The Top 7 Reasons You Should Refinance Student Loans
Refinancing or consolidation – if you have student loans, you’ve likely heard these words before, sometimes interchangeably. We’re here to set the track straight: These two options are different and can offer you different solutions to your student loan debt issues.
Student loan consolidation is exclusively for federal student loans. In student loan consolidation, the U.S. Department of Education pays off your existing federal student loans and replaces them with a Direct Consolidation Loan. But if you choose to refinance student loans, a private lender will pay off your existing student loans and give you a private student loan. Both private and federal student loans can be refinanced. But how do you know if refinancing or consolidating is a better choice for you? Here are some great reasons to explore refinancing your student loans.
1. You want a better interest rate.
When you refinance student loans, you receive a new interest rate that will likely be lower than the interest rates on your current student loans. This is one of the main differences between student loan consolidation and student loan refinancing, as consolidation does not ensure a lower interest rate.
2. You’d like to save money.
With a lower interest rate, you’re bound to save money in the long run! And who doesn’t love saving money? Depending on the interest rate you’re offered, you could be saving quite a bit too. Like, say you have $75,000 in student loans with an average interest rate of 6.50%. When you refinance student loans, you lock in a new fixed interest rate of 5.00%. After 10 years of repayment, you would be saving over $6,700 on interest! That’s money that could go towards the down payment on a house, or retirement savings, or an awesome trip!
3. You would like to reduce your monthly payment.
Life happens and situations change. Sometimes, you can’t afford the monthly payments on your student loans that you originally thought you could. When you refinance, you can select a new repayment term. When you select a longer repayment term, you’ll get lower monthly payments. Of course, this does come with a price – longer repayment terms mean more interest you’ll need to pay in the long run. But if it helps you make your payments on time, refinancing could be well worth it.
4. You prefer one monthly payment instead of multiple.
Refinancing student loans ensures that you will have a single monthly payment and a single servicer to work with through your repayment period. One loan is infinitely easier to track, organize and ultimately repay than say three loans or even ten loans! Instead of having to keep multiple payments and interest rates straight, you’ll have one payment to make every month with one interest rate. What a relief!
5. You have a steady income and a strong credit score.
To get approval for refinancing, you will need to undergo a credit check. You’ll need to provide proof of a job with income that is sufficient to cover your payments. You will also show that you are a responsible borrower with a good history.
If you can do these things without worry, you are likely a great candidate for student loan refinancing! If you don’t feel confident that you can provide this proof, you could still refinance student loans if you have a cosigner who has a steady income and a strong credit score.
6. You don’t need to use any forgiveness or income-driven repayment plans.
When you consolidate your federal student loans through the U.S. Department of Education, you’re able to keep the various benefits of federal student loans, like forgiveness programs and income-driven repayment plans. However, if you decide to refinance any federal student loans through a private lender, you will lose those benefits.
Some lenders do offer flexible repayment plans, but if you weren’t planning on seeking forgiveness or using income-driven repayment plans, refinancing your student loans could be a great choice.
7. You want to pay off your student loans faster.
If you’d like a shorter repayment term, you can choose one when you refinance your student loans. Choosing a shorter repayment term means higher monthly payments but you’ll pay less interest and pay off your student loans much faster. And being free from student loan debt is one of the most rewarding feelings!
Are there any drawbacks to student loan refinancing?
Refinancing can be a really great fit for some people, but it isn’t necessarily the best fit for everyone. There are some drawbacks you should consider before pursuing student loan refinancing:
- If you refinance federal student loans, you will lose any of their benefits (e.g., income-driven repayment plans, certain forgiveness options, forbearance, deferral).
- Hoping to pay your student loans off early? Make sure there isn’t a prepayment penalty fee when you refinance, so you don’t get charged for being responsible!
- Your refinanced loan may be a variable rate student loan, even if your previous loans were fixed rate student loans. Variable rates mean that, while they may be lower up front, they have the potential to increase – and increase substantially – in the future.
- If your credit history and income are not ideal, they may only qualify you for much higher interest rates. Don’t ever refinance for a higher interest rate! Your best bet is to compare student loan refinance companies, which is easy to do with this student loan refinancing guide from LendEdu.
If you’re still not sure if refinancing is a good option for you, contact one of our Student Loan Advisors. We can walk you through all your options on the path to being free of your student loan debt!
Disclaimer: The viewpoints and information expressed are that of the author(s) and do not necessarily reflect the opinions, viewpoints, and official policies of any financial institution and/or government agency. All situations are unique and additional information can be obtained by contacting your loan servicer or a student loan professional.
