by Tara Blaine

What to Know Before You Refinance Student Loans

Wondering if you should refinance your student loans? Whether you’re looking to get out of debt ASAP, want to pay less interest in the long term, or are seeking lower monthly payments, here’s what you need to know to make an informed decision.
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One of the best ways to get out of debt faster and make monthly payments manageable—as well as save money in the long term—is to reduce the interest you pay on your loans. Refinancing your student loans could have great benefits, but there are also potential downsides to consider before you take the plunge. Here’s an overview of what you need to know when considering whether refinancing your student loans is the right move.

How student loan refinancing works

Refinancing essentially means getting a new loan (usually from a new lender) to pay off all your existing loans. Then you just pay off the new loan, which will have its own interest rate and repayment schedule.

An important factor to keep in mind: you may have federal loans (loans made by the government), private loans (loans offered by banks, credit unions, and other institutions), or a mix of the two. When you refinance, you can only do so through a private lender—you will no longer have any federal loans.

Pros: Perks of refinancing

While most people refinance their student loans to save money, there are other benefits that come with refinancing your student loans, like having only one loan payment to manage each month, and possibly being able to get out of debt sooner.

Here are all the reasons you might consider refinancing.

Save money in the long term

First, let’s talk about the overall financial savings that can come from refinancing. Student loan refinance lenders advertise that you could save “thousands,” which isn’t necessarily untrue. They typically come up with the amount you could save by comparing the average amount of interest a subset of their customers would pay with and without refinancing. What you actually save depends on the rate on your existing loans and the interest rate you can get when you refinance.

Let’s say someone owes $100,000 in student loans with an 8% interest rate. On a 10-year repayment plan, that borrower would pay almost $46,000 in interest throughout the life of the loan—almost half the value of the original loan!

If the same person were to get a 5% interest rate after refinancing and keep a 10-year loan repayment term, they would save about $18,000, lowering the total amount of interest they pay to about $27,000.

Of course, you may owe much less or much more, and the rate you get depends on your credit score, income, and other factors. That’s why you shop: to get real numbers and make sure you can get a lower rate than what you’re already paying.

Lower your monthly payments

When you refinance at a lower interest rate, it could mean your monthly payments are lower—but that’s not guaranteed. Your monthly payment is determined by a host of factors, including your loan’s balance, interest rate, term, and repayment schedule.

If lowering your monthly payment is the main reason you want to refinance, do plenty of homework. A student loan refinance calculator can give you an idea of how refinancing will change your payments, but you’ll also want to get a clear answer from your new lender on exactly what your monthly payment would be.

Get one manageable payment

Managing your debt can be overwhelming, especially if you have several types of debt to juggle. Keeping track of multiple payments to different lenders is not only stressful and exhausting—it also leaves a lot of room for error.

Consolidating your loans into one payment can relieve you of some of this stress, making paying your debt feel more manageable and freeing up some mental space for other, happier things in your life.

Pay off debt sooner

Living with debt can take a toll on our mental and physical health: debt has been linked to higher rates of anxiety, depression, and other health struggles. Worrying about debt triggers stress, which reduces your mental and physical resilience.

Saving money on interest is cool—but if refinancing your student loans means that you can relieve yourself of the burden of living with debt sooner, that’s even cooler.

Cons: Drawbacks of refinancing student loans

While there are many potential benefits to refinancing, there are also reasons not to refinance student loans. As mentioned above, refinancing replaces federal loans with a private loan, so you’ll lose all the protections and potential benefits that come with government-issued loans.

Deferment and forebearance

Federal loans offer the flexibility to postpone payments due to economic hardship in some circumstances. Private loans aren’t required to offer this—although some lenders may have payment postponements or other flexible options.

Loan forgiveness programs

The federal government has a variety of programs that forgive your loans in certain circumstances (like permanent disability or death) or in exchange for working in sectors like teaching and public service. If you refinance with a private lender, you’ll lose those options.

Income-based repayment

With federal loans, you have a few options for setting your monthly payment based on your income, which might be a major benefit if your income is on the low side or you’re just starting out in your industry. Private loans usually have no such programs.

Delinquency and default

Missing a loan payment is a bad idea no matter what kind of loan you have. However, a private lender may declare your loan in default after just one or two missed payments—and at that point they might send your account to a collection agency or take legal action. Federal loans, on the other hand, generally aren’t declared to be in default until payments are about nine months past due, and the government offers a few ways to help you get back on track.

What you need to qualify for student loan refinancing

If refinancing seems like it might be a good option for you, look into what loans and rates you might qualify for. To determine your eligibility, lenders generally look at factors like your credit score, income, the balance of the loans you want to refinance, and the ratio of how much debt you have compared to your income. You might be able to boost your chances of qualifying for a good rate if you have a co-signer.

When you start comparing potential lenders, remember that the lowest interest rate they advertise might not be what you will qualify for—so use their online forms (or contact them) to get the information relevant to your particular circumstances.

Bottom line: do your homework

Student loans can be painfully complex, and refinancing is often complicated. Homework doesn’t end at graduation: deciding if refinancing will benefit you calls for a dose of research.

Do the math

To find out how much you could save from refinancing your student loans, use a student loan refinancing calculator to compare your options. The higher the interest rates you have now, the more you could save by refinancing your student loans. Likewise, the lower the interest rate you can get on your new, refinanced student loan, the more you’ll save.

Understand how rates work

Make sure to weigh the pros and cons of variable versus fixed interest rates before choosing. Variable-rate student loans have interest rates that can change during the repayment period. Interest rates may increase or decrease at any time, typically based on changes to the economic market. Often, the introductory rate on a variable-rate loan is lower than that of a fixed-rate loan, though it has the potential to increase later.

Educate yourself

Shop around with different lenders to find out not only the rates on offer, but the other features of their loans, like available terms, repayment schedules, and any perks available. Find out exactly what kinds of loans you have now (including which types of federal loans you have) and what the interest rates and terms are for each. The more you learn, the more confidence you’ll gain in making your decision. This glossary of relevant terms is a handy reference as you navigate your research.

And if you have federal student loans, you’ll want to hold off on refinancing at least through September 2020 to take advantage of the interest waiver included in the CARES act—take a look at this blog post to find out how that might affect you.

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