Can You Refinance Your Student Loans to Lower Interest Rates?
In May 2011, I graduated with my Master’s degree from NYU. Getting my master’s degree and going to a private school didn’t come cheap. Even though I've been on my own debt payoff plan for 5 years, I still had a whopping $68,000 left when I was able to add M.A. to my name.
My student loan balance was daunting by itself, but what made it worse were the high interest rates. My graduate student loans had interest rates of 7.9% and 6.8%. Given my large balance and high interest rates, I calculated that I was losing $300 per month on interest.
I was floored. How was I paying that much in interest each month? That was the equivalent of one cross-country flight that I could take each month, but instead was being used to pay interest. It wasn’t even hitting the principle balance. I felt so demoralized and was in a funk about my student loan repayment.
It’s these sky-high student loan balances and high interest rates that can hurt your student loan progress. Luckily, there is a way to lower your interest rates on your student loans. How? Through student loan refinancing.
What is Student Loan Refinancing?
Student loan refinancing is the process of consolidating your student loans into one monthly payment, while potentially being approved for a better interest rate.
If you have good credit, income, and payment history, student loan refinancing can help you lower your interest rate and result in some serious savings. Student loan borrowers can refinance their student loans through a private student loan refinancing company.
How Does Student Loan Refinancing Work?
When you refinance your student loans, you are essentially applying for a new loan to pay off all your other student loans.
Under the new loan, your old student loans are paid off and you are left with one monthly payment and one interest rate. In short, the process of student loan refinancing is not reversible, so it’s something you should consider carefully.
Once you apply, get approved, and move forward with your decision, your old student loans are paid off under your new loan. Under your new loan, you have one monthly payment and one interest rate (and a potentially lower one at that). Not only that, but you may have a new repayment term and a monthly payment that is more manageable.
Because refinancing will affect the way that your credit lines are reported to U.S. credit bureaus, your credit score may be affected by consolidating student loan debt.
Is Student Loan Refinancing Right for Me?
If you’re a student loan borrower overwhelmed with multiple student loans, student loan refinancing can be a good option to make your student loan payments more manageable. Not only that, you could potentially save thousands of dollars on interest over the life of your loan.
Though the cost savings can be tempting, student loan refinancing isn’t for everyone. When I learned about student loan refinancing, I was making a low salary — less than what I owed on my student loans. I was rejected for student loan refinancing because they want to know you can reasonably afford to pay back your new loan.
If you are borrowing more than you make, it’s probably not the best idea to refinance. At least not yet. You want to make sure all your financial ducks are in a row before pursuing student loan refinancing — make sure your income and credit are in good shape and that you are comfortable with the new terms and conditions of your new refinancing loan.
Pros of Student Loan Refinancing
Feeling overwhelmed by student loans? Student loan refinancing can make your life easier and also make your student loans more affordable. Some pros of student loan refinancing include:
- One monthly payment
- One interest rate
- Lowering interest and saving money on interest
These points can make your student loan repayment journey a lot more affordable and more enjoyable as well. Though you can save money on interest and have one monthly payment, there are some cons to consider as well.
Cons of Student Loan Refinancing
Though student loan refinancing can help you save money on your student loans, there are some important things to consider before you refinance:
- If you have federal student loans, you will forfeit any income-driven plans or Public Service Loan Forgiveness available to you. So if you’re banking on these options, it’s probably best to avoid refinancing.
- You could pay more in the long run. Through student loan refinancing, you may be able to extend your repayment period in addition to lowering your interest rate. While that can make your student loan payments more manageable, it can also mean paying more over time. If you extend your repayment term, you will pay more in interest.
- Student loan refinancing is not reversible. Your old student loans will be paid off by the new loan, so all of your old benefits will be gone. If you think down the line you will have trouble making payments, or would like to pursue Public Service Loan Forgiveness, student loan refinancing is probably not right for you.
If you want to get your student loans gone quickly, and your income can afford the payments, student loan refinancing can help you lower your interest. In short, you could save thousands of dollars over the life of your loan through refinancing — but it’s only worth it if you can truly afford it and are not intending on relying on public programs for federal student loans.
Which Companies Offer Student Loan Refinancing?
First of all, it’s important to note that student loan refinancing options are through private companies. Hence, the good-credit requirements and also the forfeiture of certain public programs.
When you are applying for student loan refinancing through a private student loan company, you are playing by their rules.
As mentioned above, it can be helpful if you can pay off your loans quickly and have the income and credit to support it. If you don’t, federal student loan repayment options may be more beneficial for your current financial situation.
If you're feeling overwhelmed by your student loan payments and want to streamline your payments and pay less in interest, student loan refinancing can be a good option for you. But which companies offer student loan refinancing? Here are the major players in the student loan refinancing space:
- Citizen’s Bank
For smaller balances, it is possible to use balance transfer credit cards to consolidate student loan debt as well. As always know how to use them wisely first.
Read Refinancing Terms Carefully
Many student loan refinancing companies offer various repayment terms and the option of a variable or fixed interest rate. If you move forward with student loan refinancing, it’s important to understand the impact to your monthly payment. If you choose a longer repayment term, your monthly payment may be lower. While that may seem like a win, it could mean paying more interest over time. Ideally, through student loan refinancing you are able to lower your current interest rate to something more beneficial for your financial situation while keeping the same repayment term, or something even quicker.
Refinancing and lowering your interest rate could be negated by extending your repayment term. In short, weigh the pros and cons of student loan refinancing before making a decision. Yes, you can save a good chunk of money on interest. But if you extend your repayment term and pay more in interest or lose out on student loan forgiveness options or an income-based plan, you could be shooting yourself in the foot.
Look at the perks of each student loan refinancing company as well as their eligibility requirements. Some student loan refinancing companies may have certain income and credit requirements, so you want to make sure you are eligible before applying.
If you do get approved, fully understand what benefits you may be giving up with your federal or private student loans. Maximize student loan refinancing by putting the money you save on interest toward your principle balance.
In the end, you want to consider student loan refinancing at the right time and the right place in your student loan repayment journey. For me, student loan refinancing wasn’t a good option at the time, as I owed more than I was making per year. Because student loan refinancing companies are private companies, they may have stricter credit requirements.
Before you make a decision on what is right for you, consider your financial goals, how refinancing will affect your monthly payment and interest rate, and more. Look at the big picture and not just the short-term gains.
When done right, student loan refinancing can be a smart option to save you thousands of dollars on interest — which could help you get out of debt faster. Though, if you have federal student loans and think you might want to pursue Public Service Loan Forgiveness or need an income-driven plan down the line, sticking with your current student loans may be best. If you only have private student loans, there’s less of a risk. But if you have federal student loans and private student loans or just federal student loans on your plate, consider what you will be giving up as well before you make the decision to refinance.