Student loan repayments can be overwhelming. You have to set aside a large sum of money every month to cover the repayments. This can lock up a major portion of your income, leaving only limited cash for other purposes. If you have more than one loan, you have to keep track of multiple repayment amounts and deadlines. This only adds more stress to an already stressful situation. Sometimes it can feel like those repayments will never end and you’ll never get out of debt completely. Many student loan borrowers struggle to get a handle on their student loan debt. This is where refinancing can help.
Refinancing involves exchanging your own loan for a new loan with different terms. When you refinance, you can choose new terms that are more suitable to your financial circumstances. You can adjust your monthly payments, consolidate to simplify payments or release a cosigner. If you’re eligible, you could better a better interest rate too.
Here are 6 reasons to refinance your student loans and one reason why you may not want to.
One of the most compelling reasons to refinance your student loans is to get a lower interest rate. This can happen if market rates are down or if your risk profile has improved.
The lender sets your interest rate at the time of taking the loan. If you have a fixed-rate loan, you’ll continue paying the same interest rate on the loan until you clear the loan completely. With a high-interest loan, you could end up paying a substantial amount in accrued interest over the loan term. Locking in a lower interest rate can help lower the cost of the loan significantly. The only way to get a lower rate is by refinancing.
If your income and credit score has improved since graduation, you may qualify for a lower interest rate. The exact rate you’ll pay will depend primarily on your credit score and a few other factors. The higher your credit score the lower the rate you’ll pay when you refinance.
Interest rates across the board fluctuate depending on market conditions. You’ll get an even lower rate if you refinance your student loans when prevailing interest rates are down.
Shaving off even just a few points off the interest rate can result in substantial savings.
If you’ve got a steady job and sufficient income, it’s a good idea to refinance to increase your monthly repayments. The higher monthly payments will shorten your loan term and you’ll become debt-free earlier. The relief you’ll feel from being free of debt is immeasurable. Moreover, clearing your debt earlier has an additional benefit.
A shorter loan term means less time for the interest to accrue. In addition to clearing your debt earlier, you’ll also save a lot in interest when you refinance to a shorter term. And if you qualify for a lower rate, those savings will increase dramatically.
Refinancing also allows you to lower your monthly payments, which can be a life-saver if you’re struggling financially. When refinancing your student loans, you can choose a new repayment term that better suits your current financial situation. Lowering the monthly repayment amount can free up much-needed cash that can be used to meet other financial commitments.
More importantly, it will lower the odds of you missing a payment. The late fee penalty and additional interest on the outstanding will increase the cost of your loan. Further delays can result in default, which has serious consequences.
Before you choose this option, however, it’s important to understand the ramifications. When you lower the monthly payments, you’ll take longer to pay off the loan. You’ll also pay more in accrued interest over the longer term.
Many students take on student loans with a cosigner. This is because they don’t have sufficient credit history to qualify for a loan on their own credentials. The cosigner shares responsibility for the loan with the borrower till the debt is completely paid off. This puts an unfair burden on the cosigner. A missed payment or any infraction on your part jeopardizes their credit score too. Cosigning a loan also limits their ability to borrow money for their own purposes.
Many refinance lenders have options to release cosigners after a while. It’s a great option for both borrowers and cosigners.
Keeping track of multiple deadlines and loan amounts can be a constant struggle. It’s time-consuming and increases your stress levels. Worse still, it increases the risk of missing a deadline. Many borrowers create spreadsheets that help them stay on top of payments. But this doesn’t work for everybody. If you’re finding the constant juggling too much of a hassle, it’s best to refinance.
When you refinance, you can combine several loans into one. You can combine all loans into one if you want to. That gives you just one deadline and one payment amount to keep track of every month. Another option is to do a partial refinance where you refinance only some loans and leave the others as is. For example, you can refinance only your private student loans and not the federal student loans. This way you get to keep the federal loan benefits while still reducing the number of loans to track.
Lenders vary in terms of their customer service. Some go out of their way to help their customers find solutions to their problems, others can’t be bothered. If you aren’t getting the help you need from your lender, you can change this by refinancing with a new lender. Make sure to check lender reviews left by other customers to find one that’s the best match for you.
Private student loans don’t have any major protections. You’re always better off refinancing if you can get a more suitable deal. With federal student loans, you need to be a little more careful. Federal student loans come with a few major benefits such as income-based repayment plans, forgiveness programs, and deferment and forbearance options. You’ll lose all these protections when you refinance your student loans. Don’t refinance your federal student loans if you think you may need to use any of these benefits.
We hoped you enjoyed this article! Remember, you canand potentially lower your monthly student loan payments and save money.