Refinance Student Loans: What You Need to Know
You're paying off your student loans — but are you paying more than you have to? If you're paying the same interest rate (or higher) than when you took out the loan, refinancing could help you save money on interest payments.
When you refinance student loans, you're generally taking out a loan with a different interest rate and payment terms from your previous loans. The creditor of this loan pays off your previous loan, and you proceed to make payments to the new creditor until your debt is paid off.
The main reason to refinance is to get a better interest rate. With a lower rate, you can use the money you would have paid in interest to pay off your principal more quickly. Or, depending on the loan terms, you might take the same length of time to pay off the loan but pay a smaller amount each month, freeing up some room in your budget.
Likewise, if you currently have a variable APR and you're worried about your rate going up in the future, refinancing to a fixed-rate loan would prevent eventual rate increases. This can make it easier to plan your budget and to predict when you'll finish paying off the loan.
Is Refinancing Right for You?
To start with, it may not be a viable option for you if your credit score isn't high enough to qualify for a better rate. Or, if you have federal student loans, refinancing to a private lender would mean that you no longer qualify for the federal income-based repayment program — or for other federal loan forbearance or forgiveness programs. So people who expect that they'll need help from one of those programs would be better off keeping their federal loans.
However, refinancing can be a great option for anyone who is on track to pay off their federal loans and aren't likely to qualify for federal loan forgiveness. Those who have private loans often benefit from lower rates or other favorable terms when they refinance student loans. If you took out loans while in school, you may not have established a solid credit history and there's a good chance that you're paying higher rates than you could be with your current credit history. Refinancing allows you to take advantage of your improved credit score and higher income to get a new loan that's less expensive.
Refinancing your student loans doesn't have to be an all-or-nothing deal. Even if some of your loans aren't good candidates, you may have other loans that could be refinanced for better rates. Don't rule it out until you've considered each loan by itself.
When to Refinance
The better your credit score, the better the rate you'll qualify for. Therefore, if you're currently working to raise your credit score, you may want to wait until your score goes up before you refinance.
If your score already qualifies you for a lower rate, it might be the perfect time to refinance so you can save on interest. This is especially true if you're thinking about a fixed-rate loan and you expect rates to rise; in that case, you should refinance before rates go up. It's not easy to predict economic trends, so it's a good idea to talk to a financial adviser about how rates are likely to change and when you should refinance.
Before taking out a new loan, consider the terms including the APR, monthly payment, whether the rate is fixed or not and whether it offers protection in case of unemployment. Once you look at all of the variables, you may find that refinancing reduces the amount you owe in interest and allows you to pay off those loans sooner.