When you refinance your student loans, you’re taking out a brand new loan – complete with new terms and a new interest rate – to pay off your existing debt. Doing so can be a terrific way to take control of your student debt and improve your overall financial health, but only if you do it right. With countless refinancing options to choose from, you’ll need to carefully weigh your options to ensure you’re making the right choice for you. Here are three key aspects to consider:
1. The term of your loan.
Refinancing will likely change the term of your loan, which is the number of years you have to repay your debt. In most cases, you will be able to choose from 5, 10, 15, and 20-year repayment terms. If you select a longer loan term, you’ll have lower monthly payments and more time to repay your debt – but you’ll accrue more interest over time. Conversely, if you choose a shorter term, you’ll have larger monthly payments – but you won’t accrue as much interest and you’ll be out of debt more quickly.
2. Whether the new loan is a variable or fixed interest rate.
Refinancing also gives you the chance to switch your fixed interest rate to a variable one, and vice versa. As the name suggests, a fixed interest rate doesn’t change once you’ve taken out the loan. It’s a more conservative financial option, because it protects you from rising interest rates and unforeseen costs. A variable rate, on the other hand, will fluctuate according to the economy. As such, sometimes you’ll enjoy a very low interest rate – and other times it may rise significantly.
3. Your unique financial situation.
This is the most important factor to consider when comparing student loan refinancing rates, because it determines what you can manage. For example, do you expect to have a steady job throughout the foreseeable future? Can you afford an interest rate that may potentially rise unexpectedly, as with a variable rate? Or, are your finances pretty tight and you need to know what you owe each month, as with a fixed interest rate? Can you afford to make larger payments for a short period of time to avoid accruing a lot of interest? Or, are lower monthly payments over a longer period of time more practical for you right now? Answering these questions honestly and being realistic about your financial situation will help you determine which refinancing offer is in your best interest.