If you’re asking yourself “should I refinance my student loans?” then consider this: Seven out of 10 seniors who graduated from college in 2015 borrowed money to get their degree, taking on an average of $30,100 in educational debt. All told, more than 40 million Americans owed $1.31 trillion in student loan debt as of Dec. 31, 2016.
But here’s the good news: If you struggle with student loan debt, all is not lost. With the help of refinancing experts, like us at Credible, you could potentially lower your interest rate and save thousands on your student loans.
But let’s back up a second — what does it mean to refinance your student loans? If you’re wondering when to refinance your student loans, or whether you should refinance your student loans at all, here are some things you should know.
Should you refinance your student loans?
Wondering if and when to refinance your student loans? Generally, if you’re good about making your monthly payments, but you feel like it’s still going to take forever to pay off your student loans, you might be paying too much in interest. While refinancing doesn’t guarantee that you’ll pay less in monthly loan payments, it could help you lower your interest rate so that you can pay off your debt faster.
But you shouldn’t make the decision to refinance your loans lightly. Refinancing can help some borrowers save money, but what refinancing can do for you depends on a number of factors, including the repayment term and repayment options that you choose for your new loan.
Can federal student loans be refinanced?
Yes! You can refinance government student loans with a private lender.
While refinancing could potentially help you lower your interest rate, refinancing your federal loans does mean that you will lose access to some borrower benefits that all private lenders don’t offer, such as access to income-driven repayment plans like Revised Pay As You Earn (REPAYE).
How can I refinance my federal student loans?
In order to refinance your federal student loans, you’ll have to work with a private lender. Luckily, there are a number of lenders who offer refinancing, each with many different refinancing rates and repayment options, so you can choose the offer that best suits your needs.
It’s very important that you don’t choose the first offer you see — do your research. Marketplace experts like Credible.com let you find and compare different options from multiple lenders without any obligation to choose one. By filling out one simple form and providing some basic information, such as your name, total debt amount, and income, we can show you options from lenders whose eligibility requirements you meet.
How much can you save by refinancing federal student loans?
Refinancing combines all your existing loans into one payment and can also potentially get you a lower interest rate. With a lower interest rate, more of your money will go toward paying off your principle loan debt instead of just your interest, and you might be able to pay off your debt sooner.
When you refinance your loans, you can opt for a shorter repayment term, which might increase your monthly payments but maximize your overall savings, or stretch out your repayment term and get the biggest reduction in your monthly payment.
Borrowers who use Credible to compare loan options before refinancing their student loan debt, and choose to reduce their interest rate, repayment term and total amount repaid can expect to save nearly $19,000 over the life of their new loan.
Comparing repayment terms and options
When you refinance your loans, you often have the option of choosing a different repayment term. As you might have realized, the repayment term and options that you choose can make a big difference to the amount of total savings you can achieve.
The standard repayment term on federal student loans is 10 years. When you refinance your federal loans with a private lender, you’ll find that most private lenders will offer a variety of repayment terms, ranging from five years to 20 years.
Choosing a shorter term can maximize your total savings.
All other things being equal, the shorter the repayment term, the lower the interest rate offered by most lenders. Paying down your loan principal faster will also reduce total interest payments. The tradeoff of refinancing into a loan with a shorter repayment term is that your monthly payment may increase.
Choosing a longer term can help reduce monthly payment
Borrowers who are most interested in reducing their monthly payment often refinance into a loan with a longer repayment term, which can increase their overall repayment costs.
But the interest rate reduction that they typically get when refinancing can help offset or eliminate the additional costs normally associated with extending your loan term (for a more detailed analysis of student loan refinancing strategies and outcomes, see the “Credible Report on Student Loan Refinancing Report.”)
Alternative repayment plans to consider
Federal loans offer a number of alternative repayment plans for borrowers who are struggling to make their monthly payments that aren’t always available through private lenders. These include income-driven repayment (IDR) plans such as Pay As You Earn (PAYE), Revised Pay As You Earn (REPAYE), and income-based repayment (IBR).
Your monthly payments under these plans are typically 10 percent or 15 percent of your discretionary income. You may also qualify for loan forgiveness on the amount you haven’t paid off after 20 to 25 years. But stretching out your payments over a longer period of time can increase your total repayment costs, particularly if you don’t end up qualifying for loan forgiveness
Keep in mind that when you refinance your federal loans with a private lender, you will lose access to federal IDR plans and loan forgiveness. You might also lose access to other borrower benefits that come with federal loans, such as deferment or forbearance.
Private lenders typically offer repayment terms ranging from five to 20 years and a choice of a variable or fixed rate. Some also offer deferment or forbearance for borrowers who have trouble making their payments. As of July 2017, one refinancing lender, the Rhode Island Student Loan Authority (RISLA), offered income-based repayment to borrowers who could demonstrate financial hardship.
Although borrowers who refinance federal student loans with a private lender lose benefits that come with federal student loans, many decide that the savings they can realize through refinancing are worth more to them.