If you have student loans, you know that refinancing is the new buzzword in the student loan world. If you don’t want to sound out of the loop, but you’re still confused about what refinancing is, and whether you should refinance your loans, we’ve got your back.
Here’s the first thing you should know — if you struggle with student loan debt, refinancing your loans could potentially lower your interest rate and save you thousands on your student loans.
Now that we’ve got that out of the way, let’s dive in.
First things first…
Should you refinance your student loans?
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When should refinance your student loans?
Do you feel like it’s going to take forever to pay off your 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, such as:
- The repayment term you choose
- Your repayment options
Can federal student loans be refinanced?
Yes! You can refinance government student loans with a private lender.
Here’s the thing: refinancing your loans can help you potentially lower your interest rate, and save you some money along the way.
But there’s a catch —
You could lose access to certain borrower benefits that come along with your federal loans when you refinance, such as access to income-driven repayment plans like Revised Pay As You Earn (REPAYE). While some private lenders offer similar benefits, not all of them do, so make sure you know what you’re giving up before you make a decision.
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 it’s very important that you don’t just choose the first offer you see
So how do you find the best deal for you? You go shopping of course.
- Compare all your options: 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, you can compare options from multiple lenders whose eligibility requirements you meet. The best part? You can compare all your options without affecting your credit score
- Swipe right on a lender and loan product: Once you compare all your options, it’s time to make it official with the lender and loan product that you think is right for you. How do you know which lender is right for you? Find out here
- Play that waiting game: Once you apply to a lender, you likely need to undergo a hard credit pull. You’ll probably also need some additional documents, such as your proof of` income, identity proof, and other official documents relating to your student loans
How much can you save by refinancing federal student loans?
First, you need to understand how refinancing works —
Refinancing combines all your existing loans into one payment; with this new loan, you get a new (potentially lower) interest rate, and with a lower interest rate, more of your money can go toward paying off your principal loan debt instead of just your interest.
Meaning you might be able to pay off your debt sooner. Like, multiple years sooner.
When you refinance your loans, you can also choose change your repayment term. A shorter repayment term might increase your monthly payments but maximize your overall savings (since you’ll pay less in interest), whereas stretching out your repayment term will help you get the biggest reduction in your monthly payment, but might mean that you end up paying more overall (since interest will keep accruing for a longer period of time.)
Credible can help you find the best student loan refinancing company for you.
And turns out, 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.
Should you choose a different repayment term? And if so, should you choose a longer or shorter repayment term?
Well, that depends on your goal.
Choosing a shorter term = maximize your total savings
All other things being equal, the shorter the repayment term, the lower the interest rate offered by most lenders.
With a lower interest rate, less of your money is going towards paying off just your interest, so you can pay down your principal faster.
But (as always) there’s a catch — refinancing into a loan with a shorter repayment term will mean that your monthly payment may increase.
Choosing a longer term = reduce monthly payment
If you’re most interested in reducing your monthly payment, choosing a longer repayment term might help you out.
Drawing out your loan term means that you can pay less every month, because you have more time to pay off your debt. But there’s a cost to extending your loan term as well. Since interest doesn’t stop accruing, a longer repayment term will mean that you end up paying more overall in interest.
If you’re interested in the nitty gritty of choosing one student loan refinancing strategy over another, and the outcomes of each, you can check out Credible’s Student Loan Refinancing Report.
Alternative repayment plans to consider
There’s one big advantage that federal loans offer borrowers that isn’t always available through private lenders —
Federal loans offer a number of alternative repayment plans for borrowers who are struggling to make their monthly payments, including income-driven repayment plans such as:
- Pay As You Earn (PAYE)
- Revised Pay As You Earn (REPAYE)
- Income-based repayment (IBR)
Your monthly payments under these plans are typically 10% or 15% of your discretionary income.
Income-driven plans also offer — wait for it — loan forgiveness.
You may qualify for loan forgiveness on any loan amount you haven’t paid off, after making 20 to 25 years of qualifying payments.
But remember, 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. And you might also be taxed on the income that’s forgiven.
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, as well as to other borrower benefits such as deferment or forbearance.
Some private lenders will also offer benefits like deferment or forbearance, but it isn’t a standard benefit like it is with federal loans. And, as of July 2017, just one refinancing lender, the Rhode Island Student Loan Authority (RISLA), offered income-based repayment to borrowers who could demonstrate financial hardship.
Private lenders typically offer repayment terms ranging from five to 20 years and a choice of a variable or fixed rate. And while not all private lenders will offer the same benefits as federal loans, many borrowers decide that the savings they can realize through refinancing are worth more to them.