8 Reasons it Makes Sense to Refinance Student Loans by Kathryn Flynn

When students and parents borrow wisely, a student loan can be an effective way to bridge a college savings gap. Students are able to borrow money to cover costs of tuition, room and board, and other related expenses and pay it back with interest at an agreed upon later date.

But what if your original loan agreement no longer suits you, and you’re having trouble paying down your debt? One option is to refinance your student loans. Refinancing can help you better manage your loans by lowering monthly costs, combining multiple loans into one or adjusting your repayment term. Paying off your debt in a timely manner can potentially save you thousands of dollars in interest.

Here are eight instances in which you should consider refinancing your student loans.

You Have Private Student Loans

Student loans are offered through the federal government and through private lenders. Private lenders may include banks, state credit agencies, credit unions and other financial institutions. There is often little or no incentive to refinance a federal student loan.

Federal student loans, which include subsidized and unsubsidized Federal Stafford Loans, cannot be refinanced into another federal student loan. That means if a borrow refinances a federal loan into a private consolidation loan they lose eligibility for any federal student loan benefits, which could include:

• Options for income-driven or extended repayment plans
• Deferments and longer forbearance periods
• Death and disability discharges
• Student loan forgiveness programs

You Have High Interest Rates

Student loan interest rates are at historic lows. For student loans disbursed between July 1, 2020 and June 30, 2021, interest rates on private student loan refinancing are as low as 2.99% (fixed rate) and as low as 1.99% (variable rate).

Switching to a lower interest rate is one of the easiest ways to lower the total cost of your loan. For example, if your current student loan interest rate is 8%, and you refinance to a private student loan with a 4% interest rate (keeping the repayment term the same) you could save over $18,000 over the life of your loan.

You Have Variable Interest Rates

Private student loan lenders offer fixed and variable interest rates. Fixed rates are based on a benchmark index rate, such as the London Interbank Offered Rate (LIBOR), and the borrower’s credit score. A fixed interest rate remains the same throughout the life of the loan.

A variable interest rate will fluctuate at specified intervals. Rate changes are based on a short-term interest rate benchmark and the borrower’s credit score at the time of their application. A variable rate student loan may offer a lower interest rate than a fixed interest rate to start, but the variable interest rate could increase.

You Started a “Real Job”

Most students apply for their first student loans when they are in college, or even high school. Without stable income from a full-time job, it can be difficult to qualify for the best loan options. Private student loan lenders look at a borrower’s debt-to-income ratio and credit history to determine how much you can afford to repay, and what your interest rate will be.

A college graduate with a few years of work under their belt should review their current student loans to see if there’s an opportunity to refinance into a lower-rate option.

You Want to Change Repayment Terms

The length of your student loan repayment can determine how much you have to pay each month, and the total amount you pay over time. For example, you might consider refinancing to a longer repayment term if you want to lower your monthly payments. With lower monthly payments you can free up cash flow to pay bills or other debt. But keep in mind that by extending your repayment term you will likely end up paying more in the long run.

Alternatively, you could shorten your repayment term to reduce your total loan payment. Shorter repayment terms often come with a lower interest rate and can help you tackle your debt quickly.

You Don’t Want a Cosigner

Without credit history or a stable income, it can be challenging for a student to qualify for a private student loan on their own. However, lenders may agree to lend you money if you have a parent or other creditworthy adult as a cosigner.

A cosigner and a borrower are equally responsible for paying back the student loan. That means if the borrower misses payments, the cosigner is legally obligated to repay the debt. Over time, for whatever reason, the cosigner may no longer want this responsibility. Your private loan may offer a cosigner release, but if it doesn’t, refinancing may be the only way to get the cosigner off the hook.

You Want to Consolidate

It’s not uncommon to have multiple student loans. Students typically borrow from private lenders after they reach their limit with federal loans and still come up short to pay for college. Others may take out loans to pay for graduate school before their undergraduate loans are paid off. Regardless of the reason, it can be confusing and difficult to manage having more than one student loan. Refinancing can help simplify your repayments by consolidating multiple loans into one. The new consolidated loan may also have a lower interest rate.

You’re Getting Poor Service

A student loan servicer manages your loan repayment. They typically handle billing, payment processing and customer service. Your loan servicer is who you deal with if you ever have trouble making payments and are looking for some flexibility. Private student loan lenders either service their own loans or contract with a third-party.

Refinancing is one way to cut ties with your current loan servicer. When shopping for a new loan, be sure to review the Consumer Financial Protection Bureau to see if any complaints have been filed against the lender or the servicer. A number of websites that rate private student loans include service as a criterion for their rankings.

Refinancing student loans isn’t for everyone, but it can be a good option if there is an opportunity to save money or simplify your loan repayment. The most important thing is to do your homework and understand all of your options before you decide to refinance.

Kathryn Flynn is Editor-in-Chief at Savingforcollege.com and is a subject matter expert on 529 plans. Since 2014, she has created a variety of content to help families and financial professionals understand the best ways to save for education. She has been quoted in The Wall Street Journal, the New York Times, Fortune and other well-known media outlets. She has also written for several digital publications covering student loans, budgeting, investing, tax planning and insurance. Before pursuing a career as a writer, Kathryn worked as a marketing communications manager in the asset management industry. 

Tags: refinancing, student loans