Student Loan Refinancing: Is it Worth It?
Do you have student loans? You’re not alone.
Based on the latest loan statistics, over 45 million borrowers collectively owe $1.6 trillion in student loan debt in the United States.
Even though student loans can help you complete your education, at some point, you have to pay it back. There are many ways you can repay your student loans, from student loan refinancing to income-driven repayment.
If you are considering student loan refinancing, then this guide will help you decide if it’s right for you.
Student Loan Refinancing
We can define student loan refinancing as the process of acquiring a new loan from a private lender and using it to settle your current student loan. This new loan sets you up with a new interest rate and new repayment terms.
Most people often refinance their student loans to lower their interest rate and monthly payment. This process can also help you by shortening the overall repayment period.
The steps to refinancing your student loans involve:
- Finding a lender with better terms than your current loans.
- Applying for the loan with the new loan provider.
- Once approved, you can use the loan to settle your current student loans.
- Start settling the new loan and continue paying until it is cleared.
Lenders have different rates and terms, and the rates you will receive will depend on your financial situation, including factors like credit history, debt-to-income ratio, and credit score.
In other situations, you can merge or consolidate your current federal student loans, private student loans, or both in a single student loan, which features a lower interest. As such, you will only have a single student loan to pay for at the end of the month, not multiple payments.
Why You Should Refinance Your Student Loans
You can consider getting a student refinancing loan for so many reasons. Maybe the monthly payments are becoming too difficult to meet since you have other obligations, like mortgage payments.
Or maybe you’re in a much better financial position, and now you have a good credit score. If that’s the case, you might qualify for a new loan that provides you with the benefits below.
1. Lower Interest Helps You Save money
If you find a lender who provides you with the lowest interest rate, you could save huge sums of cash over the lifetime of the loan.
For instance, if you have a $30,000 private student loans with and an interest rate of 8%, it will give you a $364 monthly payment over ten years.
Refinancing the loan to a 10-year loan term at 5% interest will save you $5,494 in total, and about $46 per month–enough to cover some part of your cable or electricity bill.
2. Reduce Your Monthly Payments
Once you secure a loan with a lower monthly payment, you can easily balance your money flows and even boost your savings.
3. Cut Your Loan Repayment Period
You can shorten your student loan repayment period by paying it off faster.
For instance, student refinancing can shorten a 30-year term student loan into a new loan with a loan term of 15 years. However, this is only possible if you land a lender providing you with a loan at a better interest rate.
4. Convert Your Student Loan Type
You can change a variable interest student loan into a fixed interest loan. As a result, you will receive cover against future rate surges.
Is Student Refinancing Worth It?
A refinancing loan is worth it, especially if you can secure a loan with a significantly lower interest rate. This will help pay the student loans faster or reduce your monthly payments. As a matter of fact, Forbes estimates that student loan refinancing can help you save over $20,000 in the long run.
But not everyone can secure a refinancing. You will probably need a college degree, a good credit score, and a source of income that allows you to afford your expenses and debt payments. Keep in mind that unlike a federal student loan, a private student loan isn’t guaranteed by a federal government.
Furthermore, it’s crucial to realize that you change your federally backed student loan to a private loan, although you will forgo some perks and safeguards–you can lose your access to income-driven repayment programs and forgiveness programs.
How to Select a Student Loan Refinancing Lender?
The best refinance lender is the one who provides you with a lower interest rate. But if the rates are alike, see other perks the lenders provide, like allowing you to structure your loan in case of financial difficulties.
Here’s a list of other things you should think of:
- The current student loan amounts you’re paying off
- Loan interest you can I secure
- The repayment period for the new loan
- The new amount you’ll pay monthly
- The flexibility of your new lender in terms of flexible payment arrangements
- The customer support offered by the lender
Student loan refinancing offers you an effective way to pay off your existing student loans while providing for your needs. If you find a lender with the lowest rate, you can save a significant amount of cash in the long run and significantly reduce your monthly disbursements.
What’s even better, you can shorten your student loan repayment term or convert your variable interest student loan into a fixed loan.
With that said, make sure you research and compare various lenders and their rate and terms to see one will meet your needs. Also, remember if you refinance your loans via a private loan provider, you’ll surrender some perks and protections offered by the federal government.