Here are a few items to consider when thinking about reducing your loan payment through an income-driven repayment plan or refinance.
Which is the best option for you and what are the cons of each
People often consider refinancing. You get lower rates right? Maybe. There are things to consider. Be careful with refinancing. You lose federal government protections as well as access to loan forgiveness programs or payments based on your income. Furthermore, you leave your co-signers and potentially your family responsible for your debt if you die, unlike if you stay in a public plan. You may also lose access to the permanent loan forgiveness Congress may pass at any time. We write this in an election year, where a few proposals have been put forth. You never know.
If you are unsure which action to take, consider refinancing at a later time because you can never go back once you refinance.
Here is a summary of options to consider based on your payoff goals. If you are unsure which payoff goal is right for you. Consider viewing the article on Pay off quickly or Pay less?
Lower your monthly payment
IDR- allows you to lower your payment temporarily or permanently. It’s based on your income. Refinancing can help you lower your payment slightly, but it’s permanent and you can’t reverse your decision
Pay your debt gradually
IDR allows you to lower your payments and strength out your payments over a longer time period. If you manage your paperwork correctly, you qualify for loan forgiveness. If you don’t, you’ll pay higher accruing interest.
Pay your loans ASAP
Refinancing - If you earn significant income and/or want to pay your loans off in 5 years or less and do not care about your federal protections, refinancing may be right for you. You can lower your interest rate, make extra payments, or double and triple your payments to pay down your debt. Your credit score impacts your ability to qualify.
If you don’t have a “good” score of ~ 650 or higher, consider staying on the standard plan and increasing your payments. LoanSense tools help you figure out your savings.
We always hear about the benefits of refinancing or the benefits of lowering our monthly payments through a different federal plan, but what are the cons?
Apparently, congress appropriations have not budgeted to receive this money, so it's not 100% that the government plans to actually tax borrowers, but it's something to consider. You can save a small sum each month for this "tax bomb". Calculate 25% of the forgiveness amount as taxes and divide by the number of payments you have left to pay to receive forgiveness. Save that amount for the tax bomb.
LoanSense application will clearly indicate the taxable amount and can help you understand how much you should be saving.
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