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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. Payday installment loans, which offer medium term loans can offer more money than other types of short-term loans.
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!
12 thoughts on “Why You Should Consider Refinancing Your Student Loans”
I actually refinance my student loans a while back. I got the lower interest and monthly payments, and because I refinance it immediately after graduating the bank let me keep my 6 months grace period. Instead of paying the minimum interest+principal a month I double and sometimes quadruple my principal payment. It took me a total of 2.5 years to pay off my 10 year refinanced student loans but by god I paid it off.
That’s awesome that you were able to pay off your student loan in such a short amount of time. I know people in their 30s and early 40s that still are paying off their student loans. It’s a sad state when paying off debt takes such a long time. Going forward, I don’t even see the value of a college education. With tuition rates climbing at such a rapid pace the value of a degree becomes less as traditional employment opportunities fade. Thank you for commenting.
Wish I was able to say I paid off my student loans in a short amount of time, but I can’t. I have about 3 more years to fully pay off my student loans, so I can’t complain too much. However, I’ve been carrying around this debt for a while now, and it has got to go. I do agree with this post to the extent that if it makes sense to refinance the student loans, then refinance. What would be truly awesome is if you are in a possible to avoid the student loan in the first place – then you wouldn’t have to worry about whether or not to refinance.
After reading posts like these and comments I feel very blessed to have graduated college with zero debt. More often than not, I hear student loan horror stories that never seem to go away. Stay the course and I hope you’ll be able to finish paying off your debts sooner than three years. I guess refinancing is always a good measure to take assuming the numbers make sense. Not sure if incurring additional fees to refinance or extending the loan length is in anyone’s favor. Thank you for sharing your thoughts.
Very interesting DivHut! I just refinanced my student loans as well!
I like the loan from the bank because there is only the option to pay interest. I believe that good debt should never be paid off and by paying the just the interest, I can leverage the rest of my money to other investment. 🙂
That’s an interesting way to look at your student debt. Not sure that I would fully agree with what you said as your comment reminds me of the millions of people that took out interest only mortgages only to get rocked when housing collapsed and though the monthly payments were smaller they ended up with zero equity after years of making payments. While it’s true you can leverage the smaller payments and use the “extra” cash to invest, you’ll always have the student loan hanging over your head. Thank you for stopping by and commenting.
This is excellent advice! Refinancing student loans is tough, so it’s important to approach it with a plan. Nice work! Thanks for sharing this!
If you can save money by refinancing then I’m all for it. On the other hand, I’m not for extending the term of any loan that’s taken out, whether a mortgage, auto loan or student loan. The best way to save money is to pay off any outstanding debt you have. Thank you for your comment.
I was actually able to refinance my private student loans THREE times, and all three companies that I used are on the list in your link! I used Citizens Bank, then SoFi, and then earnest. Bumping my interest rate down three seperate times all the way from 7.9% all the way down to a low of 2.9% with my final lender, earnest. It enabled me to save thousands of dollars on interest and pay my loans off a few months sooner than predicted. I can’t recommend it enough and the applications and transitions were all simple.
Thanks for sharing your personal experience with student loan refinancing. I’m happy to hear that you have been able to save thousands of dollars on your loan. It’s amazing why more people don’t take advantage of lowering interest rates. Over time it can make a big difference. Going down from 7.9% to 2.9% is a HUGE difference. Thank you for commenting.
Your comments about building interest and lowering monthly payments are important. Each element of the refinancing and consolidation process needs to be considered, as you indicate.
It’s so true. Credit is so much more than just a number. It’s a total picture of all debt and your ability to cover the payments each month.