Feeling Trapped by Student Loans

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Feeling trapped by massive student loan balances? You are not alone. Many students decided to go to undergrad or grad school before the Great Recession, only to graduate with little to no job prospects. With countless layoffs and experienced candidates applying for entry level jobs, it was nearly impossible for recent grads to compete.


My husband graduated from law school in 2010, when the job market was at a low point during the recession. He entered law school with the promise of an average starting salary of $80k, only to graduate with more than 50% of his class without jobs. His total student loan debt was $135k, consisting of less than $10k from undergrad, and the rest from law school.


As the recession continued, some recent grads continued on to get a higher degree due to the lack of available jobs. How did they pay for this additional schooling?  More student loan debt, of course!


Flash forward to your first student loan bill. Depending on your job situation, it is possible to defer or pay a lower monthly amount on an income-based payment plan; however, these options come with a high cost, as interest continues to be charged and capitalized (added to the balance owed) while you defer your payments.  


Trevi tip: When looking at loan payment options, consider the cost of your decision over the life of the loan.  It may be tempting to make lower payments today, but remember that the savings today will result in additional money owed later.


So, what should you do if you’re trapped beneath a pile of student loans?  First, take a look at the amounts owed - are they in multiple loans at different interest rates, or are they consolidated into one loan at a single interest rate?  Depending on your answer, your debt payoff strategy may differ.

If you have multiple loans at different interest rates, there are a few different approaches you can take:

  1. Pay off the highest interest loans first. This will save you the most money over time, since you’ll reduce the total amount of interest paid.
  2. Pay off the lowest balances first. This method works if you don’t have enough to pay off the larger loan balances, and if you apply the amount you were paying each month to the small loan to other debt payments going forward. This method is often called the snowball method.
  3. Consolidate the loans into one loan at a single interest rate.  The interest rate is typically the weighted average interest rate of your loans prior to consolidation.  The benefits from consolidation include simplification and the potential for a lower payment by extending the terms. Remember, if you extend the terms, you will pay a lower monthly payment, but will pay more over the life of the loan in interest.
  4. Refinance individual loans. Depending on the interest rate, you could refinance the higher interest rate loans and keep the lower interest rate loans as-is. This would reduce the total interest paid and allow you to maintain flexibility in your payoff approach.
  5. Refinance and Consolidate. Depending on the rate environment, this may or may not be beneficial.  If you are able to get a lower rate than the weighted average rate you’re paying now, it could be a good idea.

    Conversely, one benefit of keeping the loans separate is that you can paydown the highest interest rate first. If the loans are combined into one loan at the same interest rate as the current weighted average rate, you would not financially benefit from consolidation (other than a potential lower payment if the terms are extended, as noted above in option #3).

    Example A:

    You have $10,000 in student loans: $2,000 at 2% interest, $4,000 at 6%, and $4,000 at 7%. You consolidate and refinance the higher interest loans (at 6% and 7%), into a new $8,000 with an interest rate of 5.6%. Your monthly interest on $8,000 just decreased from 6.5% to 5.6%, which will save you $$ over the remaining life of the loan. In addition, you can still pay off the higher interest amounts first.  Sounds like a win-win.

    The key is finding a better rate than your existing rates - we recommend checking out SoFi for refinancing your student loans. Keep reading for more info about why SoFi is our student loan refinancing jam.

    Example B:

    You have $10,000 in student loans: $2,000 at 2% interest, $4,000 at 6%, and $4,000 at 7%. You consolidate to one loan of $10,000 at 5.6% (the same as the weighted average rate). You decide to make a $1,000 principal payment, resulting in a remaining balance of $9,000 at 5.6%.

    If you had kept your loans separate, you could have put the $1,000 towards the 7% interest loan, which would have resulted in $9,000 outstanding at a weighted average of 5.44% (16 basis points lower).  This difference may not seem significant, but when you’re talking about interest on thousands of dollars, it adds up quickly.
  6. Roll loans into a mortgage or HELOC.  With current low mortgage rates and rising housing prices, many people have decided to take out additional debt on their house to pay down their student loans. On the surface, this sounds like a great idea given the immediate reduction in interest rate; however, you’ll need to consider the total interest paid over the life of the loan.

    Let’s say you have 15 years left on your student loans, and you roll them into a 30 year mortgage.  You’ll be paying the debt off for twice as long, which could cost more overall. In addition, you’ll be turning unsecured debt into secured debt, which is less flexible (no deferment) and could result in foreclosure if you don’t make your payments.

If you decide to refinance your loans, check out using SoFi.  Here’s are a couple reasons SoFi could make sense for you:

  • It’s easy - the process is relatively quick and can be completed online.
  • Interest rates - their rates are competitive and often lower than the big banks.
  • Added benefits - everything from career guidance to wealth advisors to help you navigate key money decisions.

What are you waiting for?  The worst thing you can do is nothing.  The best thing you can do is pay off your debt and in the meantime, reduce the amount paid along the way.  It’s time to take control of your student loans, one step at a time. If you get stuck, or just don’t know where to start, send us a message - we’re here to help!  How much student debt do you have, and what methods have you used to tackle it? Leave us a comment to share your student debt story!


*As a consumer, it is your responsibility to evaluate the products and services offered by the affiliate and determine if these products or services are appropriate for you and your personal finance situation.

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