First of all, congratulations on paying off half of your student loan balance. The halfway point may not be the finish line, but it is a significant milestone.
Whether you are approaching the midway point, exactly there, or recently passed it, a quick revisit of your student loan plan is a good idea.
Your student loan success and progress opens up new doors and new opportunities.
The Good News: Repaying the Second Half of Your Student Debt is Usually Easier
When you start student loan repayment, things are overwhelming. Most people are either looking for or starting their first real job and facing many financial unknowns.
At the point you have eliminated half of your student debt, you are likely in a much more secure financial situation. You may be earning more money, and you have figured out how to manage your finances so that you can reduce student debt levels.
Most importantly, in the second half of student loan repayment, interest hurts less. The smaller principal balance generates less interest. Less interest means a larger portion of your monthly payment is actually paying down the principal balance.
Don’t Let off the Gas
It might be tempting to start coasting now that you see a lower balance. This attitude could be a huge mistake.
If you have been working hard to aggressively pay off your student loans, your sacrifices have made your finances significantly better. New doors may be opened, but not all of them would be good ideas.
For example, now that you have eliminated a large portion of your student loan debt, it might be easier to buy a new car. Financially speaking, this would be a mistake. If you divert money from student loans towards a car payment, you are prolonging life with student loans to buy an asset that will only drop in value.
However, there are times where shifting focus might make sense.
Should I Save More for Retirement?
Having less student debt may make it easier to put money in a retirement account, but balancing retirement savings and student debt elimination is more about interest rates.
Whether you owe $500 or $500,000 on student loans, if you have a ridiculously high interest rate, you will want to pay down the student debt.
However, there are times when it makes more sense to divert money from student loan goals and shift it towards retirement goals. For example, if your employer offers a generous matching contribution policy, you likely will want to maximize this benefit.
This article covers in more detail the times it makes sense to get more aggressive on retirement savings. At the point you have eliminated a big chunk of your student loans, you may have only lower interest loans left, which makes saving for retirement an easier choice.
Turn Your Progress Into Lower Payments
In finance, risk has a huge influence on interest rates. If you have a poor credit score or a limited credit history, lenders will be reluctant to loan you money. If they do, they will charge a higher interest rate because they expect the chances of default to be higher.
As someone who has made steady progress on their student loans, you probably fall into a low-risk category. You have less debt and a proven track record of making payments. This opens the door to student loan refinancing.
In a student loan refinance, a refi lender pays off your older high-interest student loans and creates a new lower-interest loan. These lenders can get away with charging lower interest rates because they identify borrowers who are very likely to repay their loans.
At present, the best refinance rates are available with the following lenders:
| Rank | Lender | Lowest Rate | Sherpa Review |
|---|---|---|---|
| T-1 |  | 4.86% | ELFI Review |
| T-1 |  | 4.86%* | Splash Financial Review |
| 3 |  | 5.29% | Laurel Road Review |
The big consideration for borrowers is whether or not it makes sense to refinance. The type of loan you currently have will drive the decision.
Federal Government Student Loans – Refinancing federal government loans may be a risky choice. Federal loans have important borrower protections like income-driven repayment and student loan forgiveness. They may also come with unexpected perks like the 0% interest rate during the Covid-19 Pandemic. Refinancing permanently eliminates these benefits. Borrowers need to weigh the potential savings against the lost benefits carefully.
Private Student Loans – Refinancing private student loans is significantly less risky. Borrowers are merely shifting from one private lender to the next private lender. As long as loan terms like interest rates are improved, the refinance is a smart move.
Be Wary of the Risks of Auto-Pilot
If you have paid off the majority of your student loans, you likely have a routine that is working for you.
A positive routine is excellent.
However, it is also essential to keep in mind that the rules regarding student loans do occasionally change. Over the last five years, multiple new repayment plans have been created, and the government responded to an economic crisis by suspending student loan payments and interest.
If you spend a bit of time every year or so, you might be able to find better repayment options or tax breaks. Those that never think about their student loans may miss valuable opportunities.
To keep things easy, I write a monthly article on the latest developments and changes in the world of student loans.
