Editor’s Note: In response to the coronavirus pandemic, as of March 13, 2020, the Trump Administration has halted interest payments on federal student loans. Please note that this applies to federally held student loans only and may not apply to your private student loans. Also note that student loan payments are still required, however your entire payment will now be made toward the principal of the loan. Check with your student loan provider for more information.
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 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. 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. 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. For example, many private lenders are currently offering variable rates starting below 3%.
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.
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 money at all. For comparison sake, here’s 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 private lenders offer rates significantly 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
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 is an excellent place to start. Here, you can compare rates from multiple lenders all at once. It’s like Trivago for student loans! Checking your rates is fast, free, and easy. It won’t hurt your credit score either. Plus, you may be eligible for a bonus of up to $200 if you refinance through them. If you’re thinking about refinancing, you should definitely check them out.
Need more info?
You can also find a list of our favorite student loan refinancing companies here. We’ve also update their rates whenever terms change, so the information is always current. Enjoy!
Other Tips for Saving Money on Student Loans
Looking for other ways to save money on student loans? Here are a few more quick tips to help you save:
- Make Money from Your Couch – The more money you can throw at your loans, the faster you’ll pay them off. One easy way to earn more is by taking online surveys for money. Dozens of survey companies will pay you to take surveys and surf the internet. They won’t make you rich, but you can use the extra money to pay off your loans quicker. Follow the link above to find some of the best, or read about our favorite site in our Survey Junkie review.
- Improve Your Credit Score – Better credit scores usually equal better interest rates. If your credit score isn’t where you want it to be, here are some easy ways to improve your credit score fast.
- Eliminate Forgotten Expenses – We all have subscriptions or expenses we’ve forgotten about. Trim is a free app that helps you find these extra bills and cancel them. Take that “found” money and use it to pay your loans back faster. Learn more about Trim here.
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!