Refinancing your student loans can mean getting a lower interest rate which reduces your monthly loan repayment.
You’ll also benefit from paying less money overall with a reduced interest rate. This can save you thousands of dollars over the life of your loan repayment.
While saving money is great, refinancing is not always the best option. As always, refinancing will depend on your financial situation and future outlook.
Let’s take a closer look at the pro’s and con’s of refinancing student loans, and figure out if refinancing is right for you.
What does refinancing student loans mean?
Refinancing your student loans is simply a process of obtaining a new loan that pays off your existing loan. Your new loan will likely have a new interest rate, monthly payment amount, and the term can change too.
You can refinance Federal and private student loans. You can refinance some or all of your student loans.
It’s usually a smart decision to refinance your higher interest loans into a new loan with a lower interest rate. If you have loans with low interest rates, they may not be worth refinancing.
When you refinance (whether it be Federal or private loans), you will be working with a private company.
When Refinancing Your Student Loans Makes Sense
Your loan interest rate is high: The biggest reason student loan debtors refinance is to save money. If the interest rate on your student loans are high, lowering it with a refinanced loan can save you money. Interest rates generally start in the 3.25% region for a refinanced loan. If your current loan interest rates are higher, refinancing is worth exploring.
Your credit has improved: When you obtained your student loan, it is likely your credit was used to determine your interest rate. Since many students typically have no credit or little credit when initially applying for their loans, it’s unlikely they received the lowest interest rate possible.
If you’ve been responsible with credit or your credit situation has improved since you obtained your student loans, refinancing your student loans may yield you a lower interest rate which will save you money. A small percentage decrease in interest rate over the life of 10-20 years of repayment can equal thousands of dollars saved.
You want to remove your co-signer: You are able to refinance your loan under your name only. You can remove a co-signer by doing so. This will place the repayment responsibility solely on your shoulders and release the debt from your co-signer.
Your monthly loan repayment has become unmanageable: One way to decrease your loan repayment is to spread out your debt over a longer period of time. For example, if your initial terms of repayment was over a 10 year period after finishing school, you could extend that to 20 years as an example.
This would mean lowering your monthly payments to a more manageable level. However, this also means paying more money in interest costs. This may be an option for you if you are struggling to keep up with regular payments with little options elsewhere.
You want one loan payment: Students typically have several loans to repay. With different due dates, amounts, and loaners to deal with, it can be tedious to stay on track. Refinancing all of your loans means you will consolidate all your student loans into one monthly payment, to one company, which simplifies repayment.
When Refinancing May Not Be Appropriate
If you have Federal student loans, you may qualify for certain benefits that you should consider before refinancing.
There are two main programs to keep in mind:
1. Income driven repayment plans:
You could qualify for an income driven repayment plan.
There are several types, however they are all share a similarity in that your monthly loan repayment is based on your income and financial situation. If you make a lot of income, you may not qualify. A standard repayment plan is likely more appropriate for higher income earners.
Your monthly student loan payment will be based on a percentage of your salary (as low as 10% of your discretionary income). This may be a good option if you have a large amount of student loans to pay back and do not generate a sufficient income to cover regular payments.
The standard Federal loan repayment plan is 10 years. Under an income driven repayment plan, your loan repayment plan would increase to 20 or 25 years. You’ll benefit from lower monthly payments, however it likely means paying more in interest costs over the life of the loan because the repayment period has increased.
2. You qualify for student loan forgiveness:
It is very difficult to get student loans forgiven, however there are some circumstances where you may qualify.
- Public service loan forgiveness: You may qualify for student loan forgiveness if you work in a qualifying non profit or public sector job. You’ll need to make a minimum of 120 student loan payments (on time) first. Whatever balance is left over may be forgiven should you qualify. This plan is especially useful for student loan holders who make a small salary compared to their Federal student loan debt.
- Death or permanent disability: In the unfortunate case of death or an accident leading to permanent disability, you may be able to get your Federal student loans forgiven.
Should you Refinance Your Student Loans?
In most cases, refinancing makes sense if you can lower your interest rate. You’ll benefit from lower monthly repayments as well as pay less money overall for your loan.
Here’s an example of a refinance:
Let’s say you have $40,000 in student loan debt with an average interest rate of 6%. Over a typical 10 year repayment period, your monthly payment will be $444 and you will pay $13,290 in interest over the life of the loan.
If you refinanced your loan and obtained a new interest rate of 4%, this lower interest rate means your monthly payment would be reduced to $405, and you’d only pay $8,598 in interest over the life of the loan.
Compared to the initial loan terms, you will have saved $4,692 by refinancing.
The bigger the spread between your current student loan interest rate and your new refinanced interest rate, the more money you can save.
How To Refinance Your Student Loan
Refinancing your student loan(s) is similar to obtaining other types of loans.
You’ll fill out an application with a refinancing company and they will ask you questions about your financial situation. With this information, they will determine if you qualify for a student loan refinance and at what interest rate and term.
Filling out an application online is a very quick way to see what you can get. You can get results in a few minutes.