Student loan refinancing involves taking out a brand new student loan and using that new loan to pay off your existing loans. Some of its benefits can include the opportunity to release cosigners on your existing loans and obtain a lower interest rate. But how do you know when the right time is to refinance your student loans?
Here are just a few of the situations in which you might consider refinancing your student loans:
1. Your Credit Score Has Improved Since College
Most federal student loans don’t take credit scores into account, and students or cosigners who use private student loans don’t always have high credit scores. A few years in the workforce may provide opportunities to improve your credit score. With a better credit score, you may be in a better position to refinance and obtain a lower interest rate.
2. Interest Rates Have Changed
Interest rates for student loans are tied to certain economic indicators during the year of their disbursement. As the economy changes over time, so do student loan interest rates. You can have student loans with above-average interest rates simply because you went to school at a time when interest rates were high. When economic conditions change and interest rates decrease, it may be a good opportunity to refinance. This can help you get a better deal on both your in-school student loans and previously refinanced loans.
3. Economic Conditions are Just Right and You Have a High Income
When refinancing your student loans, you may be given the opportunity to choose between a fixed or variable interest rate. These two are exactly like they sound: a fixed rate doesn’t ever change, while a variable rate will change over time based on certain economic indicators.
Variable rates are generally lower when interest rates are low across the economy. If you find yourself in a financial position to pay off your student loans in full over the next few years and interest rates are on the decline, then it’s possible to get a great deal on student loan refinancing by choosing a variable interest rate and paying the entirety of your student loans before interest rates increase.
What are the Benefits of Refinancing a Student Loan?
Now that you know when the right time to refinance might be, it’s important to understand the benefits and potential risks associated with refinancing your student loans.
The main benefits to refinancing or consolidating your student loan are the convenience and potential savings. Refinancing into one loan makes it easier to manage by keeping up with only one monthly payment, and it could cost you less, depending on your options. You may be eligible for a new loan that is tailored specifically to your credit score and history, your income, and overall financial goals, which have likely changed since your time in college.
It’s easier than you think to lower your monthly payments, repay your loan faster, and avoid many of the pitfalls of student loan debt so you can enjoy a more successful financial future. The entire process can be accomplished online, too, which simplifies things to save you time, effort, and hassle.
Risks of Refinancing Student Loans
Refinancing has many benefits, but it isn’t always the right decision. Here are some risks to watch out for if you’re thinking about refinancing your student loans.
- High-interest rates. If interest rates are high, you could end up paying more than you would have on your original loan.
Losing Federal Student Loan Benefits. Federal student loans come with certain benefits, such as income-driven repayment plans, which you may lose if you refinance your federal loans. However, not everybody qualifies for or benefits from them. If you think that you might use any of these benefits, it may not be a good idea to refinance your federal loans into private student loans.