Student Loan Debt is Rising; Wipe it Out Faster | One Smart Dollar (2024)

Refinancing Your Loans Will Help

It’s no secret that student loan debt is on the rise. Current statistics show that graduates from the class of 2017 owe, on average, $39,400. That’s roughly triple the average from 1990.

While there are a variety of different factors that go into the rise in costs, one thing remains the same. Wiping out that debt can help you succeed far more quickly than just paying the bare minimums.

With student loan rates running between 5% and 8%, one of the best ways to wipe out the debt faster is to refinance it at a lower interest rate. Here is what you need to be aware of before refinancing, and what to consider after.

Millennials are more Debt Aware than Ever Before

Discover, the company behind Discover Card, conducted a survey recently that shows Millennials are actually more financially savvy than commonly thought. Millennials, often getting a bad rap for overspending, under committing, and complaining, are considerably more credit aware than other generations.

The study looked at saving and credit habits in 2017 and made some interesting discoveries. The younger generations, Generation Z included (at least those 18-21 years old), are saving more than they have in the past, and a greater percentage of them have checked their credit score in the past year.

That credit awareness may bring about a startling discovery.

Side note: If you haven’t checked your credit score in a while, you can do so for free at Credit Sesame.

Your Credit May Need Fixing

When we are younger, we tend to make poorer choices. Eat that entire pizza by myself? Absolutely! Sign up for that credit card because someone called me and asked if I wanted it? Why not! Down the road (or later that night in the case of the pizza) those choices can have some nasty consequences. Mismanaging credit at a young age isn’t the end of the world, but it can take some specific steps to fix it.

Having a credit score that is too low to get the best rates can often be fixed by using credit appropriately for an extended period of time. But “broken” credit often involves a whole lot more than simply making sure that your credit history is extensive.

Getting your credit score to a place where you can enjoy low-interest rates, and the best terms on a loan often involve using a credit repair company.

Lower Interest Rates, but Extended Terms

When you refinance your student loan debt, you basically take out a new loan that pays off the old. So there are a few things that you should be aware of.

A new loan will often extend the number of years you have to pay the loan back. If you are set up with a 20 year payback period for your loan, and you are 5 years into it, a new loan may end up resetting that 20 year period. It’s important to keep this in mind when determining the overall cost of the new loan.

What is really applicable is the interest rate on the new loan. If you’re locked into an 8% interest loan, dropping that by 2 or 3% can save you many thousands of dollars over the term. But if you really want to save money, you should structure it so that your payment doesn’t change.

How does that work? Suppose your payment is $300 per month at 8%, but it would drop to $225 at 4%. That’s great, you save $75 per month! But keep paying that $300. It is what you are used to, and it will wipe the debt out much faster since it’s like making four extra payments every year.

Take Taxes into Consideration

Before you make any decisions, consider the tax implications. Student loan interest is an “above the line” deduction; meaning it can be deducted even if you take the standard deduction on your taxes. If you refinance, you may lose those benefits.

Don’t give up thousands of dollars in savings on interest charges so that you can keep hundreds of dollars of savings on your taxes; crunch the numbers to see what makes the most sense.

Wipe Out Those Student Loans

Student loan debt is holding a lot of people back from pursuing their life goals. It’s preventing many from becoming homeowners, a detriment to some peoples’ dreams of travel, and may also be stopping a significant portion from investing in themselves and opening their own business.

Refinancing that debt so that less goes to interest is a great way to break away and discover financial freedom.