YFP 234: Your Student Loan Refinancing Questions Answered

Your Student Loan Refinancing Questions Answered

YFP Planning Lead Planner, Kelly Reddy-Heffner, discusses commonly asked questions regarding refinancing student loans.

Episode Summary

We last had our guest on the show almost two years ago to dig into the most recent administrative forbearance extension for those with student loans, where we helped you calculate your next moves before the end of that extension in January 2022. With that date right around the corner, it’s time to remove the snooze button and get prepared for those student loan repayments to start up again! Refinancing is one of many options available, and with that in mind, we sit down with our very own Kelly Reddy-Heffner, to cover commonly asked questions about refinancing student loans. Hear how the end of the administrative forbearance period impacts one’s decision to refinance, what to look for when considering various refinancing options, and some hugely important points on consolidation. We also dive into what you may be giving up and gaining when moving your loans from the federal to the private systems through a refinance and who should and should not consider refinancing their loans. Kelly also shares some valuable insight on rates in the current climate, partial refi’s, income-based repayment options, and some crucial questions to ask your servicer. This episode has all the answers you need; tune in now to get empowered on your refinancing journey!

Key Points From This Episode

• An introduction to Kelly Reddy-Heffner, and recapping her previous YFP episode. 
• How it’s a complicated decision to choose the right repayment plan for you. 
• The two distinct categories of who refinancing is not a good fit for.
• A reminder that refinancing is a one-way street from federal to private. 
• Do checking rates impact my credit score? Be aware of the language used!
• Unpacking the option of refinancing more than once.
• Reading the fine print on what happens to the loan in the event of death or disability.
• Picking a time horizon and monthly payment amount that’s doable.
• Fixed-rate or variable? Kelly recommends what to do in the current climate.
• We break down the difference between consolidation and refinancing. 
• Pursuing income-based repayment options, and some challenges with private loans.
• Hear about a partial refi of a federal loan.
• We reflect on some of the past rates etched in Tim’s mind from his repayment journey.
• Thoughts on the upcoming end of administrative forbearance and unlikely extensions.
• Kelly shares some parting advice for December that we all need to hear!

Highlights

“It is time to really be prepared and to expect those loan payments to start up again.” — Kelly Reddy-Heffner [0:03:14]

“That interest rate that you’re offered is based on your creditworthiness. Unlike in the federal system where it’s a set rate for the year and it’s predetermined in the private market, it is based on your overall capacity to take on that debt and to pay it off successfully.” — Kelly Reddy-Heffner [0:08:19]

“We recommend picking a time horizon and a monthly payment amount that is doable. We love to see people push a little bit to be able to accelerate that repayment and get it done as quickly as possible, but it doesn’t make a ton of sense to walk into a loan that just isn’t doable.” — Kelly Reddy-Heffner [0:11:35]

“Be knowledgeable. It is time to look at everything with a clear open mind and use the information that we have available at present to make a good decision about if this is a good move for you and the student loans.” — Kelly Reddy-Heffner [0:24:09]

Links Mentioned in Today’s Episode

• Student Loan Refinancing
• YFP Planning: Financial Planning for Pharmacists
• YFP 220: Student Loan Forbearance Extension – Now What?
• Student Loan Refinance Calculator
• Student Loan Refinancing Offers
• Learn More About Our 1:1 Student Loan Analysis with a CFP® – use code YFP for 10% off
• Your Financial Pharmacist Disclaimer and Disclosures

Episode Transcript

[INTRODUCTION]

[0:00:00.4] TU: Hey everybody, Tim Ulbrich here and thank you for listening to the YFP Podcast, where each week, we strive to inspire and encourage you on your path towards achieving financial freedom.

This week, we got a chance to sit down with YFP Planning lead planner, Kelly Reddy-Heffner to talk about commonly asked questions with refinancing student loans. During the show, Kelly and I talked about how the end of administrative forbearance period impacts one’s decision to refinance, what to look for when considering various refinancing options, what you may be giving up and gaining when moving your loans from the federal to the private systems through a refinance, and who should and should not consider refinancing their loans.

Those that are itching to learn more about refinancing student loans, you can head on over to yourfinancialpharmacist.com/refinance, where you can look at current offers, calculate projected savings and download a copy of our free refinancing worksheet to compare multiple offers.

As we wrap up another year of this show and are knee deep into the planning for 2022, I want to say thank you to the YFP community for entrusting us with your time by listening to this podcast. We don’t take for granted your support and encouragement of the work that we are doing at YFP to help pharmacist on their path towards achieving financial freedom. 

Also, a big shout out to the YFP team members, Katelyn Boyle and Rose Mercado who are the engine behind making the YFP Podcast a reality each week. Katelyn and Rose, your contributions to the team and the YFP community are truly appreciated.

[INTERVIEW]

[0:01:35.1] TU: Kelly, welcome back to the show.

[0:01:36.5] KRH: Thank you for having me Tim.

[0:01:38.3] TU: Before I put you on the hot seat and rapid fire some common refinance questions for you to answer, give us a brief introduction of yourself and your role at YFP Planning, for those that may not have heard you on a previous episode of the podcast.

[0:01:51.3] KRH: I am one of the lead planners here at YFP and have the privilege of working with clients to do comprehensive financial planning. I’ve been with the firm over a year now, I just celebrated my one-year anniversary, which was great. And I certainly am very passionate about these student loan topics today, talking about refinancing as a potential option fits right in with that conversation.

[0:02:19.9] TU: I suspect we have some team Kelly clients that might be listening saying, “Hey, that’s my planner” so shout out to team Kelly that’s listening. We’re certainly super grateful to have you as a part of the team. So we had you last on the show on episode 220 when we talked about the most recent administrative forbearance extension. And on that show, we talk through how those with student loans should be calculating their next moves prior to the end of that extension, which we now know is at the end of January 2022.

Here we are, about a month away and we’ve had the snooze button on student loan payments for almost two years. Kelly, is this really happening, are we going to be back in action here?

[0:03:01.7] KRH: I sadly think it is and isn’t it funny? I was thinking, when did we first start talking about this but right, it seemed like it was so far in the distance. But I do believe we are here. It is time to really be prepared and to expect those loan payments to start up again.

[0:03:22.4] TU: We have discussed many times, emphasis on many, student loan repayments on the show and we’ve talked about how it really is a complicated decision. There’s lots of options, right? We’ve got all the options in the federal system including the standard tenure repayment, extended fixed graduate host to the income driven repayment plans.

Furthermore, we have forgiveness options, both public service, non-public service loan forgiveness and as we’ll discuss today, the various options you have outside in the private sector through a refinance. All that to say, the decision can be complicated in terms of student loan repayment plan that’s best for your personal situation. I really do believe it’s worth the time and the effort to make sure that you’re evaluating all of your options. 

With that in mind, remembering that refinancing is just one of the options, let’s dig into some common refinance questions. Kelly, are you ready?

[0:04:12.6] KRH: I am ready.

[0:04:13.1] TU: All right, here we go, number one, who should not refinance their student loans or who should consider at least that this may not be the best move for them?

[0:04:21.5] KRH: I would say, there are two distinct categories of who this is not a good fit for at present. Of course, if you’re working for a nonprofit or a qualifying employer to receive public student loan forgiveness, then this is not a good option. That usually is a competitive strategy when we match that up against all other options, so that at least needs to be strongly looked at as an option if you work for a qualifying employer. As a subset of that, I think if you run the numbers and non-PSLF forgiveness is compelling, then I think that that would be a reason not to refinance as well. 

I will say, the other area which is kind of a little bit of an interesting nuance in our current workplace environment is, if you are thinking about leaving your job or changing your job to the point where you might have lower income or are unsure about the consistency of your income. Then I would not rush into a refinance either, and we’re seeing a little bit of transition happening right now I think.

[0:05:34.4] TU: Good points and I think all of that is a good reminder that refinancing is a one-way street from federal to private, right? We ain’t coming around the corner, back into the federal option ones, we go down that pathway, we’re there. Some of the doors that you were kind of alluding to that we might want to keep open for certain folks, we need to be evaluating that before we pull the trigger on refinancing. 

Kelly, number two is, will checking rates impact my credit score? I get this question a lot because one exit we recommend for folks that have determined this is a potential path forward is to do the work to go out, shop around, compare rates. And I think that naturally raises the question as, what impact is that going to have on my credit score?

[0:06:11.5] KRH: Yeah, again, we want to make sure people’s credit scores are healthy because it impacts other things. Getting a requote in general should be a soft inquiry, so those soft inquiries aren’t specifically related to an application for credit, so those are recorded differently on your credit score. They’re noted but they should not have an impact on the overall number. 

Now, actually, applying, getting approved – and sometimes the language is a little bit interesting.  I looked up one of the loan servicers recently and it does give a disclaimer that by checking this box, you’re kind of giving the green light to have some type of credit checked. 

I think when we see that type of language, you should assume that there could be a little bit of an impact, it should be minor, that hard inquiry for a period of time. But that’s why we say the kind of group, the shopping together too is supposed to work where if you do a number of inquiries and close proximity to each other that is going to count as one. Similar to shopping for a mortgage rate as well.

[0:07:21.3] TU: If folks go to our refinance page, yourfinancialpharmacist.com/refinance, we have a spreadsheet that you can download that will help you as you’re shopping and comparing some of those rates especially if you decide to bunch those together as Kelly just mentioned.

Kelly, another common question is, can I refinance more than once? What about the opportunity to re-refinance, perhaps because rates have changed or there might be some bonus offers out there or combination of things, what are the opportunities here to look at refinancing more than one time?

[0:07:49.8] KRH: Sure, yeah. It is an option to refinance more than once, like you are not locked into that rate for an indeterminate amount of time. You should be shopping around when you know that rates are lower, the refinance again is based on wanting to get a lower interest rate. If you’re still in the four and 5% range, current rates are lower than that. 

Now, I will say, that interest rate that you’re offered is based on your credit worthiness. Unlike in the federal system where it’s a set rate for the year and it’s predetermined in the private market, it is based on your overall capacity to take on that debt and to pay it off successfully. 

It is a little less work than a mortgage as well to refinance a mortgage. I do encourage people to look for those lower rates and to make a change. Even a couple of points can make a big difference in overall what you pay over time.

[0:08:56.4] TU: Yeah, we’ve got a calculator as well and this is you know, great place that folks are shopping around to think about too, “What’s the repayment timeline and the impact of the rate?” Shorter timeline to payoff, obviously, the difference of savings versus a longer time to payoff might be greater, depending on the rates. So, considering that as you’re shopping around rates.

Kelly, one of the common concerns I hear is, “Hey, when am I going to be giving up, when am I going to be losing by leaving the federal system, especially if this is a one way street?” And we often talk about that when it comes to the federal loans, if someone were to unexpectedly pass away or become permanently disabled, there’s some protections there, but what about in the private system? Will loans be discharged if one passes away or becomes disabled?

[0:09:39.9] KRH: I’m heading into typical financial planner territory and giving the Tim Baker answer of, it depends. I think this was a mail bag question about maternity benefits and cause payments a little while back. So similar to that answer, in case anyone recalls that, it really does depend on the loan servicer, but we are seeing a lot more private lenders give those provisions a discharge at death or disability. 

So that is something that I would say is appropriate to be asking the lender and reading the fine print, and making sure that you do select a loan that not only is a competitive interest rate wise but also has some of those other features that help you feel more comfortable about making the change. And they do exist out there but not with every lender.

[0:10:35.0] TU: Absolutely and you’ll see that, we have some of that listed on the refinance page but to your point, it really does depend on the lender. And for folks that find themselves, maybe they refinanced, historically, they’re listening to this and are coming to realization, “Hey, I didn’t know that I’m currently working with a company where I don’t have those protections.” A great example of where student loans can intersect with other parts of the financial plan. So, thinking about life, disability insurance policies if that’s the case in your situation, “Can I pay extra towards my loan? If I want to be able to pay these off quicker, can I pay off more each month and is there going to be a penalty incurred if I do that?”

[0:11:10.4] KRH: Yeah, it’s very unlikely to see a loan in the current market space where there would be a penalty for prepayment or accelerated repayment. But again, all in the fine print, all in the details, perfect question to ask as you are considering a refinance. But in general, the answer is yes, you can pay extra. We do encourage when we’re talking to clients about refinancing, we recommend picking a time horizon and a monthly payment amount that is doable.

We love to see people push a little bit to be able to accelerate that repayment and get it done as quickly as possible, but it doesn’t make a ton of sense to walk into a loan that just isn’t doable. It’s really important to make sure that you pick a monthly payment, a term that makes sense and then right, if you have some extra that you can put towards that, yes, whether hopefully or a lump sum at the end of the year, anything will help reduce the overall amount of interest that you pay on the life of the loan.

[0:12:20.8] TU: You can always make extra payments, right? You can’t not make the minimum payment. So, good insights there, I think. Fixed or variable? This is an important question because of how these refinance options are presented, where folks might be looking at, “Is it fixed, is it variable, how do I make that decision?” And then even just thinking about the nature of the variable rate and some of the uncertainty that may come from there. 

Knowing this is – and it depends, I’m certain, on one’s personal situation. What are some of the things that you’re thinking through, or asking some questions of a client that might be planning, when making this decision around fixed or variable?

[0:12:54.4] KRH: Well, in definitely, the current interest rates are a big component on decisions so we’re at h historically low rates right now. I would lean towards – and again, it does depend on the individual circumstances, but lean towards a fixed rate because the likelihood of a rate being lower in the future is probably not really likely in our current environment.

If you are going to consider a variable rate, again, the attention to detail is extremely important because you need to know the fine print. How frequently will the rate change or could change by how much, and is there a cap on how high the rate can go? So usually, variable rates are when rates are higher and we’re hopeful that they’ll go down in the future. So we kind of lock in something lower and keep looking for a lower rate. But right now, with fixed, they’re pretty low.

Depending on the circumstance, I would lead towards getting that lowest rate locked in for the duration of the loan.

[0:14:04.0] TU: Kelly, refinancing versus consolidation. I often will get questions from folks when we present on student loans and they may be using the terms consolidation but might mean refinancing. Just break this apart for a moment of what the difference is between refinancing and consolidation? 

[0:14:20.8] KRH: Sure, so when you have federal loans, often we’re taking loans out, different semesters. When you graduate, you have potentially ten separate loans going on, maybe even more than that. Consolidation is, you’re taking those federal loans and you are consolidating them into one or two loans. Usually, it’s broken down into subsidized, unsubsidized, for convenience. It doesn’t impact the interest rate of anything. It’s kind of the average of the interest rates and it’s rounded up a little bit, so it’s not improving the interest rate on the consolidation side. 

A refinance is you’re either taking those federal loans and you are refinancing them into the private market, so you are moving them from federal to private, or you have existing private loans and you’re refinancing them into other private loans. 

Again, as you said already Tim, which cannot be emphasized enough, going from federal to private is a one way transaction. There is no turning back and again, consolidation is a little bit of a one way transaction as well. You can’t un-bundle the loans then. Consolidation can be helpful if you’re staying in the federal system to qualify for loan forgiveness programs or certain income driven repayment plans. We often consolidate to open up federal options. We often refinance to get better interest rate. 

[0:15:53.8] TU: Just a really good reminder Kelly, I have talked to a few folks in the last few weeks that, where I could tell they were ready to pull the trigger on either a refinance or consolidation but they weren’t yet fully aware of the implications of what that decision was going to mean, and what that ultimately may lead to in terms of other repayment options and pathways not being open to them anymore. 

Just a good opportunity to take a step back, make sure we’re looking at all the options around the table and then of course, refinancing and consolidation may or may not be a part of that path forward. Are income-based repayment options available? Obviously, we know that many pharmacists, especially those that are perhaps making that transition from student or resident to a new practitioner, income-based repayment options allowing for that payment as they ease into that bigger income and bigger payments. Are those something that they can pursue also on the private side? 

[0:16:46.0] KRH: Unfortunate that is not a feature of private loans and that is why when I said the categories of people that should not jump into refinancing, this is exactly that reference. Just the option to have income-driven repayment gives that flexibility if there is a period of time where you’re not working or income has decreased. You can re-certify your income within those income-driven repayment plans using a statement, and have that payment re-evaluated and probably lowered based on that new income amount. 

That’s the challenge with the refinance is, there could be some provisions for unemployment but there is not a system for, “I’m working less” or “I am working different hours.” And we’re seeing a lot of flexibility, we have – many of our pharmacist clients have seen an increase in those per diem hours, different overtime. You know, if that is fluctuating quite a bit and changing, make sure, if you’re going to refinance, you do pick that right term that fits what you know your income is going to be. Because those private plans don’t have that flexibility. 

[0:18:04.7] TU: That’s a great point Kelly. I was talking to a pharmacist earlier this week that is working part-time with variable night shifts, day shifts and that’s income is fluctuating, so really important consideration. The other thing I think you might have been eluding to is, we’re seeing a lot of pharmacists that are out there picking up extra shifts with COVID vaccines and other things, so if that were to change and hours were to come back down, that could have some implications as well. 

A good reminder of the value of those income-driven options inside of the federal system. What about a partial refi of a federal loan? Maybe not all of them for whatever reason but can I do a partial refinance of my federal loans? 

[0:18:41.4] KRH: This probably would not have been a common question prior to the conversation starting about a potential loan forgiveness, like in bulk amount. Once that became a new story, I think there’s been a fair amount of conversation like “I want to leave a little bit on the federal system to just in case, you know, $10,000, $25,000.” We have not heard a lot more conversation about that towards the end of the year. 

[0:19:14.6] TU: Yeah, it’s been quiet. 

[0:19:15.9] KRH: Yeah, it has been very quiet so I don’t know if that would really happen. And there probably will be some criteria in place, potentially, for who would qualify for that. But, in general, if you’ve already consolidated your loans, then no. You’ve bundled them, you really can’t separate them out. If they are still individual, then you have the potential to explore if you want to maybe refinance the highest rate one, or a combination to see what really would work out the best. 

We do see some of those loans, depending on the year they were taken out, on the federal side, could be in the 3%, 4% range. Again, if you’re shopping for a refinance rate and the rate is in the threes, you know then maybe you’re taking a 6.8% federal loan and into the private side, but if you have like a 3% or 3.5% loan on the federal side, then maybe you’re sticking on the federal side for some of those loans. 

We don’t like to overcomplicate strategies, try to keep things simple, straightforward, so just keeping that in mind as a component though. You want to make sure everything is easy to make the payment on time, where does the payment need to go. But yes, we do get asked that. I do think it’s a question that has come up because of the current environment, with the possibility of that bulk forgiveness but I cannot say that that is going to happen at this point either.

[0:20:49.5] TU: Yeah, it has been quiet. And, interesting, Kelly when you said 6.8% as an example, it still makes me squirm in my seat. That was many of my federal loans in my debt repayment journey where it’s 6.8% so thank you for bringing up those negative memories. But good example of what that may be. 

[0:21:05.5] KRH: Tim, I forgot. I know, well, I think it is – everyone’s like that 6.8%, it’s so high. It competes with a credit card rate. Yes, I apologize though. I don’t want to send you back to a dark space.

[0:21:21.3] TU: No, it’s just interesting, like I can see it on the screen, you know? It’s just amazing how those get etched in your memories. But the story at the end was good, so that’s all positive. The last question I have for you, perhaps the one that many folks are thinking, and knowing it certainly depends on one’s personal situation, but we’re coming up at the end of the administrative forbearance coming around the corner, and so this question of timing.

When should I consider refinancing with the upcoming end? I think there’s been some rumblings all along for good reasons about, will there be an extension coming? And that happened and then it happened again, and it looks like as you mentioned earlier, here we are at the end. So this timing of refinancing is, I suspect, one that we’re going to see a lot of folks asking here in the next month. 

[0:22:03.8] KRH: Yeah, how amazing that when we started talking about it again, it seemed like so far in the distance. I don’t see any indications of payments not restarting. In fact, I would recommend that people follow up with their loan servicer and inquire, like we know the forbearance is ending in January. We’ve definitely seen people’s payments starting anywhere from February through July depending on how they had made their last couple of payments or if they made any payments during the COVID forbearance. 

Check in with your loan servicer, reconfirm when that payment is going to start. I think it probably is time for the New Year to shop the rates. Right now, I kind of double check to see what they look like for maybe six months ago, and I’d say there’s still competitive and still similar. Those shorter term rates, like five and seven years, look like a little bit lower than even six months ago. But longer term like 10, 20 year looks slightly higher, but again, still well within the two and half to 3.4%. 

Again, it does depend on your credit, what rate you get but I think it’s at least time to start asking the question and maybe work through the numbers. Evaluate how likely you are to qualify for a non-PSLF or PSLF forgiveness program. And it is always about that mindset too. I think we’ve spent a lot of – I hope we’ve spent a lot of the last, is it 18 months now? I feel like I’m still saying a year and a half but I think we’re creeping towards two years. 

[0:23:48.3] TU: Almost two years, yeah. 

[0:23:49.7] KRH: Somewhere in that timeframe, wherever you’re at emotionally with this, you know we’ve been in a little bit of a hiatus. Hopefully, people have been saving, paying down any other debt that they had or making great other choices along the way. Maybe they were able to do a home purchase, do some other things. So now, get the information. Be knowledgeable. It is time to look at everything with a clear open mind and use the information that we have available at present to make a good decision about if this is a good move for you and the student loans. 

[0:24:25.9] TU: Great stuff Kelly. I really appreciate your insights here on this episode and previous episodes, and the work that you do with many of our clients at YFP Planning. Not just on student loans, but obviously this being one part of the financial planning, and an important for many folks and how it fits in with other pieces of the puzzle. 

If folks are looking to take action on what they have heard today and specifically for those that are looking to make a move on refinancing or inquire more information, you can head on over to yourfinancialpharmacist.com/refinance. There you can look at current offers, start to get some quotes, run some calculations on potential savings, and as I mentioned previously, download the spreadsheet that we have that we can use to compare multiple offers. 

For those, secondly, that are looking for more information about which option to pursue, again refinance being just one of the many options to pursue, we have a student loan analysis service that is intended to do exactly that and that more information is at yourfinancialpharmacist.com/sla. And really the purpose of this is that you would work one-on-one with one of our certified financial planners, so that you could look at all of your options and confidently choose a plan that will save you the most money and align with your financial goals. 

Again, yourfinancialpharmacist.com/sla. You can learn more information there and if you use the coupon code “yfp” that is good for 10% off. Kelly, thank you so much. I really appreciate you coming on the show. 

[0:25:45.1] KRH: Thank you Tim. And I know it is hard in December, but start putting the money aside if you haven’t started doing that. The runway is starting to close in, so go ahead. December is a nice extra little bit of a challenge to top that student loan payment aside into a savings account, but getting back into the habit is important so it’s definitely time to do that. 

[0:26:12.2] TU: Absolutely. You say that so gently but it’s so important. Yes, we need to be getting back into the rhythm, the habits and get ready for what we’ve got. A little bit of time to get ready but it’s going to be here before we know it. So, Kelly, thanks again. And to the community, we really appreciate you joining and we hope you have a great rest of your day. 

[0:26:25.7] KRH: Thanks Tim. 

[END OF INTERVIEW]

[0:26:27.3] TU: As we conclude this week’s podcast, an important reminder that the content on this show is provided to you for informational purposes only and it is not intended to provide and should not be relied on for investment or any other advice. Information of the podcast and corresponding materials should not be construed as a solicitation or offer to buy or sell any investment or related financial products. We urge listeners to consult with a financial advisor with respect to any investment. 

Furthermore, the information contained in our archived newsletters, blog post and podcast is not updated and may not be accurate at the time you listen to it on the podcast. Opinions and analysis expressed herein are solely those of Your Financial Pharmacist unless otherwise noted and constitute judgments as of the dates published. Such information may contain forward-looking statements, which are not intended to be guarantees of future events. Actual results could differ materially from those anticipated in the forward-looking statements. For more information, please visit yourfinancialpharmacist.com/disclaimer. 

Thank you again for your support of the Your Financial Pharmacist Podcast. Have a great rest of your week. 

[END] 

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