To refinance or not? Grads explore paths to debt-free living
FARGO — After college, graduates look forward to their next rite of passage — not their first promotion or buying their first home — but that day when they will finally find themselves without student loan debt.
Eager to reach their day of financial freedom, many post-grads consider refinancing their student loans, seeking the path of least resistance to their own debt-free day.
Here, area post-grads share how they decided if refinancing was right for them.
Refinancing: Students loans simplified
Early in their post-grad career, some young professionals consider refinancing so they can manage their monthly payment.
Lucas Reuter, a financial services professional with New York Life Insurance Co., remembers filling out a refinance application with the Bank of North Dakota — a "DEAL One Loan" — shortly after he graduated from college.
"The minimum monthly payment was going to be around $800, and I really couldn't afford that at that time," he says.
Like other students who applied for both federal and private loans, Reuter saw student loan refinancing as a way to simplify his finances. Reuter was able to move all of his loans to one institution and refinance, changing his interest rate and loan term.
Reuter opted for the lower variable interest rate that fluctuates with the market instead of the higher fixed rate.
"I was able to refinance my loans so the payments were about $250 a month with a variable rate at first of about 1.6 percent," he says. "Before I refinanced, I had a fixed rate, so there is a little more risk in it now, but it made more sense to go from 6.5 to now 2.2 percent."
Now 31, Reuter says refinancing is different for everybody, but in his case it was the best option.
As a North Dakota resident, he received many of the residential benefits from the Bank of North Dakota including the waved consolidation fee other banks may charge.
For any North Dakota resident, the variable rate in the DEAL One Loan program cannot increase more than 1 percent each quarter — even if the market warrants a sharp increase.
Refinancing: Student loans stretched
Other college graduates view refinancing as a detour rather than a solution.
"The way I looked at it was refinancing wasn't going to get rid of the problem," says Tawna Hermanson, a financial adviser with Financial Strategies Group. "It wasn't going to help my debt disappear. It was just going to move it."
While she was in college, Hermanson received Dave Ramsey's "Total Money Makeover" book from her brother. She didn't read the book then, but decided to give it a try after college when she became tired of her hefty loan payments.
After reading the "Total Money Makeover," she began implementing its strategies.
"What made sense for me was to throw as much money at it (as possible)," she says. "And how do you get more money? You work."
Hermanson found two part-time jobs and cut out expenses like her gym membership and smartphone. Without refinancing, Hermanson decided to use Dave Ramsey's "snowball" technique to pay off student loans efficiently. By listing all of her debts from smallest to largest, she focused on paying off the smaller debts first. After she paid off one loan, the payment from that loan would roll over to pay larger debts.
By prioritizing debts from smallest to largest, Hermanson was able to pay off all of her student loans in just a year and half.
Reevaluate before refinancing
Reuter and Hermanson suggest post-grads take these steps before examining any refinancing option.
Step 1: List debts from all institutions. It's important to "know what you owe," Hermanson says.
Step 2: Find out your credit score. Consider if any of your loans are in forbearance or default. Any of these instances may prevent an institution from accepting your refinance application.
Step 3: Consider your financial stability. Do you currently have an emergency savings? Do you plan on switching jobs in the near future?
Step 4: Rate your risk tolerance. Can you handle a large monthly payment or an unexpected expense?
Step 5: Find out about student loan forgiveness. Teachers or those who work in the public sector may be eligible for some student loan forgiveness from the federal government. After a person refinances their student loans, loans will not qualify for these programs.
"Refinancing depends on how much you have left and the time period. Say you have $5,000 to $10,000 in student loans, then you probably don't need to refinance because you'll most likely be able to pay this amount off in a decent amount of time," Reuter says. "But if you have more than that amount or if you still have 20 years or more left (on your loan term) it might be a good idea."
Reuter says if you're just getting out of college or starting a new job, it may be a good idea to refinance.
"If you're smart about it, the amount money saved by a lower payment can be put somewhere else that can really help you to get ahead," he says.
Ready to refinance? Reach out
Most institutions have specialists who deal with student loans on a day-to-day basis. Most often these specialists will be able to quote personalized loan options when provided with up to-date information. Ask these five questions when you shop for options:.
• Are there options for a fixed and variable rates?
• What is the repayment term?
• What will be the monthly minimum payment?
• Are there exceptions available for financial hardships?
• Will there be any added fees to refinance or consolidate?