Are you feeling overwhelmed by your student loan payments? Refinancing your student loans could be the solution you need to turn things around. Not only could it potentially result in a better interest rate, but it can also simplify repayment and adjust your monthly bills.
If you’re ready to take control of your student debt, read on for six good reasons to refinance your student loans.
1. Lock in a Lower Interest Rate
One excellent reason to refinance your student loans is to seek a better interest rate. By combining all your federal and private loans into one new loan with a private lender, you have the opportunity to secure a lower interest rate. This private lender could be a bank, credit union, or an online institution like SoFi.
Before giving you an offer, the lender reviews your income and credit score. If you have a steady job and strong credit, you could qualify for lower interest rates, since these factors show that you’re not a risky candidate for a loan.
Most lenders look for a credit score of 650 or higher. If your score falls below that mark, applying with a cosigner could net you a better interest rate. Adding a cosigner to your application can be another way to reduce risk in the eyes of the lender.
The lender will offer you a variety of loan terms with both fixed and variable interest rates. Currently, variable rates tend to be lower than fixed rates at the beginning, but they could go up (or down) over time. Whatever you choose, lowering your interest rate could save you money over the life of your loan.
Let’s say you have $50,000 in student loan debt with an average interest rate of 6.80%. Through refinancing, you lock in a new fixed interest rate of just 4.99%. After 10 years of repayment, you would save over $5,438 on interest.
2. Reduce Your Monthly Payments
Another reason to refinance your student loans is the opportunity to change your repayment terms and reduce your monthly payments. Unlike most federal and private loans that come with a standard 10-year repayment term, refinancing options offered by banks typically range from five to 20 years.
By refinancing your loans to a longer repayment term, you can significantly lower your monthly payments, providing some relief to your monthly budget. This extra cash can make it easier to cover other essential expenses such as rent or groceries.
However, it’s essential to keep in mind that extending your repayment term may result in paying more interest over time. Consider paying off your loan early if your finances improve. Many lenders do not penalize borrowers for prepaying their loans, but it’s always good to check with your lender to confirm.
3. Take Advantage of a Flexible Repayment Plan
While banks and private lenders may not be known for their flexibility, some do offer helpful repayment options. For instance, SoFi allows you to defer monthly payments if you return to school on at least a half-time basis, while CommonBond offers temporary forbearance in the case of economic hardship.
Refinancing your student loans with a private lender, however, means losing access to federal repayment plans like Income-Contingent Repayment (ICR), Revised Pay As You Earn (REPAYE), and Income-Based Repayment (IBR). Additionally, federal loan forgiveness programs such as Public Service Loan Forgiveness (PSLF) will also no longer be available to you. Consider these factors before deciding to refinance your federal student loans.
4. Release a Cosigner from Your Student Loan
If your parents or someone else cosigned your current student loans, refinancing can provide the opportunity to release them as cosigners. By making on-time payments for a certain number of months, you may be eligible for cosigner release. This not only relieves stress on your relationship with your cosigner but also improves their credit score.
Removing your cosigner from the loan allows them to access new lines of financial capital if they need to make significant purchases like a home or a car. Make sure to check with lenders that offer cosigner release to explore this option further.
5. Switch to a Lender Offering Better Service
If you’re unhappy with your current student loan lender or servicer, refinancing your student loans gives you the opportunity to switch to a new one that provides better customer service. Take advantage of online reviews and resources like the Consumer Financial Protection Bureau, Federal Trade Commission, Better Business Bureau, and TrustPilot to research and choose the right lender for you.
Many lenders in the refinancing space now offer extensive online and phone-based customer service, making the application and repayment process more accessible.
6. Consolidate Student Loans for Easier Management
Simplifying repayment is one of the top reasons to consider refinancing your student loans. If you borrowed money to pay for college, chances are you have multiple student loans to repay. Additionally, student loan servicers may buy and sell loans, resulting in your payments being sent to different places over time. This can become confusing and difficult to manage.
Refinancing allows you to combine multiple student loans into one, making it easier to organize, track, and repay your debt. Instead of worrying about multiple payments and interest rates each month, you only have to focus on making one payment, potentially at a lower interest rate.
While federal consolidation loans through the government can also combine your debt, they typically maintain similar interest rates. Refinancing offers the advantage of simplifying repayment while potentially saving you money in the long run.
If you’re tired of dealing with multiple student loans and the complications that come with them, it’s time to start researching your student loan refinancing options. By refinancing, you could potentially save money, time, and a whole lot of hassle.
