If you’re struggling with student loan debt that has become unmanageable, you are not alone. According to the experts at College Board, the two-year default rate for college graduates was 14 percent at last count while those who didn’t graduate defaulted at a rate of 24 percent. And, even among those who never default on their loans, there are many students struggling to stay afloat. Due to the crushing stress of student loan debt, many of these borrowers feel they’ll never reach other financial goals such as buying a home or saving up enough cash to start a family one day.
If you’re tired of never getting ahead due to your student loans, it’s possible that refinancing your student loans could lessen the burden. By refinancing your loans, you have the potential to trade a troublesome loan and payment for one that’s more affordable and easier to manage.
But, should you refinance your student loans? Because refinancing works best for certain types of borrowers, you’ll need to read more about the process and how it works before you decide.
How Does Student Loan Refinancing Work?
In a lot of ways, refinancing your student loans is a lot like refinancing a mortgage or a car loan; simply put, refinancing your student loan entails meeting with a bank or lender who will offer you a new loan that replaces your old one. Once your new loan is opened, you’ll stop making payments on your old student loans since the proceeds from your new loan were already used to pay them off.
You can refinance any type of student loan you want whether your loans are private or overseen by the federal government. For the sake of simplicity, many borrowers also refinance several student loans into a new loan all at once.
However, not everyone can qualify to refinance their student loans. Since refinancing is offered via private companies who set their own standards, you typically need good or excellent credit or a co-signer to qualify.
Why Should I Bother Refinancing My Student Loans?
By now you’re probably wondering why anyone would take the extra steps to refinance their student loans. Why not just stick with the loans you have?
The reality is, student borrowers refinance for different reasons that depend on their unique circumstances. Some of the biggest benefits of refinancing include:
- You may qualify for a lower interest rate. One of the biggest drivers that gets consumers to refinance student loans is the allure of a lower interest rate. By trading your student loans in for a new loan with a lower rate, you have the potential to save money on interest over the life of your loan.
- Your payment could go down. Saving money on interest can also help you lower your monthly payment. If you’re someone who is struggling to keep up with your student loan bills, a lower monthly payment could make keeping up that much easier. If you want to get a better idea of how much you can expect to pay a month on your student loan, use DollarGeek’s student loan monthly payment calculator.
- Paying one monthly payment could make your debts easier to manage. Many student borrowers refinance their student loans due to the simple fact they are tired of juggling multiple payments every month. By refinancing your existing student loans into a single new one, you can stop making several payments and make just one payment each month going forward.
- You could remove a co-signer from your loan. Finally, some borrowers refinance their student loans so they can remove a co-signer on their original loan.
Downsides of Student Loan Refinancing
While the benefits of refinancing student loans can make the trouble worth it, that doesn’t mean refinancing is easy or risk-free. Before you decide whether refinancing is a good idea or not, you should consider the downsides as well:
- Refinancing federal student loans with a private lender can mean missing out on important consumer protections. Federal student loans come with special protections such as deferment and forbearance. For the time being, you may also qualify for income-driven repayment programs that lead to student loan forgiveness when you have federal student loans. When you refinance these loans with a private lender, you give up these protections and benefits.
- Refinancing isn’t always free. While a handful of lenders promise “fee-free” student loan refinancing, some may charge an origination fee or application fee. Ideally, you’ll want to look for a student lender who will refinance with no fees. Some lenders even offer a signup bonus or referral fee.
- You typically need good or excellent credit to refinance. While you can qualify for federal student loans regardless of your credit score, student loan refinancing offered via private lenders comes with much stricter requirements. Most lenders ask for very good or excellent credit, which usually means a FICO score of 740 or higher.
What is the Difference Between Consolidating and Refinancing?
Once you start researching student loan refinancing, you’ll also come across the prospect of consolidating your student loans. What’s the difference? Well, it depends on who you ask and the type of loans you have.
Generally speaking, many students who just want to simplify their financial lives wind up consolidating their federal student loans with a Direct Consolidation Loan. This process lets them combine all their existing loans into a single new one, meaning they can stop juggling multiple loan payments every month. But, since Direct Consolidation Loans come with an interest rate that is computed using the average of your existing interest rates, this option won’t save you money on student loan interest.
You can also consolidate your federal student loans and/or private student loans with a private lender. Many people refer to this process as student loan refinancing when really you’re doing both — refinancing loans to get a better deal and consolidating several loans down to one. If you’d like to read more about consolidation vs refinancing click here.
4 Signs You Should Refinance Your Student Loans
Should you refinance your student loans? How you answer that question could save you — or cost you — thousands of dollars over the next ten to twenty years. Still, there are signs that refinancing could be a good deal in your case. Clues to watch out for include:
#1: Your student loans are at a high interest rate and you believe you could get a better deal.
If your student loans are at an interest rate that makes you feel uncomfortable, refinancing can make a lot of sense. After all, even federal student loan rates can be high. As an example, Direct PLUS Loans taken out between 7/1/2017 and 7/1/2018 come with an APR of 7%!
With student loan refinancing companies offering rates as low as 2.5% these days, it can make sense to refinance if your rates are much higher than that.
#2: You want to pay off your loans as quickly as possible and don’t care about forgiveness programs.
While federal student loans can help you qualify for income-driven repayment programs that allow loan forgiveness after 20-25 years, not everyone wants to spend most of their adult life juggling student loan debt. If you’re someone who wants to pay off loans quickly and a lower interest rate gained through refinancing can help you achieve that goal, then you should consider it.
#3: You want to reconfigure your loans to get a monthly payment you can live with.
If your monthly payments are too high and refinancing could lower your payment every month, refinancing could be the answer you’re looking for. If you can lower your interest rate by a few points by refinancing especially, your monthly financial obligation could go down considerably.
What It Comes Down To
If you’re looking to trim down some monthly costs, student loan refinancing can be a great way to get you there. It’s important you review your current student loan information like your interest rates and monthly payments. Refinancing your student loan with one of the top refinancing student loan lenders is free and won’t cost you a penny. If you’re still not sure if refinancing your student loan is right for you, check out our student loan refinancing calculator and see where you stand.