With 44 million student loan borrowers currently owing $1.5 trillion in outstanding debt, it’s safe to say student loan debt has reached a critical point in the United States. With its heavy cost, many borrowers are forced to delay major life milestones like starting a family, buying a home, or saving for retirement.
As more and more graduates feel the burden of debt, they are beginning to seek new alternatives to manage it. Entire industries have been born to help borrowers manage their student loan debt.
If you are feeling the pinch of student loan debt, you might consider student loan refinancing. This article will explain more about what student loan refinancing is and how to know if it could be the right choice for your situation.
What Is Student Loan Refinancing?
When you refinance your student loans, you are essentially replacing your existing loans with a new loan at a lower interest rate.
The company you are refinancing with becomes your new lender; they repay your existing loans and give you a new loan at different terms. This option is available for borrowers with both private and federal loans.
Refinancing is different from consolidating your loans with the government because, with federal consolidation, you aren’t eligible for a new interest rate; the new rate will just be a weighted average of your old loans. Also, private loans can’t be consolidated with the government which makes refinancing an attractive option.
Refinancing can save you thousands of dollars in interest over the life of the loan. It can make your monthly payments more manageable and give you additional money to put toward saving, paying off debt, or living expenses.
When Is it a Good Idea to Refinance?
At this point, you may be wondering how to know whether refinancing is the best decision. There are several things to be considered.
First, you must consider your current interest rate and term length. If your current interest rate is seven percent and you have more than ten years left on the life of the loan, then refinancing might be the right choice. By lowering your interest rate, you’ll save a lot of money on interest over the life of the loan.
However, if your interest rate is already low or you are almost done paying off your loans, refinancing might not help much. Refinancing is also a good option if you have a stable income and can keep up with the monthly payments.
Once you refinance, you will be working with a private lender. So, if you have federal loans, you’ll want to make sure you won’t need any federal protections in the future.
Things to Keep in Mind
Student loan refinancing has helped many people lower their monthly payments and manage their debt more effectively. However, there are instances where refinancing may not be the best option for you.
It’s important to keep in mind that if you have federal loans, you’ll be giving up several benefits including:
- Income-driven repayment plans: Income-driven repayment plans lower your monthly payments to a percentage of your discretionary income. After a certain period of time, the loan will be eligible for forgiveness.
- Deferment and forbearance: Federal loan borrowers are eligible for deferment or forbearance if they fall into financial difficulty. If you refinance, you may not have that same option.
- Loan forgiveness: There are several federal loan programs that offer loan forgiveness to borrowers that meet certain conditions. The Public Service Loan Forgiveness program (PSLF) offers forgiveness to borrowers that work in public service and make 10 years of qualified loan payments.
Once refinancing your loans, you can’t go back and receive these benefits later. Refinancing could still be a good choice but it’s something to think about first.
If you are struggling with student loan debt, refinancing may be a good option for you. But first, you’ll need to determine whether you’re even eligible.
Most private lenders will want to know that you have a good credit history and stable income, so you can make the monthly payments. If you fall short in either of these areas, you may need a co-signer to qualify. To find out if you qualify, reach out to several lenders and ask about their eligibility requirements.
The bottom line is before deciding to refinance your student loans, you want to make sure it’s the right choice for you. Make sure you understand the full weight of your decision, so you won’t have any financial regrets in the future.
Andy Kearns is a Content Analyst for LendEDU and works to produce personal finance content to help educate consumers across the globe. When he’s not writing, you can find Andy cheering on the new and improved Lakers, or somewhere on a beach.