Millions of Americans manage student debt, and paying off that debt often means deferring other financial goals, such as getting a student loan. For example, paying down a house or saving for retirement.
Student loan refinance is a way for borrowers to add some wiggle room to their monthly budget. Read on to learn how this procedure can save you money.
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Why Refinance Student Loans?
Student loan refinance can help make paying off your debt more manageable — especially if you have a very high interest rate or multiple loans that you’re having trouble keeping track of. When you refinance, you take out a new loan. This can help you get a lower interest rate or secure a lower monthly payment (and sometimes both). It also allows you to reduce the number of your credit accounts and free up a co-signer.
But remember, if you have federal student loans that you want to refinance, you must do so with a private lender. That means you are no longer eligible for federal student loan protections like government loan forgiveness, income-tested repayment plans, pandemic student loan pause, or other assistance programs like longer deferrals or deferrals. They are also not eligible for the comprehensive student loan forgiveness program that the government will introduce later this year.
Consider carefully whether refinancing with a private lender is the right choice for you before proceeding. On the other hand, if you already have private loans, refinancing is simply a matter of finding a new loan with better terms.
Benefits of Refinancing Student Loans
The benefits of student loan refinancing depend on your goal, whether you want to pay off your loans faster, lower your interest rates, or lower your monthly payments.
However, most borrowers seek refinancing to save money over the life of their loan. To qualify for the loan terms that give you the most savings, either you or your co-signer must have a very good credit history. Here’s a more detailed look at how you can save:
Shorter term
Oftentimes, a new refinance loan can come with a shorter repayment period than your original loan. Shorter repayment terms typically result in the greatest savings when refinancing, as they help you pay less interest over time and pay off your debt early. But shorter terms also mean you’ll likely have to afford higher monthly payments.
Lower interest rates
Securing a lower interest rate is one of the biggest benefits of refinancing. If your financial situation and credit score have improved since you started college, there’s a good chance you’ll get a refinanced loan with a cheaper interest rate, which means you’ll pay less interest over the life of your loan.
Here’s an example of how refinancing at a lower interest rate can save you: If you owe $25,000 on your 15-year student loan at a 6.5% interest rate, you end up paying down more than $14,000 interest over the course of the loan. If you refinance at a 4.5% interest rate and keep the same 15-year term, you save about $4,700 in interest. If you refinance to a 10-year term but keep your original interest rate, you’ll save more than $5,100. Doing both will save you a total of $8,100.
Each lender has their own underwriting model that takes into account details like creditworthiness, debt-to-income ratio, earning potential, and more, so shop around to make sure you find the lowest interest rate.
Reduced monthly payments
If you’re struggling to make your loan payments each month, refinancing can help alleviate some of that burden by lowering your monthly payments. The lowest interest rates are usually tied to the shortest terms. But you can still lower your interest rate while getting a longer repayment period (depending on your credit rating, of course). Keep in mind that a longer loan term likely means you’ll be paying more interest over time.
credit consolidation
If you have multiple student loans with outstanding balances, refinancing can help you consolidate those loans into just one, with a single monthly payment. Your credit score could be temporarily affected after consolidation – longstanding accounts generally help your credit score, while newer accounts tend to lower your score.
An important difference to note here: student loan consolidation and student loan refinance can mean two different things. Refinancing loans always means taking out a personal loan – there is no refinancing option within the federal student loan portfolio. But if you have federal student loans, you do can Consolidation of these loans within the federal system. You will receive a so-called direct consolidation loan. This doesn’t reduce your interest rate (your new interest rate is a weighted average of your current interest rates), but it does combine all of your accounts into a single loan.
Frequently asked questions about student loan refinance
What is the best way to pay off the student loan?
The best way to pay off your student loans is at the fastest rate that you can comfortably afford. The goal is to pay as little interest as possible over the life of your loan. Still, it’s important to make your payments on time, so don’t commit to a plan that doesn’t work for your monthly budget.
Does refinancing student loans really help?
Refinancing your student loan can be of great help, but it all depends on your individual circumstances. If refinancing can help you secure lower interest rates or a lower monthly payment, and you don’t mind forgoing your access to federal loan benefits (both current and new benefits announced in the future), refinancing might make sense. You end up saving money on interest and could even pay off the entire loan faster.
Why are student loans so expensive?
Student loan interest rates are typically higher than mortgage or car loan rates because student loans are unsecured debt. That means a bank doesn’t have to take collateral (like a house or car) if you don’t pay, making it a riskier investment for lenders. While student loans tend to have lower interest rates than other types of unsecured debt (like personal loans and credit cards), interest still adds significantly to the overall cost of your student loan because it accrues over a period of years.
Does Consolidating Student Loans Save Money?
It’s possible to save money by consolidating your student loans. Student loan refinance is a type of consolidation that could help you pay less each month through a lower interest rate, or pay less over the life of the loan by refinancing it into a shorter loan term. Federal borrowers who use a direct consolidation loan do not save money this way, but do benefit from a simplified one-time monthly payment.
More of money:
How to Refinance Student Loans
Down payment vs. student loan: How to decide where to put your money
A guide to credit scores and student loan refinancing
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