This post may contain affiliate links:
If you have been presented with the opportunity to refinance your student loans, you may be wondering why you should. There are quite a few reasons why you need to sit down and consider it. Below, I will go over some of these reasons in hopes to provide you with the information you need to make the right decision.
1. Lowered Monthly Payments
If you are having trouble affording your monthly student loan payments, you will find that refinancing and consolidating your student lodans will actually lower your payment. For example, the standard repayment plan is set to 10 years, but you may have chosen a 5-year plan at some point. When you refinance your student loan, you can choose to stretch the payments out over a term of 20 years, thus lowering your payments immediately.
One thing you do want to keep in mind though is whether or not this is the best move for you. While you do lower your monthly payments, you are stretching the term longer, which can mean thousands more in interest.
2. Better Interest Rate
Who wouldn’t love a better interest rate on their student loan? The standard rate for a federal loan is about 6.8 percent, but it may be more or less. Refinancing your student loan is pretty much a guarantee that you will receive a lower rate.
This lower rate can save you hundreds per month and thousands per year. In fact, most refinanced interest rates are somewhere between two and four percent.
3. Get Rid of a Co-Signer
If you have a co-signer on your student loan and you no longer want them there or they do not want to be there, refinancing means that you can release them. This is a good move for you because now you only have to worry about yourself and you can grow your credit as well.
Also, if you are close with your co-signer, removing them from your student loan can free them up to co-sign for you on another loan or for a credit card.
It is always a wise idea to take on a student loan yourself when possible.
4. Combine Loans
If you have a variety of different loans out there, it gets confusing. When you refinance, you may have the option to consolidate some of these loans and combine them into one.
The biggest benefit of this is that you will only pay one interest rate on the entire loan now instead of multiple, different rates on each loan. This option will help save you money.
Note: This is different than Federal Direct Consolidation, which consolidates all of your federal loans into one. The new interest rate, however, is just a weighted average of the other loans, so you won’t save money on your loan.
One of the benefits of refinancing your loan is that you can often receive benefits from different lenders when you switch to their bank. For example, a lender may offer you a discounted rate when you refinance through them. This will help you because you can often take the discount and apply it to your loan payments.
You will also find that there are additional benefits such as a discount if you pay on time every month, if you use an auto debit feature, and more.
Know Before You Sign
As with anything, you want to make sure that you do not jump into something that you are unable to handle. Refinancing your student loans is beneficial, but you need to be ready to make that leap.
If you are already struggling to make your payments each month, it may not be wise for you to refinance for a shorter term, as this means the payments will increase.
Also, you need to consider the rates and terms that you receive as well. Some lenders will offer you a variable rate, which may see enticing at first, but a variable rate can increase multiple times over the life of your loan. If you are interested, here is a full list of student loan refinancing companies and their associated rates and terms.
Also, some lenders do not let you pay off your student loan early and if you do, you will receive a penalty that must be paid.
If you are planning on refinancing your student loans, consider all of your options first and speak with your financial aid lender to see what options are available to you. Don’t be afraid to ask questions either!