Should I Refinance My Student Loans?
“I have $100,000 in private and federal student loan debt. Should I refinance my student loans?”
I get this question all too often from my following of young residents, physicians, and dentists. And it’s not an easy question to answer because student loans have various characteristics are complicated by when you took them how, what type of loans they are, what status the loans are in, etc. If you have a question about your student loans, feel free to drop us a line.
Student loan debt is a growing epidemic among college grads in the U.S. The national outstanding student loan debt total recently reached $1 trillion and it shows no sign of slowing down anytime soon.
Fortunately, there are quite a few debt relief options for borrowers. One of those is student loan refinancing. Refinancing your student loans involves taking out a new loan (most likely with a lower interest rate) to pay off your existing student loan balance.
When you refinance, you often get a new lender with new terms that you need to abide by. If you think refinancing your loans might be an option for you, here are a few things you might want to consider.
How Much Money Can You Save By Refinancing Your Loans?
Refinancing your student loans is all about saving money. If you initially took out loans at a higher interest rate or a variable interest rate, you may be able to lock in a lower interest rate when you refinance.
Having a lower interest rate can mean more of your payments will go toward the principal balance instead of interest. Of course, this depends on how your student loan payments are allocated but over time, you could save hundreds or even thousands of dollars by refinancing your student loans.
It’s important to calculate how much you can save over time if you were to refinance your student loans before making any final decisions. You can compare offers online from various different lenders like SoFi and Earnest.
There are also many different student loan refinance calculators online like this one that can do the work for you after you enter in basic information like your loan amount, current interest rate, and current monthly payment.
Can You Afford to Make Your Minimum Monthly Payment?
Earlier, I mentioned student loan refinancing being a suitable debt relief option. This is because it can make your monthly payments more affordable. If you are struggling with making payments on your student loans each month and don’t want to go into default, refinancing your loans can not only lower your interest rate but it can also lower your monthly payment as well.
However, it’s important to realize that by lowering your minimum monthly payment, that might result in stretching out your term. Even if your payment is low and manageable for now, stretching out your terms mean you’ll be making more payments. This means spending more money over the life of your loan term.
The pay less now but spend more over time concept might not sit well with everyone, but it’s better than not being able to afford your monthly payments. If you are struggling financially, you can always refinance now and put extra money toward your loans later when your financial situation improves.
On the other hand, if you can afford your loan payments and have an average interest rate, you may not see the value in refinancing and you can just stick to making your regular payments and putting extra money toward your loans each month to get rid of your debt quicker.
Do You Have Federal Loans?
There is no such thing as federal student loan refinancing, but you can refinance your federal student loans. Sound confusing? Let me explain.
Federal student loan lenders don’t offer refinancing programs so if you took out federal direct loans for example and wanted to refinance them, you’d have to go with a private lender.
The downside of refinancing federal student loans with a private lender is that you will no longer be eligible for any federal student loan relief benefits like deferment, forbearance, and student loan forgiveness to name a few.
If you undergo a financial hardship or lose your job and have federal student loans, it’s somewhat reassuring to know there are options to put your student loan payments on hold or even adjust your monthly payment to a lower amount if you enroll in the pay as you earn (PAYE) payment plan. If you switch to a federal lender, they probably won’t offer those benefits.
Not every borrower with federal loans take advantage of these options though so if you just want to save money by getting a lower interest rate so you can pay your loans off super quick, refinancing may still be a valid option for you.
Have You Considered any Fees that Might Be Associated with Refinancing?
Refinancing your student loans may not happen without some costs upfront. Borrowers should consider things like an origination fee which is a fee banks charge usually up to 2% of the total amount you are requesting to be financed.
Sure it doesn’t sound like much, but if you have a higher loan amount like $75,000 and your origination fee is 2%, you’ll at least pay $1,875 off the top before you even receive your new loan.
I believe this fee can also be added to your total loan amount due as well if you can’t pay it upfront.
How Is Your Credit?
If you are interested in refinancing your student loans, you may not receive the benefit of a lower interest rate or more affordable payments if your credit isn’t up to par. Lenders will look at your credit score and use it to determine which loan terms of offered to you.
Applicants with high credit scores in the upper 600s and up will be offered the most competitive interest rates. If your credit has improved and you initially had to take out student loans with a co-signer, you could refinance your loans to relieve that co-signer from their financial responsibility.
If your credit score is not up to par, you may need to wait and take the time to pay off more debt, maintain a low utilization rate with your credit cards, and let your credit history length improve over time.
There are so many things to think about when it comes to refinancing your student loans. It’s important to analyze your situation carefully and determine how much money you could save by refinancing. If you have federal student loans, you’ll need to decide whether you can do without the student loan relief benefits made available to you if you want to switch to a private lender.
If you only have a few thousand dollars of student loan debt left and your interest rate is manageable, you may not see the need to refinance and should just keep paying off your student loans. But if you have a lot of student loans and your interest rate is high or variable, refinancing may make sense.
If refinancing sounds like a good option to you, your next steps should be checking your credit score and report to see where you stand and shopping around to see what different lenders offer. Ask plenty of questions to make sure you understand the specific terms before signing any new loan paperwork.
Have you ever refinanced your loans before? What other factors should borrowers take into account?