It’s no secret that student loan debt is on the rise. According to this story by Forbes, the Class of 2016 racked up the most student loan debt ever – weighing in with an average of $37,172 in debt. Ouch.
With all that debt hanging around your neck, you’ve got to be wondering if there’s a way to save money? Of course there is!
Refinancing your student loans could be an excellent way to save thousands. Unfortunately, many graduates don’t realize this option even exists. Further, those in the know may not understand the process or may balk due to incorrect information.
Don’t worry, y’all. We’ve got your back. We’re here to tackle student loan refinancing head-on. Let’s cut through the noise and learn whether refinancing your student loan debt is the right money move for you!
What is Student Loan Refinancing?
Refinancing your student loans could be a great way to save yourself thousands over the life of your loan. Consolidating and refinancing are two ways to achieve this, although they’re not exactly the same thing.
Consolidating generally refers to combining all (or some) of your federal student loans through a federal student loan consolidation program. So, if you have a $10,000 federal loan and a $5,000 federal loan, both would be combined into a single new loan totaling $15,000. This is called a Federal Direct Consolidation Loan. Doing this will also change your interest rate… kinda. Your new interest rate becomes the weighted average of the interest rates from your original loans. For example, if the $10,000 loan has an interest rate of 6.80% and the $5,000 loan is at 4.66%, the total $15,000 consolidated loan would have an interest rate of 6.125%. Capiche?
Refinancing student loans is similar to consolidating in that your loans are combined into one new payment. Rather than using a weighted average of your old loans’ rates, the new (private) lender determines your interest rate based on your creditworthiness. So, if you have excellent credit, you might qualify for an interest rate that is much lower than what you had on your original loans. That rate is then applied to the entire loan. Using the same example as above, you may be able to refinance the entire $15,000 for much less than the 6.125% offered through a federal consolidation loan. Lenders like SoFi offer rates starting as low as 2.615%* when you use their auto-pay system.
Obviously, if you have student loan debt, refinancing is an option you should consider. Here are a few excellent reasons to refinance student loans:
- Ease of Payment – One of the best reasons to refinance student loans is because it makes paying them back a lot easier. Rather than writing checks for a dozen different loans, you can refinance the whole shebang into one easy payment – which is very attractive.
- Save Money on Interest – If you’re able to refinance your student loans into a lower interest rate, this might be a great move for you. Refinancing your loans to a lower rate could save you thousands – or, even tens of thousands – over the life of your loan.
- Lower Monthly Payments – If you’re strapped for cash, refinancing your student loans could potentially help you lower your monthly payments. By changing the terms of your loans – either the length, the interest rate, or both – you could easily give your monthly budget a little more wiggle room.
- Shorten or Lengthen Your Term – As previously suggested, you can refinance student loans in a way that changes the length of your loan. Generally, if you lengthen the terms, you’ll pay a higher interest rate but your monthly payment may decrease. If you shorten the terms of your loan, you may be able to save by decreasing your interest rate while increasing your monthly payment amount.
- Change the Type of Interest Rate – Refinancing your student loan can help you move from a variable interest rate to a fixed rate, or vice versa. Keep in mind that variable rates will likely be lower than what you are paying now, but you’re betting that you’ll pay it off before the rate rises. Fixed rates are generally higher, but they give you the security of knowing that your rate will never rise above the current rate.
Reasons Not to Refinance Student Loans
Although refinancing your student loans could potentially save you thousands of dollars, it may not be the right decision for everybody. Here are some things you must consider before deciding to refinance.
Federal Loan Considerations
Before refinancing your student loans through a private lender, you must consider whether you’ll lose certain federal protections and repayment options. Federal loans provide some borrowers with “loan forgiveness” options. Because of this, teachers and certain public servants should be particularly cautious that refinancing makes sense for them. Federal loans may also allow income based repayment options for low-income borrowers. Additionally, federal loans allow borrowers to defer their payments should they experience financial hardships. Through most private student loan refinancing companies, these protections and options will be lost.
Credit Score Problems
If your credit score has significantly decreased since the time you originally applied for your loans, refinancing may not be a good option for you. Because most private lenders determine your interest rate based on your creditworthiness, a significant reduction in your credit score would make it difficult to qualify for interest rates better than those you already have. Rather than refinancing your student loans, you may want to consider a direct loan consolidation instead.
Will I Save Money?
Refinancing your student loans can potentially save you money, but that isn’t always the case. If you’ve already locked in at low rates or your credit has gotten significantly worse, you might not save any money at all. For comparison sake, we’ve got a a current list of Federal Stafford Loan Interest Rates below.
Interest Rates for Federal Stafford Loans
Keeping in mind that you may lose the special privileges mentioned above, some lenders can offer rates much lower than what you may already have – especially if you’re willing to gamble on a variable rate. Over the life of your loan, that could mean saving thousands of dollars in interest.
Where to Refinance Student Loans
Full disclosure here: We are an affiliate of SoFi*, so if you click on one of our links and decide to refinance with them we will receive a small commission. That being said, we still think SoFi is the best place to refinance your loans, and we wouldn’t say that if we didn’t believe it.
Before underwriting your loan, SoFi takes into account your employment history and the merit of your account. This allows them to provide solutions that may not be available with other lenders. Plus, they do it all while providing excellent service to their customers. Best of all, they have great rates that potentially can help you save a ton of money.
SoFi Student Loans at a Glance
- Average borrower saves $22,359*
- Variable rates as low as 2.615%* with “Autopay”
- Fixed rates as low as 3.350%* with “Autopay”
- 5, 7, 10, 15, 20-year terms
- No origination or prepayment fees
- Unemployment benefits
The Bottom Line
Refinancing your student loans can be a great way to save a lot of money. Keep in mind, however, that a private refinance isn’t right for everybody. Before you refinance privately, make sure that you weigh any savings with the potential loss of special privileges offered through federal loans. By refinancing your student loans the right way, you may be able to save yourself thousands!