Refinancing with Earnest
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The five-second rule for dropping food on the floor? False.
Apollo moon landing photos faked? Nope. Urban legend.
Cell phones interfering with a plane’s instruments, causing a crash? Not a chance.
TV’s MythBusters disproved all these wacky notions some of us believed to be true. But there are some claims about student loan repayment that are just as crazy. And what’s worse? Myths about student loan forgiveness, income-based repayment, and more cost borrowers like you thousands of dollars.
Here are four student loan myths that may be costing you some serious cash.
Myth #1: Borrowers can’t discharge student loans through bankruptcy
Reality: Discharging student loans through bankruptcy isn’t automatic or easy, but it’s far from impossible.
You’ve heard this one before, right? The media loves to play up the drama that borrowers are stuck with student loans and there’s no way out, including bankruptcy. But has anyone ever fact-checked this? If they did, they’d see that it’s simply not true.
In fact, this study found that 40% of student loan borrowers who sought to have their loans discharged in bankruptcy were successful. The key to a successful bankruptcy filing: you must exhibit “undue hardship.” This means you’re unable to pay now and it’s unlikely anything will change that will allow you to pay in the future.
This study notes that those who succeeded did have three key characteristics compared to those who failed. They were:
1. Less likely to be employed
2. More likely to have a medical hardship, and
3. More likely to have lower annual incomes the year before they filed for bankruptcy.
So why don’t we hear more about borrowers shedding student loans through bankruptcy? Most don’t try. It turns out 99.9% of those filing for bankruptcy don’t attempt to include their outstanding student loans.
Myth #2: Student loan forgiveness can help most borrowers
Reality: Borrowers with both average student loan debt and average income probably won’t have any debt left to be forgiven after 20 years of payments.
Student loan forgiveness sounds like a great plan. You make payments for 20 years and after that, your remaining debt is wiped out. Basically, free money, right? Unfortunately, when you run the numbers, the average college graduate will have already paid off all his or her debt within 20 years of starting repayment, regardless of the student loan repayment plan. Here’s an example:
Loan balance: $34,000
Weighted interest rate: 3.9%
Starting salary: $30,000
Projected Loan Forgiveness (for all but “Pay As You Earn”) program: $0
So who can benefit from student loan forgiveness? As you might have guessed, those with large amounts of debt (think $100,000+) and low salaries are more likely to have enough debt for student loans forgiveness to work.
Loan forgiveness may also benefit high-income earners with extreme amounts of debt, like doctors or lawyers. Outside of these cases, you’re likely out of luck.
Myth #3: Income-based repayment plans always help borrowers repay loans
Reality: Typical borrowers could pay more interest with income-based repayment.
Like Myth #2, this one largely depends on the borrower’s income and student loan balance.
Income-based repayment allows borrowers to lower their monthly payments and pay only a portion (no more than 15%) of their discretionary income towards loans. This is helpful for borrowers who can’t afford to make their full student loan payments.
But, as with all loans, smaller payments mean you’ll pay more interest. How much interest? Here’s an example.
According to the Federal Student Aid website (click “Proceed” to view page after clicking link), the average graduate of a four-year, not-for-profit university will graduate with a student loan balance of $29,214 at 3.9% interest. Let’s assume a starting salary of $30,000. Based on these calculations, this graduate would pay $35,327 on a standard student loan repayment plan. With income-based repayment, this graduate will pay $38,943, about $3,600 more.
The trade off here is supposed to be loan forgiveness after 20 years of repayments. However, as I showed you in Myth #2, there won’t be any debt left to forgive for this borrower. In terms of savings, income-based repayment is a bust in this and many other cases.
Myth #4: Everyone should consolidate to make student loan repayment easier
Reality: Consolidating loans can cost you more money.
Consolidating does make managing loan repayments easier. But other than that, it can be a money-loser.
One reason: consolidation takes away options. You won’t be able to target higher-interest loans with increased payments or by refinancing.
Let’s say you have two outstanding federal student loans:
Loan #1: $16,000 at 3.68% APR
Loan #2: $15,000 at 6.8% APR
Let’s say you’re planning to pay $400 towards your student loans every month, which is more than the standard required monthly payment.
If you want to pay off these loans and pay as little interest as possible, you’d put any over payments towards Loan #2 since it has a higher interest rate. By doing this, the total amount paid for both loans including interest would be $36,780.
However, if you consolidated these loans, you wouldn’t be able to use this strategy. By consolidating, you’d have one loan with a principal of $31,000 and a weighted interest rate of 5.25%. Assuming the save $400 monthly payment, the total payoff would be $37,943. That’s $1,163 more than if you didn’t consolidate loans and used the fast-track payoff method instead.
The overall lesson: Don’t believe what you hear. Instead, check the numbers. We even have student loan calculators to make this easier.
Interested in refinancing student loans?Here are the top 6 lenders of 2018!
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1 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 5.87% APR (with Auto Pay). Variable rate loan rates range from 2.47% APR (with Auto Pay) to 5.87% 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 Month/Day/Year, 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 08/21/18. 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 email@example.com, or call 888-601-2801 for more information on ourstudent 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.
2 Important Disclosures for Laurel Road.
Laurel Road Disclosures
3 Important Disclosures for SoFi.
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.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|2.57% – 6.98%3||Undergrad & Graduate||Visit SoFi|
|2.47% – 5.87%1||Undergrad & Graduate||Visit Earnest|
|2.80% – 6.22%2||Undergrad & Graduate||Visit Laurel Road|
|2.51% – 8.03%4||Undergrad & Graduate||Visit Lendkey|
|2.48% – 6.25%5||Undergrad & Graduate||Visit CommonBond|
|2.57% – 8.17%6||Undergrad & Graduate||Visit Citizens|