Whether you have federal student loans or private student loans, refinancing might be a great option for you if you have decent credit and are looking to save money on your monthly payments. There are many reasons that refinancing your student loans makes sense and here are just five of them.
Should you refinance your student loans? There are many factors to consider, including whether it’s better to pay off your loans early, or just let them be until they reach the default status. This guide will help you sort through the pros and cons of refinancing your student loans so you can decide if it’s the right financial move for you.
Should you refinance your student loans? That’s the big question that each borrower should ask themselves before deciding on what to do with their existing debt load. While it’s easy to just focus on your monthly payment, there are plenty of factors that go into whether or not refinancing makes sense for you and your financial goals as a whole. Here are five reasons why you might want to consider refinancing your student loans right now!
Reasons You Should Refinance Your Student Loans
If you have student loans, you may be able to refinance them to a more affordable rate. Refinancing student loans can save a lot of money in interest payments over time. Your monthly loan payment might be reduced by as much as 40 percent or even more, depending on your current interest rate and income level. It’s important to weigh all your options before taking out a new loan, so we took some time to compile five reasons why you should consider refinancing your student loans. Of course, if you decide that refinancing isn’t right for you, then that’s okay too! We just want to make sure you get all of the information necessary to make an informed decision about your financial future.
Interest Rates are Lower
Some student loans offer fixed interest rates while others fluctuate. Whether you’re taking out new student loans or refinancing old ones, it’s worth seeing if your interest rate could be lower. To refinance your student loans, you may have to be creditworthy and meet certain income thresholds (your lender will check your FICO score). If that isn’t a problem for you, then it can make sense to apply for private student loan refinancing with a company like SoFi. It takes some research but if done right, it can save money in the long run.
As of 2019, your student loan interest can be deductible for up to $2,500 a year. Whether you think that deduction is worth it may depend on whether you have other tax deductions. The IRS allows any eligible expense with a total cost greater than 2% of your adjusted gross income (AGI) to be deducted from your taxable income, including state and local taxes and mortgage interest. Other common expenses include contributions to IRAs or 401(k)s, as well as medical costs not covered by insurance. If you’re paying more than $2,500 in these types of expenses per year and itemizing your deductions on Schedule A, refinancing might end up being worth it—but only if you really want to pay off loans early.
Things to Consider Before Refinancing Student Loans
- Are you really saving money? If you’re just paying over a longer-term, you may end up paying more over the life of your loans
- Will you lose any current student loan benefits, such as repayment options or Public Service Loan Forgiveness?
- Will your new loan be considered a student loan or a personal loan? If it’s not a student loan, will you lose out on an interest tax benefit?
- Will you have to pay any service fees to refinance your student loans?
- Will you lose any discounts that you’ve had with your loan originator?
Bad Credit? No Problem!
For many people, student loans are a necessary evil—and with your future earning potential on the line, it’s often worth taking out loans to get your degree. However, if you do end up with student loan debt hanging over your head when it comes time to refinance or consolidate those loans (either due to job loss or simple desire), you may need to rely on something other than creditworthiness.
Fortunately, there are more options for refinancing student loans today than ever before, including programs that aren’t based on credit scores. As a result, anyone who has federal and/or private student loan debt can look into refinancing options to reduce interest rates and pay off their loans faster. Here are five reasons why
Consolidation of Debt
Should you refinance your student loans? That depends. Do you have a high-interest rate? If so, then refinancing may save you money. The reason many people struggle with student loan debt is due to interest rates as high as 12% or more – which is not uncommon for those who chose private or unsubsidized loans.
If you’re carrying a balance at such an interest rate, then it makes sense to consolidate your debt and lower that rate to something in line with market averages (between 4% and 10%). However, if your interest rate is relatively low – between 3% and 5%, for example – it doesn’t make sense to consolidate just because of a low-interest rate.
What Happens When You Refinance a Student Loan?
When you refinance your student loans, you’re basically applying for a new loan. A lender will look for many of the same factors they looked for when you first applied for a (private) student loan, like these:
- How’s your credit? According to some websites, you may need a credit score that’s in the high 600s or even the 700s.2 If not, you may need a cosigner.
- How responsible have you been? What’s your record of on-time payments?
- What’s your income and your debt-to-income ratio? This is a measure of your ability to take on new debt—the total of your monthly debt divided by your gross monthly income. If you have a high one, it may indicate to a lender that you’re at a higher rate of defaulting on the loan.
- Are you a U.S. citizen? With some lenders, if you’re a non-citizen or permanent resident, you may have to add a cosigner.
- How much do you have left? If you don’t have a large enough amount of debt, then it might not be worth refinancing; you could save a small amount but apply for a new loan could impact your credit report.
Who Can Refinance Their Student Loans?
You may be able to refinance your federal and private student loans, even if you’ve refinanced them before. Most borrowers who refinance have been out of school for a bit, so there’s been enough time for interest rates to change. Being out of school for a few years can also give you time to build up your credit, which is considered when a lender looks at your refinancing request.
When you refinance a student loan, it means that a lender will pay off your current loan balances. In return, you get a new loan—which may or may not have a lower interest rate. If your current lender is doing the refinancing, you’ll still have a new loan with them.
- If you extend the term of your loan (how long you’ll be paying it), you may end up paying more over the life of your loan.
- Your monthly payment isn’t guaranteed to be lower; the rate you’re offered will depend on your creditworthiness and the interest rate environment.
Flexibility in Repayment Options
One reason to refinance your student loans is that it will likely lower your interest rate and offer more flexibility in your repayment options. The federal government offers a few different repayment plans for its student loan borrowers, but these are relatively rigid. Income-driven repayment plans, on the other hand, can help you maximize how much money you can put toward your loan and pay back as little as possible over time.
That’s great news if you’re trying to save money on interest or prioritize other financial obligations like rent and utilities. By refinancing your student loans with a private lender or bank, you may be able to make payments more comfortably while keeping your debt burden in check—particularly if you have variable income like self-employment earnings or contract work.
How to Refinance Student Loans
You’ve decided you want to refinance your loans…here are a few steps you should take:
- Research the lenders who are highly rated for refinancing. These could include banks, credit unions, and online lenders.
- Compare their interest rates to see who offers the best rates and terms.
- Be careful to read the fine print: Are there fees? What are your options if you can’t make a payment? Will the rate increase at any time?
- Complete your chosen lender’s application, upload the documents they require, and, when you’re approved, sign the final documents.
- Make your payments to the new lender. Note: Make sure the last payment to your original lender has been made and you don’t owe them anymore.
Should I refinance my student loans? The decision to refinance your student loans depends largely on your perspective. While you may have solid reasons for refinancing (like lower interest rates), only you can decide if it makes sense financially. Ultimately, it’s best to run your numbers and make an informed decision based on what is best for you and your family.
When that happens, don’t be afraid to walk away—refinancing isn’t right for everyone. Remember, there are other ways to manage your money too! Check out these easy tricks for making extra cash fast or here are 5 simple steps to start saving money today.
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