Refinancing with Earnest
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What is refinancing student loans? And how does it compare with income-driven repayment plans? These are key questions if you’re having trouble affording your student debt payments and are looking for a solution.
When you borrow federal student loans, they automatically go on the standard 10-year plan with fixed monthly payments. But this payment plan isn’t for everyone, especially if you have a large balance and can’t afford the high monthly bill.
To make your student loans more affordable — and ensure you avoid default — you can lower your monthly payments in two main ways: apply through the government for an income-driven repayment plan or turn to a private lender to refinance your student loans.
Read on to learn the pros and cons of adjusting your monthly payments through income-driven repayment versus student loan refinancing.
Income-driven repayment vs. student loan refinancing: A quick comparison
Before getting into the details of refinancing loans and income-driven repayment, check out this chart that highlights the main differences between these two approaches.
|Income-driven repayment||Student loan refinancing|
|Can lower monthly payment||✔||✔|
|Can lower interest rate||✔|
|Offered by the federal government||✔|
|Offered by private lenders||✔|
|Requires a credit check||✔|
|Can end in student loan forgiveness||✔|
Income-driven repayment: what it is and how it can help
The Department of Education offers four main income-driven repayment plans for federal student loans:
- Pay As You Earn (PAYE)
- Revised Pay As You Earn (REPAYE)
- Income-Based Repayment (IBR)
- Income-Contingent Repayment (ICR)
Each of these plans caps your monthly student loan payments at 10%, 15% or 20% of your discretionary income while lengthening your repayment terms to 20 or 25 years. If you still have a balance at the end of your term, you could get the entire amount forgiven.
While these plans can be a useful way to adjust your student loan payments, they also come with a few drawbacks. By extending your terms, for instance, you’ll likely end up paying more interest over the life of the loan. So while these plans feel less costly in the short term, they’ll actually make your student loan more expensive in the end.
Second, you have to recertify your income-driven repayment plan on an annual basis. If you forget to file this form, you could get kicked off the plan.
Also, Parent PLUS borrowers don’t have access to all these income-driven plans; they’re only eligible for ICR. And finally, if you get your loans forgiven at the end of your plan’s term, you might still have to pay taxes on the final amount.
Even with these downsides, though, income-driven repayment can be an easy way to trim your student loan payments and, as a result, free up more of your income for other expenses.
Student loan refinancing can lower your payments, too
Student loan refinancing can be another way to lower your monthly payments and change your repayment terms, as well as to simplify repayment by combining multiple loans into one. But this strategy has some key differences from income-driven repayment.
For one, refinancing isn’t offered through the federal government. Rather, you refinance with a private lender, such as a bank or credit union. Since you refinance privately, you’ll need to pass a lender’s requirements for credit and income (or apply with a cosigner).
If you do meet credit requirements, you could qualify for a lower interest rate than you have now. Lowering your interest rate by even a small amount could potentially save you significant money by the time you repay your loan. If you go this route, make sure to shop around carefully for the best deal.
Once your refinancing application is approved, you can choose new repayment terms, as well as a fixed or variable interest rate. By going with a longer repayment term, you can snag lower monthly payments.
But as with income-driven repayment, a longer plan means you’ll likely pay more interest overall. If you can afford a shorter term, you could get out of debt sooner and pay less interest as a result. Play around with this student loan refinancing calculator to see how the different terms would affect your monthly and total loan costs.
Before refinancing your student loans, though, note this important downside: Refinancing federal student loans turns them private. As a result, you completely lose access to some useful federal programs, including income-driven repayment and forgiveness.
Some private lenders offer forbearance in the event you can’t pay your loans, but they typically don’t offer as many protections as the Department of Education. So if you’re hesitant to give up federal benefits, refinancing might not be the best choice.
On the other hand, if you understand what you’re getting into, refinancing could be a smart way to adjust your student loan bills and potentially lower the interest rate on your debt.
Should you apply for income-driven repayment or refinancing?
While both income-driven repayment plans and refinancing can make your student loans more affordable on a monthly basis, these approaches have some key differences.
Income-driven plans, for instance, offer a straightforward way to adjust your student loan payments and potentially get loan forgiveness in the long term.
Refinancing, on the other hand, lets you simplify repayment by combining several loans into one and could save you money on interest.
Do your research on both options, so you can pick the one better suited to your unique financial situation and goals.
Elyssa Kirkham contributed to this report.
Interested in refinancing student loans?Here are the top 6 lenders of 2019!
|Lender||Variable APR||Eligible Degrees|
|Check out the testimonials and our in-depth reviews!
1 Important Disclosures for SoFi.
2 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 3.89% APR (with Auto Pay) to 7.89% APR (with Auto Pay). Variable rate loan rates range from 2.50% APR (with Auto Pay) to 7.27% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of April 17, 2019, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 04/17/2019. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at firstname.lastname@example.org, or call 888-601-2801 for more information on our student loan refinance product.
© 2018 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.
3 Important Disclosures for Laurel Road.
Laurel Road Disclosures
However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the fixed rate will decrease by 0.25%, and will increase back up to the regular fixed interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.
However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the variable rate will decrease by 0.25%, and will increase back up to the regular variable interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.
All credit products are subject to credit approval.
Laurel Road began originating student loans in 2013 and has since helped thousands of professionals with undergraduate and postgraduate degrees consolidate and refinance more than $4 billion in federal and private school loans. Laurel Road also offers a suite of online graduate school loan products and personal loans that help simplify lending through customized technology and personalized service. In April 2019, Laurel Road was acquired by KeyBank, one of the nation’s largest bank-based financial services companies. Laurel Road is a brand of KeyBank National Association offering online lending products in all 50 U.S. states, Washington, D.C., and Puerto Rico. All loans are provided by KeyBank National Association, a nationally chartered bank. Member FDIC. For more information, visit www.laurelroad.com.
4 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
5 Important Disclosures for CommonBond.
Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown.
All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 2.49% effective March 10, 2019.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|2.50% – 7.27%1||Undergrad & Graduate|
|2.50% – 7.12%3||Undergrad & Graduate|
|2.81% – 8.79%4||Undergrad & Graduate|
|2.50% – 6.65%2||Undergrad & Graduate|
|2.55% – 7.12%5||Undergrad & Graduate|
|3.00% – 9.74%6||Undergrad & Graduate|