September 17, 2015
Student loan debt has reached new heights. The class of 2015 officially has the most debt in history, with students graduating from school with an average of $35,051 in student loans — many of which are private student loans. With high monthly payments and interest rates, an increasing number of graduates are exploring their refinancing options as a way to take control of their debt and pay it down faster.
When you refinance student loans, you’re paying off your existing debt by taking on a new loan with brand new terms. This comes with a number of benefits that are appealing to graduates looking to improve their financial situation, including the ability to:
- Qualify for a lower interest rate and a lower monthly payment
- Shorten or lengthen the term of the loan
- Add or release a cosigner
- Save thousands of dollars over the life of the loan
Though the benefits are enticing, the decision to refinance student loans is a personal one that depends on a number of factors, including your reasons for refinancing as well as your current financial situation. With that said, here are three key questions to ask before deciding to refinance:
1. What’s your current financial situation?
Lenders offer the best interest rates and loan terms to borrowers with good credit scores and full-time jobs. As such, if you have excellent credit and a steady income, there’s a chance you’ll qualify for both a lower interest rate and a lower monthly payment, potentially saving you thousands of dollars over the life of your loan. In this case, it’s a good idea to look into refinancing your student loans.
However, if you’re unemployed or your credit score isn’t ideal due to late payments or a heavy debt load, focus on building your credit first. Then look into your refinancing options once your financial situation has improved. Or, you could consider refinancing with a cosigner, which will increase your likelihood of qualifying and receiving a better interest rate.
2. What kind of interest rate are you eligible for?
If you’re currently paying a high interest rate on your student loans, you may benefit from refinancing – especially if you have a good credit score that will qualify you for a lower rate. Compare your current interest rate with those you’ll be offered through refinancing to see how much money you can save.
Also, look into whether you want a variable or a fixed interest rate. When you have a fixed rate, you’ll pay the same amount in interest until your debt is paid off, meaning your monthly payments will always be the same. Conversely, variable rates tend to start lower than fixed rates, but may increase or decrease over the life of your loan. Both types of interest rates have their pros and cons, so just be aware and choose the one that’s the best fit for your situation.
3. Are you having trouble making your monthly payments?
If your payments are high compared to your income and you have a good credit score, you can achieve a more manageable monthly payment when you refinance student loans. However, in addition to refinancing, it’s a good idea to look for ways to trim your budget as well, to ensure you’re living within your means and putting as much money as possible towards paying off your debt.
The bottom line…
By honestly assessing your current financial situation, your reasons for wanting to refinance you private student loans, and the rates and loan terms you’ll be offered based on your credit score, you can make a smart decision about whether or not refinancing your private student loans is in your best interest. In the meantime, also check out the 6 Reasons Why You Should Refinance Your Student Loans Today.
Please note that the information provided on this website is provided on a general basis and may not apply to your own specific individual needs, goals, financial position, experience, etc. LendKey does not guarantee that the information provided on any third-party website that LendKey offers a hyperlink to is up-to-date and accurate at the time you access it, and LendKey does not guarantee that information provided on such external websites (and this website) is best-suited for your particular circumstances. Therefore, you may want to consult with an expert (financial adviser, school financial aid office, etc.) before making financial decisions that may be discussed on this website.
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