It’s no secret that student loan debt is on the rise. Americans now owe nearly $1.7 trillion in student loan debt – and, yes, that is trillion with a “T.” Ouch.
If you’re one of the 44 million Americans with student loan debt hanging around your neck, you may be wondering if there is a way to save on your student loan payments? Of course there is! Refinancing your student loans might be an excellent way to save thousands. Unfortunately, many graduates don’t realize this option even exists.
Don’t worry, y’all. We’ve got your back. Whether you have private student loans or federally funded loans, 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 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.
Using a Federal Direct Consolidation Loan will also change your interest rate…sorta. 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. For example, many private lenders are currently offering fixed rates starting below 3%.
Why Should I Refinance My Student Loans?
If you have student loan debt, refinancing is an option you should at least consider. Here are a few excellent reasons to refinance student loans:
- Ease of Payment – Refinancing student loans 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 could be a great move! Refinancing to a lower rate could save you thousands over the life of your loan.
- Lower Monthly Payments – If you’re strapped for cash, refinancing your student loans could potentially 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 loans 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 fixed rates, 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, 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 and are typically handled by a servicing company called – appropriately – FedLoan. 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 are lost.
Credit Score Problems
If your credit score has decreased significantly since the time you originally applied for your loans, refinancing may not be a good option. Since most private lenders determine your interest rate based on your creditworthiness, a significant reduction in your credit score makes 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.
See Also: How to Get a Free Credit Score
Temporary Federal Forbearance
In response to the coronavirus pandemic, the Trump Administration has suspended loan payments, stopped collections on past-due loans, and waived interest payments on federal student loans through December 31, 2020.
It’s important to understand that this applies to federally held student loans only and may not apply to your private student loans. So, while it might make sense to do nothing with your federal loans at the moment, refinancing any private loans should definitely be considered – especially considering the current low rates.
Also, keep in mind this is a temporary suspension on payments, not forgiveness of your loans. You still owe the amount you owe. Borrowers may also continue to make payments on your loans if you wish. Check with your student loan provider for more information.
Will I Save Money?
Rates for student loan refinancing are currently at record lows. This 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 money at all.
Keeping in mind that you may lose the special privileges mentioned above, some private lenders offer rates significantly lower than what you may already have. Over the life of your loan, that could mean saving thousands of dollars in interest. Be sure to calculate your savings prior to making any decisions on whether or not to refinance your student loans.
Where to Refinance Student Loans
With so many student loan companies to choose from, where do you even start? The sheer number of companies offering refinancing can seem downright overwhelming.
Credible helps ease the burden. Here, you can compare rates from multiple lenders all at once. Checking your rates is fast, free, and easy. It won’t hurt your credit score either. Plus, they are so confident you’ll find the lowest rate that they offer a $200 “Best Rate Guarantee” (terms apply).
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 refinancing, be sure to 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!