In many ways this year has felt extremely long, but in other ways, January 2021 has snuck up on us! The new year brings 12 new chapters — and 365 new chances. And for many, there are financial goals to accomplish in 2021, which might include tackling student loan debt.
January is a very popular time of year to refinance student loans. One reason for this is because spring and summer graduates have a six-month grace period after graduating before their student loan payments enter repayment.
This causes borrowers to look at their student loan situation more carefully toward the end of the year or early-January.
Another reason could be because getting one’s financial house in order could be a big financial goal for the new year. This coming year, in particular, COVID-19 student loan relief will be lifted for federal student loans, kickstarting interest and payments after January 31, 2021.
Refinancing student loans
Refinancing is when you take your private or federal student loans to another private loan company in hopes of reducing your interest rate and changing your terms. Refinancing can be a great way to reduce the overall cost of your loan payback. Here are the pros and cons of refinancing student loans.
Pros of refinancing
- Save money overall on your interest cost
- Adjust your payment by reducing your interest rate and/or term
- Simplify your loan repayment — you’ll have one loan, with one interest rate and one monthly payment
- Change a variable-rate loan into a fixed-rate loan
- Remove a cosigner or find a company with a cosigner release clause
Cons of refinancing
- Less flexible repayment options, limited forbearance (if any), and no forgiveness opportunities
- Refinancing is a permanent decision
Should you refinance in January?
If you already have private student loans, any time is a good time to refinance if you can lock in a lower interest rate! We have the largest cash bonuses for student loan refinancing (up to $1,275) and two-year, record-low rates currently, so go for it!
There’s also no limit on how many times you can refinance, you’ll just have to use a different company and make sure your credit score is in a great place.
If you have federal student loans and are wondering whether refinancing into a private loan makes sense for you, there are a lot of important factors to consider.
Refinancing rules-of-thumb for those with federal loans
- If your federal student loan debt balance is lower than your annual income: Prioritize your loan repayment sooner than later to minimize your cost over time. Refinancing can be a great way to achieve this.
- If your balance is close to your annual income with no major pay-raises in the foreseeable future: I’d strongly suggest against refinancing so that you can leverage your flexibility within the federal system until you get your student debt balance lower.
- If your balance is 1.25x or greater than your annual income: Refinancing your federal debt to a private loan might not be the best move for you. You might want to consider taking a passive approach with your student loan debt instead.
All of this said, before refinancing your federal student loans, you should be able to answer “YES” to each of these questions:
- Do you have at least three months’ expenses in the bank (emergency fund)?
- Is your debt-to-income ratio below 1.5:1? For example, if you make $100,000, but owe less than $150,000 in student debt.
- Are you confident that you won’t need federal loan programs, like the Public Service Loan Forgiveness (PSLF) program?
Student loan refinancing is worth it if you’re in a financially stable situation. You should also be willing (and able) to give up the benefits and protections of federal loans.
Is refinancing right for you?
In the right situation, refinancing your loans can save you lots of money on your student loan debt repayment. If refinancing seems like the right move, check out our refinancing calculator to see how much it could save you.
If you’re not sure about whether refinancing is the right step, or you want a customized student loan plan, schedule a consultation with a consultant today.
Other tips to get your financial house in order in 2021
Pay off credit card debt
Credit card debt is the most expensive debt to carry. Pay these off in full every single month to avoid a 15% to 29.99% premium on your card purchases.
Establish your emergency fund
Having your emergency fund established is extremely important. The rule-of-thumb here is three to six months of living expenses in savings. Emergency savings is your first line of defense if your financial situation changes or something unexpected comes up. If you’re a business owner, you might need 12 months’ worth of expenses or more.
I typically recommend putting this savings somewhere “out of sight, out of mind” that way it’s not as quick to transfer money back into checking for a non-emergency.
Make sure you are saving for your long-term future
To save for the future, start with contributing 5% or more to your retirement account. If your employer has a matching opportunity, take advantage all the way up to the match.
Also start with a minimum of $100 a month into a non-retirement account. For those of you who are pursuing long-term IDR forgiveness, this savings account is your “tax bomb” account.
Why would I suggest prioritizing savings over paying off all of your other debt first? Your financial independence comes down to you and your savings rate. Strike a balance between paying off debts and saving, and that balance is even more important when a debt is a lower-interest debt that’s not backed by an asset.
Accelerate other debts with an interest rate
Interest rates higher than 5% to 7% should be prioritized. After your credit cards are paid off, an emergency fund is established, and your savings rate is in a good place, pay down any high-interest debt.
To help reduce private student loan costs over time, this is where refinancing comes into play!
Increase retirement savings
Above, we prioritized putting a minimum of 5% toward retirement and $100 a month toward your non-retirement investment account. But that’s likely not enough to reach your goal of retiring or being financially independent as soon as you’d like.
Consider working with a Certified Financial Planner (CFP®). If you want a place to start, you can book a free introductory call with our referral partner, Buckingham Wealth Management.
Save for short-term goals
What are your short-term financial goals? If you haven’t already, start making a plan to save for those things now. Your high-yield savings account could be a great place for these savings if your goal is within the next few years.
A brokerage account could be a good place for goals that are five years out or longer, to have some market participation. Betterment is a good option if you want a digital advice platform for a relatively low cost.
If you go through this Betterment link to open an account, you can get one month to one year of account management for free, depending on your initial deposit.
Accelerate your federal student loans
See the rules-of-thumb above to determine whether it makes sense to refinance and accelerate your federal student loans.
Start saving for your child’s education
Saving up a college fund for your child is lower on the totem pole if your finances aren’t in order yet. But if everything is on track, saving for your child’s education could be a good goal for extra money.