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Author name: Vickie An

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STUDENT LOANS 101: WHAT YOU NEED TO KNOW ABOUT REFINANCING YOUR DEBT

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Brought to you by First Republic Bank With the price tag on higher education growing steeper every year, it’s become routine for most graduates to head into the real world not only with a degree but also with about five figures of debt. In fact, the Wall Street Journal reported stats from student loan Pro-Mark Kantrowitz that show the average borrower from the class of 2016 left school with more than $37,000 in student loans—adding to the $1.3 trillion in total college debt the Federal Reserve reports that Americans now carry. Typically, these balances are spread out across multiple loans that may carry varying conditions and interest rates. Some people may mistakenly believe that because they’ve signed those promissory notes, they are stuck with the loan terms they graduated with—but it is possible to refinance student loans in much the same way you can refinance a mortgage or car loan. Refinancing can be a worthwhile strategy for borrowers hoping to ease the burden of repayment because it could mean you’ll pay less over the life of your loan. That said, it may not be suitable for everyone’s situation, and there’s much to consider before you decide whether it’s the right option for you. To help you understand the basics, we pulled together the quick primer below with five things you need to know about student loan refinancing. 1. Refinancing is not the same thing as consolidation. Refinancing “means that you take out a new loan that pays off your other existing loans,” says Robert Farrington, founder of TheCollegeInvestor.com, a website that helps Millennials manage their student loan debt. Your new interest rate and terms depend on what you qualify for with your lender. Reasons why you may choose to refinance include getting better loan terms and a lower interest rate than what you’re currently getting, Farrington adds. It is possible to refinance multiple student loans, whether they are public or private, into one loan, but be careful not to confuse refinancing with consolidation. Typically, when people talk about consolidating their student loans, they are referring to the federal government’s direct consolidation loan program, which only applies to federal loans. This enables you to combine multiple federal loans into a single loan, so you can make a single monthly payment. Your new interest rate is based on the weighted average of the interest rates on all the federal loans you’re consolidating, and it is fixed for the life of the loan. 2. When you refinance federal student loans, you’re privatizing them. Both federal and private loans can be refinanced, but if you choose to refinance your federal loans, then you’re opting to pay back a private lender as opposed to the government—and there’s no reversing back to federal-loan status. “[Student loan consolidation] is a free service and it only impacts federal loans,” Farrington says. “Refinancing, on the other hand, is done by private banks and companies.” Refinancing could give you a lower interest rate on both private and federal loans, but refinancing a federal loan may mean giving up some federal loan benefits that you might qualify for, such as income-driven repayment options, loan forgiveness, or deferment and forbearance programs. Not all private lenders offer these options. 3. Your credit score—among other factors—will help determine your interest rate. The interest rate for federal student loans is based on whatever federal law mandated at the time you borrowed the money and remains fixed for the duration of the loan. Private lenders, however, will look at your credit score to determine what kind of interest rates to offer you and might even consider other factors like your college degree and how much income you’re currently earning, says Pamela Capalad, CFP®, a Brooklyn, New York-based financial planner. And, as with other types of loans, if your credit score isn’t strong enough to nab a lower interest rate than what you’re currently paying, you may be asked or required to get a cosigner for the loan, Farrington says. Just remember that your cosigner is potentially putting his or her credit on the line for you, so it’s worth looking to see if your lender offers features like a cosigner release, which removes the cosigner from the loan after a predetermined period of time in which you’ve proven you can make your payments. 4. You may be offered fixed or variable interest rates. As we mentioned, federal student loans are fixed, which means their interest rate won’t change for the life of the loan unless you decide to consolidate them. But if you decide to go the refinancing route, you may be offered either fixed or variable interest rates, which means your interest rate could change after a specified period of time, generally anywhere from a month to a year. Typically, variable rates start low, but they have the potential to shoot up once the introductory period is over, which means you potentially put yourself at risk of paying a much higher rate down the line. On the flip side, if you qualify for a loan that offers a really low-interest rate for an extended period of time, it could save you on total interest paid, particularly if you pay off the loan before the interest rate goes up. Another thing to keep an eye out for when it comes to calculating the total cost of refinancing a student loan is the amount you may end up paying in origination fees, says Capalad. If you see these costs, it “basically means that the loan company is charging you a certain percentage of the amount you borrow to actually switch the loan over,” she says. “So that’s something to take into consideration as well.” 5. You may or may not be able to change the terms of a refinanced loan. Because refinancing means you’re taking on a new loan with new terms, once you’ve chosen to refinance you’ll be responsible for keeping up with your new monthly payment. Some private lenders do allow flexibility when it

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WHY HAVING A HIGH CREDIT SCORE DOESN’T ALWAYS MEAN YOU’RE FINANCIALLY HEALTHY

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Originally posted by Vickie An at LearnVe$t There are few numbers that can make you feel prouder about your money-management skills than a strong credit score. And for good reason: Lenders use credit scores to determine everything from the interest rate on your mortgage to whether you qualify for the juiciest credit card rewards. So if you’ve worked hard to reach a score of 700 or higher (generally considered entering the “good” range), that means you’ve been doing something right—and are likely to be rewarded for your financial diligence. Want More? “Your credit score is a number that is representing you to the world,” says April Lewis-Parks, director of education and public relations at credit counseling organization Consolidated Credit. “So the impact, financially, of having a good credit score is huge.” It means you’re attractive to lenders, who may then offer you loan terms that those with a lower score wouldn’t qualify for. That said, it’s important to remember that your credit score isn’t the be-all and end-all of your financial health. It’s entirely possible to have a decent score and still struggle with debt—or at the very least, make decisions that aren’t necessarily good for your money in the long run. To understand how this could happen, we asked credit and financial pros to share some scenarios that illustrate how it’s possible to have a strong score but still be making some less-than-stellar money moves. You’re never late on your payments … but only pay the minimum each month. Meeting that payment-due deadline on time is one of the most important ways to keep your credit score strong—after all, payment history makes up a hefty 35% of your FICO score (one of the most common credit scores used by lenders, and the one we’ll be focusing on here). However, if you’re just paying the minimum amount due and carrying a balance every month, you’re digging yourself into a debt hole that could take years to dig out from—especially if your interest rates are high, explains Katie Ross, manager of education and development at American Consumer Credit Counseling, a nonprofit credit counseling agency. Ross offers up this hypothetical example: Some credit card issuers set their minimum payments at just 2% of the total balance. So if you owe $5,000 on an account with an 18% APR and only pay the minimum of 2% each month, it will take more than 44 years to pay off your account. Plus, you’ll have paid more than $12,400 in interest—money you could be allocating toward goals like your emergency or retirement fund. On top of that, even if you’re not getting dinged for late payments, paying only the minimum means you’re potentially increasing your credit utilization rate—a separate factor in calculating your credit score (more on that below). You have a low credit utilization rate … but it’s because you keep applying for new credit. The amount you owe on your credit accounts makes up 30% of your FICO score, and a key factor in this calculation is your credit utilization rate—that is, the total amount of debt you owe divided by the overall credit limit available to you. “If your utilization ratio is higher than the recommended 30% to 35%, it may not reflect well on your financial stability,” says Ross. One way people may try to improve their credit utilization rate is to increase the total amount of credit they have to their name. That strategy, however, has the potential to backfire because it could 1) discourage you from being more aggressive about paying down what you owe; and 2) tempt you to keep spending, because you have more credit to spend against. “Just because a credit card company wants to lend you more money or increases your credit limit does not mean you can afford to [spend more],” says Lauren Zangardi Haynes, CFP®, of Evolution Advisers in Midlothian, Virginia. “If you already have a credit card and you ask [the company] to increase your limit, and they do, great—as long as you’re not going to max it out.” Indeed, one instance in which it might be tempting to open a new credit card is if you’re already close to maxing out one that you have. Lewis-Parks illustrates this scenario: Say you have a credit card with a $4,000 balance, and that card has a $5,000 credit limit; your credit utilization rate on that account is a whopping 80%. Then you receive an offer in the mail for a new card with a $12,000 limit, which will let you transfer your balances for a limited-time 0% APR. Once you transfer that $4,000 over, your credit utilization ratio is a much more favorable 33%. But here’s the rub: “People consolidate their debt and still have the other line of credit open, so they end up charging up both cards,” Lewis-Parks says. Plus, once your 0% teaser rate expires, the APR on any debt you have will likely shoot up—potentially putting you in worse shape than when you started, she adds. Increasing your available credit boils down to this: “If you know that credit cards are going to be very tempting to you, then you should not open a bunch of credit cards,” Haynes says. Plus, remember that every time you apply for new credit or a loan, it triggers a hard inquiry on your account, which could ding your score by a few points—particularly if you apply for multiple lines of credit in a short amount of time. Your strong credit score qualifies you for a large loan amount … and you borrow to the max. As we mentioned earlier, the better your credit score, the more likely you’ll be to receive favorable terms from lenders, like lower interest rates and higher borrowing limits. But it’s important to reiterate: Just because you can borrow a large amount of money doesn’t mean that you actually should. Haynes says she sees this spring up often when it comes to getting qualified for a mortgage. Homebuyers will often borrow the largest amount

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