans don’t always work out okay.
You can spend years making loan payments and end up owing more than you originally borrowed.
The good news is that there’s a way to pay off your student loans quickly.
By refinancing your student loans now, while interest rates are low, you can save money and pay off your student loan debt more quickly.
Plus, if you take advantage of some of the tips we offer in this article, you can shave thousands more off your debt and pay it off years earlier.
There’s no guarantee that interest rates will remain low, so if you ignore the opportunity to refinance at lower rates, your chance to cut your debt could disappear.
Why Refinancing Matters
If you let your student loans slide, you could be carrying tens of thousands of dollars of loan debt twenty or thirty years from now.
Allowing yourself to carry heavy student loan debt affects more than just the quality of your home or what type of car you drive.
Debt can burden you for decades to come by affecting your ability to pay for quality health care, live in a neighborhood with decent schools, or even send your kids to college.
Thanks to the market’s current interest rates, you have a unique opportunity to refinance your loans in a way that can save you money and help you wipe out your student debt years earlier than expected.
Why You Should Refinance Immediately
Interest rates dropped several times in 2019 and 2020, so anyone who took out loans prior to 2019 is probably paying too much interest on their student debt.
One or two percent difference may not sound like much, but when you do the math – it’s huge.
For example, if you’re paying 6% interest on $50,000 worth of loans, and you refinance for 4.5%, your monthly payments drop by about $150 per month.
Instead of a minimum $650/month requirement, now you owe $500 a month.
If you think like the minority instead of the majority, you see an opportunity here!
Keep paying $650 a month instead of the new minimum payment of $500, and you can pay off your loan three years earlier than planned.
How to Refinance Responsibly
Minority Mindset thinkers look at the opportunity created by current lower interest rates and think, “How can I use this opportunity to build wealth?”
If you approach refinancing carefully, it can become a catalyst that quickly moves you from debt to wealth-building.
If you’re not careful, though, you can end up deeper in debt than you were in the first place.
To refinance in a way that’s responsible and builds a better future for yourself and your family, follow these two tips:
- Refinance for only the amount of debt you owe.Taking out loans for more than what you owe doesn’t give you “free money,” but instead will put you deeper in debt for a longer period of time. By refinancing for only what you owe, you can save thousands of dollars and get out of debt years sooner.
- Shop around for the best rates.Banks offer different refinancing rates, so you’ll want to do some research and find the very lowest rates available. Every point you save represents less debt that you’ll owe, and the potential to pay it off even quicker.
We at Minority Mindset recommend using Credible.com to find the best refinancing rates. It only takes a few moments to fill out a free form and receive a list of rates from vetted lenders.
Credible’s Best Rate Guarantee means they’ll find you the lowest rate possible with no hidden fees.
You can also use refinancing as an opportunity to further slash your debt and pay it off sooner by adjusting your new monthly payments:
- Make payments every other week instead of monthly.Most student loan payments require 12 monthly installments each year. If you split your monthly payment in half and pay every other week, you’ll end up making the equivalent of 13 monthly payments instead of 12 – every year. This simple trick can save you an average of $1600 annually and will get your loans paid off a full year earlier!
- Pay an extra $100 a month.Making minimum monthly payments on your student loan debt keeps you buried in responsibility for years.Instead, consider paying an extra $100 a month, which can dramatically reduce your balance and allow you to pay off your loans earlier.
For example, if you took out $50,000 in loans at a 6% interest rate over ten years, paying an extra $100 a month saves you $3400 and gets your debt paid off two years earlier.
How Interest Works On Student Loans
Making minimum payments on your student loans can keep you buried in debt for decades because of the way interest works.
When you take out student loans, you make an agreement with the bank to pay back more than the amount you borrow.
That additional amount is called “interest,” and you might be shocked to discover how expensive interest can become.
Here’s how student loan interest works:
Student loans are “front-loaded,” which means you pay off the loan’s interest first. The amount you borrowed, the “principal” amount, gets paid off slowly over time.
How much you pay in interest is different in year one than it is in year ten.
For example, if you’re paying $333/month in student loans, here’s what you’re paying for in year one:
- $1700 in interest
- $2300 in principal
Each year, you pay less in interest and more toward the principal amount of your debt.
By year ten, you’re paying:
- $150 in interest
- $3850 in principal
Here’s how front-loaded loans create an opportunity.
The quicker you pay off your loans, the less money you pay in interest. The longer you take to pay off your loans, the more expensive they become.
Long-term loans put you at a disadvantage because you’re gambling on the idea that you’ll have the ability to make your payments on time every month for the next ten years (or the length of your repayment agreement).
The problem is that over the course of ten years, life happens. This means that, especially as you’re getting started in life, you’re vulnerable to financial setbacks caused by everyday issues such as
- Health care expenses
- Business closing
- Major home or car repairs
- Natural disasters
For example, Lacy Johnson owed $70k in federal student loans when she graduated in 2008. Except for a brief period of unemployment, Lacy made her payments. After 11 years, she had paid $60,000 dollars toward her loans and still owed $70,00.
In time, you’ll build an emergency savings fund that helps you get through the unexpected financial crises. During the early years of your career, though, you could encounter some bumps along the way.
When you’re carrying massive student loan debt and something happens that causes you to temporarily miss payments, you can get stuck in a trap that’s hard to pull out of.
You can be charged fees, fines, and interest upon interest that, over time, makes your student loan debt unmanageable.
Then, one day you wake up and you’re 40 years old, wondering how you’re going to send your kids to college when you’re so deep in your own debt that you can’t think straight.
That’s why paying your student loans off quickly and early is a priority for Minority Mindset thinkers. You need to wipe it away so you can get busy building wealth and enjoying a debt-free life.
The good news is that paying a little extra on your student loans every month can save you a small fortune and help you climb out of that financial pit much quicker.
Additional payments make a significant difference because any $$$ you pay above and beyond your minimum monthly payments is interest-free.
When you pay more than the minimum due, that extra amount pays off your principal (not interest). This reduces the total amount due, plus it reduces the amount you pay in interest (since it takes less time to pay it off).
Why There’s No Escaping Student Loan Debt
If you’re like most people, you probably made the decision to take on student loans before you were even a legal adult. At that time, you most likely had no concept of budgeting, banking, or how interest rates work.
Now, the debt is like a weight hanging around your neck, and the only way you can deal with it is by thinking about it as little as possible. Sound familiar?
Sadly, avoiding your mountain of debt will only make it worse. Many people think there are ways out of or around paying off their loans, but that doesn’t usually work out the way you think it could.
Do any of the following excuses sound like you?
I’ll just file for bankruptcy.
Dismissing your student loan debt through bankruptcy is a long shot, and it’s rare that people are able to prove the “undue hardship” required to get out of their student loan debt.
I’ll file for student loan forgiveness.
Almost no one receives student loan forgiveness through the Federal government. According to a report by the Federal Reserve and New York Federal Reserve:
- 41,221 people submitted applications for student loan forgiveness as of 2018, and only 206 borrowers received student loan forgiveness.
I’ll get on one of those sliding-fee repayment programs.
Enrolling in a government repayment program that’s tied to your income is one of the most common ways people end up deeper in debt than when they started.
Because of the way interest works on many student loans, you can end up paying tens of thousands of dollars more than you originally owed on your student debt.
This is how many people end up burdened with debit even into their 40’s and 50’s.
I’ll wait until the government forgives everyone’s student loans.
Don’t hold your breath on this one!
If the U.S. government were to forgive all student loans, it would impact our taxes as well as inflation. No matter how good it sounds, the U.S. ultimately has to protect its economy to remain functional.
So, while loan forgiveness sounds wonderful to people who owe the debt, it’s unlikely that the ”powers that be” will allow it to happen, since it could have a significantly negative impact on our economy.
I have no problem making my student loan payments on time. If there’s an emergency, I can just put my debt in forbearance.
So, you’re making your monthly payments on time, and everything is going as planned? Great!
But what happens if you end up unemployed for a year? If you’re thinking, “No problem, I’ll put my loans in forbearance until I’m back on my feet,” you should be warned that it’s not as reasonable as it sounds.
While in forbearance, your debt accrues interest that gets added to the balance once you start making repayments. That means you’ll be paying interest on your interest.
By the time you’re back to work, your debt has grown, and you’ve dug yourself into a deeper hole than before, with no guarantee that you won’t get sick or end up unemployed again before your debt is paid off.
How Student Loan Refinancing Works
Refinancing your student loans in the near future can have a massive impact on your overall debt, credit score, and ability to build wealth.
You can refinance loans in one of three ways:
- Refinance for the same repayment term
- Refinance for a shorter repayment term
- Refinance for a longer repayment term
#1 – When you refinance for the same repayment term, it significantly reduces the minimum monthly payment required.
If you use this opportunity to make additional payments (above the minimum), you can save thousands of dollars and pay off your student loan debt years earlier.
#2 – When you refinance for a shorter repayment term, you can save a significant amount of money over the term of your loan, as long as you stick to your repayment plan and pay on time every month for the entire term of your loan.
For example, borrowers who used Credible to refinance student loans with shorter repayment terms increased their monthly payments by an average of $135 and reduced the term of their loans by 50 payments.
This strategy saved borrowers an average of $17,000.
#3 – When you refinance with longer repayment terms, you can drop your payments down to a much lower minimum monthly payment.
While this refinancing strategy means you’ll pay about $209 less per month, it also requires you to make an additional 62 months (on average) of payments.
*The above figures are based on an average student loan debt of $52,001. Savings, rates, and terms vary according to your loan balance and lender.
We recommend refinancing for the same repayment term, then paying more than the minimum amount due each month.
This strategy allows you to reduce the amount of your loan and pay it off years earlier. However, if you have a bad month or become unemployed, you can stick to the minimum payment required without incurring outrageous additional debt.
How to Refinance Student Loans
The process of finding a lender and applying for a loan is simple and often very quick, thanks to services such as Credible that help you research vetted lenders.
Credible is a free service that provides you with a list of competitive loan rates from several banks, and it only takes a few moments.
Filling out an application at Credible won’t affect your credit score, and they don’t give your phone or email information away, so you never get hounded by hungry salespeople.
When choosing a lender to refinance your student loans, look for the following:
- Find the lowest interest rates.
- Select a company that’s willing to refinance based on the term length you need.
- Refinance with a company that offers low or no-fee refinancing.
- Avoid lenders that penalize you for early payments!
If you’re using Credible, you can select a lender and fill out a full loan application immediately. Then, you’ll wait for an offer to arrive by email.
Important! After you sign loan papers and receive your funds, continue making payments on your current loan until you receive confirmation that you’ve been released from your original loan(s). Otherwise, you could end up damaging your credit score.
How Student Loan Refinancing Can Help You Build Wealth
Wiping out your student loan debt is critical to building wealth because investing should be done early. The earlier and more often you invest in assets, such as stocks and real estate, the more money your investments will earn over your lifetime.
For example, if you begin investing in stocks at age 20, and get an average return rate of 6% on your money, you’ll need to invest about $360 a month to become a millionaire by the time you reach retirement age.
If you wait to begin investing until you’re 30, though, you would need to invest about $700 a month to reach the same goal.
By age 35, if you haven’t begun investing, you need to invest nearly a thousand dollars a month to become a millionaire by retirement age.
Every year you carry student loan debt impacts your ability to build wealth.
Allowing your loans to drag out for an extra 5 or 10 years can massively reduce your earning potential from investments.
Once you refinance your student loans, if you find it a challenge to pay more than your minimum monthly amount due, find a way to earn additional income. Whether you pick up a side hustle, start your own business, or downsize your lifestyle, your future self will thank you for pushing through it quickly!
Getting a jump on your debt means you’ll have more time to enjoy your wealth while you’re still alive!
Besides saving you a great deal of money over the next 5 – 10 years, refinancing can help you start investing sooner — which may translate to hundreds of thousands more dollars earned over your lifetime.
Recovering From Student Loan Debt
Many people take out tens of thousands of dollars in student loans before they’ve ever held a job or managed a budget. But, by educating yourself on how payments, interest, and refinancing work, you can pull yourself out of the financial pit quickly and begin to build wealth.
Refinancing while interest rates are low can give you a giant head start on paying off your debt more quickly.
When refinancing, be sure to compare lenders to find the best rates and lowest fees!
We recommend using a service such as Credible, which will help you find the best interest rates available in under 5 minutes.
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