Student loan debt reached another all-time high in 2019 and many are looking into options to repay their debt. Student loan refinancing is one of the options that has become increasingly popular in recent years. But what is student loan refinancing? When you refinance your student loans, you pay off your existing student loan or loans with a brand new one. This allows you to seek better interest rates and terms that fit your financial situation.
So, should you refinance your student loans? While refinancing isn’t the right choice for everybody, it has its benefits. Let’s take a look at a few different reasons to refinance your student loans.
Lower interest rates. When refinancing a loan, you have an opportunity to get a better interest rate, especially if you currently have loans with high interest rates. Lowering your interest rate can help you save money depending on the term you choose. If you’ve been out of school for a while and have used credit responsibly (e.g., you’ve made timely payments), your annual income and credit history is likely to have improved since you were a student. With improved credit and financial history, you may see a lower rate.
Keep in mind that many factors go into determining what interest rate you may qualify for, including the current economic climate and prevailing interest rates. Depending on when you take out your loan, you may see different interest rates, even if your personal situation has not changed. Companies like LendKey allow you to check your rate without affecting your credit score before submitting an application. You may be able to refinance your student loans again through the same company if you find better rates in the future.
Reduce monthly payments. As mentioned above, you can reduce your monthly payment by lowering your interest rate. You can also extend the life of the loan by refinancing for a longer term. For example, if you have 10 years left on your loan, refinancing it to a 15-year loan will likely lower your monthly payment. Keep in mind that the longer you take to pay off a loan, the more you may end up paying in interest.
Pay off your loan faster. Alternatively, you can also refinance your loan and shorten the term, for example from 10 years to 5 years. While this may mean higher monthly loan payments, you may save money on the interest you would have paid over a longer period of time. Plus, paying off your loan faster gives you the freedom and satisfaction of being student loan debt free.
Release a cosigner. If you previously had a cosigner on your private student loan, refinancing gives you the option to release this cosigner.
Reduce hassle. While student loan refinancing is not necessarily the same as consolidation, when you refinance your loans, you have the option of combining multiple loans into one. One loan means the convenience of only one payment to keep track of and the same due date each month.
Refinancing Federal Student Loans
If you plan to combine federal student loans and private student loans, you’ll have to do it through a private lender. You may want to carefully consider refinancing federal student loans because they often come with benefits, such as loan forgiveness in certain career paths. When a borrower refinances federal loans, they lose access to some repayment programs like Income-Based Repayment and Pay As You Earn – so decide whether or not you’d use any of these programs before refinancing.
Should You Refinance?
Everybody has different financial priorities and unique situations. If any of these reasons appeal to you, then it’s worth looking into refinancing.