When Student Loan Refinancing Is a Good Idea and When to Rethink
Refinancing should be a great option for some people. This article will help you understand if this is the right path for you.
When it comes to figuring out whether refinancing student loans is a good idea, the answer is it depends. When you refinance student loans, your original loan is paid off and replaced with a new one. Ideally, this new loan will have a lower monthly payment or reduced interest rate.
Given this information, it sounds smart to refinance your student loans. However, not all situations warrant doing so. There are several scenarios where you’re better off sticking with the loan you have now.
When is Refinancing Student Loans a Good Idea
There are plenty of reasons why it’s a good idea to refinance your student loans. Some of these include lower interest rates and the desire to simplify your payments.
Your Student Loans Have a High Interest Rate
The main reason why someone would want to refinance their student loans is to lower their rates. So, if you have a student loan with a very high interest rate, it’s a good idea to refinance, especially if you can get a much lower rate.
For instance, if you have a federal student loan interest rate of 7% or higher, you could save thousands of dollars in interest charges just by refinancing. Granted, you’ll need to have good credit to increase your chances of qualifying for a lower rate. But if you can, taking the time to refinance could take the pressure off paying back your loans.
Think about what you can do with the money you’ll save on interest charges.
Of course, refinancing federal student loans does have its downsides. The major one is losing all your benefits and protections unique to federal student loans. For instance, you won't have access to student loan forgiveness programs or income driven repayment plans.
You Have Good Credit and Stable Income
Aside from having good credit, you’ll also need to have a reliable and stable income source to qualify for the best refinance rates. After all, getting the most competitive interest rate will help you lower your payments and the amount you’ll pay overall for the loan.
For those who don’t have good credit, enlisting the help of a trusted co-signer (one that’s reliable and with a great credit score) will help. It can both help you qualify for a loan and one that’s at an extremely competitive rate.
Keep in mind that using a co-signer is a decision not to be taken lightly. This person is essentially signing up to be responsible for your loans in case you can’t. So make sure this person is on board and that you’ll be sure to make on-time payments.
You Want to Change Interest Rate Type
In most cases, you’ll have a fixed interest rate. However, for private student loans, you may have signed up for a variable rate instead of a fixed one. In this case, you may want to refinance to get a fixed interest rate so that you know exactly how much you’ll need to pay each month.
Or, if you’re really close to paying off your loan, refinancing to a variable rate may make sense if the rate is much lower. It’s especially a good idea if you know you’ll pay it off before the rates may go up.
You Want to Be Debt-Free Sooner
Refinancing your loans will most likely help you pay off your loans faster. Two options to do so include shortening your original loan term. Or, you could get a lower interest rate and take what you saved to make extra payments (assuming there’s no prepayment penalty).
Doing any of the above could mean shaving off months or years off your student loan debt repayment journey.
You Want to Simplify Your Payments
If you have multiple loans but find it cumbersome to keep track of due dates and minimum payment amounts, refinancing could solve your problem. When you refinance, you can roll all your loans into a new loan so you only have to deal with a single payment.
You can refinance a mix of federal and private loans or these types separately. If you have federal loans, you can consider federal loan consolidation. It’s a good idea consolidating your student loans if you don’t want to go through a credit check and want to keep the benefits you receive from federal loans.
If you take advantage of a Direct Consolidation Loan, your loans will be combined into one and your new interest rate will be the weighted average of your current loans (it’ll be rounded up to the closest one-eighth of a percent).
When Refinancing Student Loans Isn’t a Good Idea
While there are plenty of benefits to refinancing, there are also plenty of reasons why you shouldn’t. These include keeping your federal student loan benefits and you don’t have a steady income source.
You Don’t Have a Creditworthy Co-signer
Like mentioned earlier, a lender looks at factors like your credit income and history to determine whether to qualify you for refinancing and your interest rate. If you have low credit, you may not qualify. If you do, you’ll most likely qualify for higher rates. That’s why many folks turn to creditworthy co-signers to help increase their chances of qualifying for a better rate.
That means if you don't have one and your credit score is low, you may not reap the benefits of refinancing.
You Already Have a Great Rate
Refinancing is usually so that you can get a lower interest rate. If yours is already low, you may not be able to get a lower one. That’s not to say you shouldn’t check to see what’s out there —
Juno lets you compare your rates with multiple private lenders easily to see where you may be able to save.
You Don’t Have Reliable Income
Since lenders also look at your income sources, if it’s too low or not reliable, you may not qualify for refining. Besides, you can qualify for several repayment options for federal student loans, which aren’t available with private lenders.
For instance, you can take advantage of an income driven repayment plan which will be based on your income. Doing so can lower your payments, depending on your financial situation.
You Qualify for Student Loan Forgiveness
If you want to meet the requirements for student loan forgiveness, you need to keep your federal student loans. If you refinance to a private student loan, programs such as the Public Service Loan Forgiveness (PSLF) are no longer available to you. Check with your loan officer to see whether you’re eligible for PSLF or other forgiveness options, and go from there.
Sarah Li Cain
Sarah Li Cain is a finance writer and a candidate for the Accredited Financial Counselor designation whose work has appeared in places like Bankrate, Business Insider, Financial Planning Association, Investopedia, Kiplinger, and Redbook. She’s the host of Beyond The Dollar, where she and her guests have deep and honest conversations about money affects their well-being.
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