So, you have student debt? You’re not alone, according to the latest Federal Reserve data, which shows that Americans owe more than $1.5 trillion on student loans. Among the Class of ’16, average debt at graduation topped $30,000 in 17 states, according to the Institute for College and Success’s 12th Annual Student Debt Report. Average debt ranged from a high of $36,350 among graduates of New Hampshire schools to $20,000 in Utah. The likelihood of having debt ranged from 77% in West Virginia to 43% in Utah.
Student debt isn’t just an issue for new graduates. In a recent study for the Brookings Institute, Columbia University economics professor Judith Scott-Clayton showed that the average debt of people who entered college in 1996 stood at $20,024, and that 25.5% of students from that year group had defaulted on a federal loan. By 2024, Scott-Clayton predicted, the average debt of people who entered college in 2004 will be $29,101, and 38.2% will have defaulted on a federal loan.
How to Avoid Becoming Another Statistic
If you only have federal loans, you may be able to qualify for a federal loan forgiveness program if you:
- Are employed by a federal, state, or local government organization, or by a qualifying non-profit organization.
- Have taught full-time in a low-income school or education service agency for a minimum 5 consecutive years.
- Have taught in low-income schools or with children with disabilities.
- Have taught math, science, foreign languages, or other fields classified as having a shortage of qualified teachers.
- Have a disability.
- Have filed for bankruptcy.
- Went to a school that has since closed down, withdrew from school, or if the school falsely certified your eligibility for the loan.
If you have private student loans or a combination of private and federal loans, there are broadly 2 options: student loan refinancing or consolidation; or a personal loan.
Personal Loans: Pros and Cons
Whether you’re looking to pay off student debt or cover any other large expense, a personal loan can be tempting. After all, personal loans don’t require any collateral, they offer potentially low rates (providing you have good credit), and the application process is straightforward. With a personal loan, you can consolidate your debt payments into a single monthly payment with a fixed interest rate for the duration of the loan. What’s more, you have the freedom to use the funds for whatever purpose you want, so you can allocate a portion to paying off your student loan and the remainder to other expenses.
A personal loan isn’t the same as a student loan, even if you’re using the funds to pay off student debt. Anyone paying a student loan may deduct up to $2,500 of the interest from their taxes, provided they earn less than $80,000 a year, according to the IRS. With a personal loan, you don’t have that privilege. By using a personal loan to pay off student loans, you also forfeit your right to apply for federal student loans or to qualify for loan forgiveness.
Student Loan Refis: Pros and Cons
A student loan refinance involves replacing one or more student loans with a single, better loan from a private lender. Both private and federal student loans can be refinanced. Provided you have good credit, you may be eligible to qualify for a student loan refi with a rate of as low as 2.5% (for a variable loan) or 3.2% (fixed rate).
Applying for a student loan refinance typically involves more paperwork than applying for a personal loan. For example, many recent graduates don’t have the credit history or income to be approved for a student loan refi unless they bring a co-signer. A co-signer can be anyone in a strong financial position who’s willing to share liability for your debts, but they must fill out paperwork too. On the flipside, if you had someone co-sign your previous loan and your credit has since improved, you can drop the co-signer from your refi.
When is it a Good Idea to Use a Personal Loan?
There are 2 situations in which it might be a good idea to use a personal loan to pay off student debts: if you can’t qualify for a student loan refinance, or if a personal loan would offer a superior interest rate to a student loan refinance. Qualifying for a personal loan is simple. The minimum credit score varies by lender, typically ranging from around 580-640. However, borrowers generally need a credit score of at least 700 to qualify for a single-digit interest rate, and need almost-perfect credit (approaching 850) to be considered for a rate of less than 5%. If you qualify for a student loan refi, it’s unlikely you’ll find a personal loan with a better rate. But thanks to the rise of online marketplaces like Credible and LendingTree, it only takes a couple of minutes to compare rates from the best personal loan companies for students.
When Is it a Good Idea to Use a Student Loan Refinance?
Most of the lenders in the student-loans market also offer student loan refinancing. If your credit has improved since your student days or if you took out a student loan 10-20 years ago—when interest rates were much higher than today—you stand a good chance of qualifying for a student loan refi with a reduced rate. A student loan refi can save you thousands of dollars on interest payments, not to mention it would reduce the risk of defaulting on your student loan.
One of the main reasons people slide into debt is that they don’t bother to refinance old loans. Most people sign up for student loans at age 18, when they typically have little to no credit history and have to rely on a parent or co-signer to help them get a loan. If you have a federal loan and meet certain conditions, you may be able to have the loan forgiven altogether. But even if you have private loans or a mixture of private and federal loans, a personal loan or student loan refinance could potentially save you hundreds or thousands of dollars on interest payments.