#AskFarnoosh: Refinancing My Student Loan
Ken asks:
I have $25K in federal student loan debt with a 6.55% fixed interest rate. I am wondering if there are any good options for refinancing. I considered borrowing on my HELOC to take advantage of the lower variable rate but decided against taking equity out of my house in case I have to relocate in the next year or two and have to sell my house. I do have an excellent credit rating and the only debt I have is my mortgage and student loans (other than credit cards which I pay off each month).
Dear Ken,
It sounds like you are already earning a reduced interest rate on your student loan. The typical rate on the unsubsidized Stafford loan is about 6.8%, but by opting for automatic payments you earn a 0.25% rate reduction. Nice work!
At this point, your refinancing options are slim. The U.S. Department of Education does offer Extended Repayment – which stretches the standard 10-year loan up to 25 years, reducing your monthly payment by a third (but doubling your interest) – but only to borrowers with $30,000 or more in federal student loans. Even if you did qualify, it’s not something I’d really recommend since it will mean paying so much more in interest over the life of the loan.
I agree with you that tapping out your home equity to pay off your student loans is a risky proposition – especially if you plan to sell or relocate in the near future. HELOCs – unlike federal loans — typically carry variable rates, which means your monthly payments may change over time. “Also if you default on a home loan, you can lose your home. But if you default on a student loan, they can’t repossess your education,” says Mark Kantrowitz, publisher of Finaid.org and Fastweb.com. That said, if you can get your hands on a fixed-rate HELOC that’s below 6.8%, avoid closing costs and still have enough equity left over in your home’s value to avoid going underwater, you may want to explore this option further. Start by calling local credit unions about their various loan options. Perhaps you can even get a personal loan with a fixed rate to help you refinance.
If you’re really struggling to make your monthly payments due to financial hardship, Kantrowitz reminds us that there are flexible repayment plans such as income-based repayment, which pegs your monthly student loan payment to no more than 10% of your income and family size.