Student loan debt is serious business, with college graduates leaving school with an average student loan balance of $29,650. If you’re hoping to pay off your debt early, there are many paths you can take, and student loan refinancing is one of them.
Refinancing student loans isn’t for everyone, but there are some situations where it may be a no-brainer. Read on to learn what it means to refinance student loans and when it’s a good idea to consider refinancing.
What is student loan refinancing?
Refinancing student loans involves replacing one or more existing federal or private student loans with a new loan. Unlike student loan consolidation, which you can do with federal loans through the U.S. Department of Education, you can only refinance student loans with a private lender.
Student loan refinancing can have several benefits, including some of the ones we’ll cover in a bit. But there are also some potential drawbacks to consider.
For example, unlike the Department of Education, private student lenders require a credit check to get approved, and the terms you qualify for are based on your creditworthiness. This means that refinancing could end up costing more, or you may not get approved at all.
Second, if you refinance federal loans, you’ll lose access to some of the benefits the Department of Education provides, including access to income-driven repayment plans, loan forgiveness programs, and generous deferment and forbearance options.
If you’re looking at student loan refinance options, carefully consider the pros and cons before you decide to apply.
8 reasons to refinance student loans
Depending on your credit and financial situation, as well as your student loan repayment goals, here are eight reasons to use student loan refinancing to help pay off your debt.
1. Score a lower interest rate
Student loan refinance lenders use your credit score, income and other financial information to determine your loan terms. And if everything looks great, you could potentially qualify for a lower interest rate than what you’re currently paying.
Not only would a lower rate save you money on interest, but it can also lower your monthly payment, making it more affordable.
2. Reduce your monthly payments
Locking in a lower interest rate can decrease your monthly payments, but so could refinancing with a longer repayment term. You may consider this if you’re struggling to get by with your current loan payments, and you don’t have federal loans that qualify for income-driven repayment plans.
The only thing to keep in mind is that extending your repayment term will result in more interest paid over the life of the new loan. So while this could provide some temporary budgetary relief, consider making additional payments when you can to pay off the debt early.
3. Get a variable interest rate
All federal student loans come with a fixed interest rate, but many private lenders offer both fixed and variable rates. Unlike a fixed rate, which stays the same for the life of the loan, variable rates fluctuate based on the current market rates.
Variable rates tend to start out lower than fixed rates, so it can be worth it to get one if you’re planning on paying off your loans in the next year or two and want to get some extra savings. However, the longer you take to pay off your new loan, the higher the risk that your interest rate will cost you more than a fixed-rate loan.
4. Tailor your repayment plan
The Standard Repayment Plan with federal loans is 10 years, and many private lenders also offer this term. But if you can afford the higher payment that comes with a shorter term, you can become debt-free faster.
Or maybe you have another specific repayment plan in mind that you’d prefer over your current one. As you compare student loan refinance lenders, you may have the opportunity to find a repayment plan that’s more suited to your needs.
5. Drop a cosigner from your loan
If you applied for a private student loan in college with a cosigner, they are equally responsible for your monthly payments until the debt is paid in full. Your loans also show up on their credit report and can affect their ability to get approved for credit for themselves.
If your credit is good enough, refinancing student loans in your name only will effectively release your cosigner from their duties. Of course, some private lenders offer a cosigner release program, but if you can’t qualify for it, refinancing could be the next best alternative.
6. Shift ownership of the debt to your child
If you’re a parent who took out student loans on behalf of your child while they were in school, you can refinance Parent PLUS loans or private loans in their name — assuming they’re on board with it — through student loan refinancing.
Doing this will not only relieve you of your obligation to make monthly payments, but it will also result in the debt being completely paid off on your credit report, and the monthly payment will no longer affect your debt-to-income ratio.
7. Get a lender with better service
With federal loans, you don’t get a say in who your student loan servicer is. And while you can choose a new servicer by consolidating your loans with another one, there aren’t a lot of great options among federal loan servicers.
With student loan refinancing, you’ll have the opportunity to choose a lender based on their service and benefits.
8. Simplify your monthly payment
If you have multiple loans with different servicers or lenders, a student loan refinance lender can allow you to combine all of them into a single monthly payment, simplifying your finances. This may not necessarily help you become debt-free faster, but it can make your life and money management a little easier.
Refinance student loans through Purefy
If you’re thinking of refinancing student loans, use Purefy’s rate comparison tool to view rates and terms from the best lenders in one place. Simply share a few details about yourself and your debt, and you’ll be able to —shop around” without needing to visit each individual lender’s website and fill out a cumbersome application.
Depending on your situation, refinancing student loans can be a key step in paying off your debt more quickly. At the very least, it may give you a little more room to breathe.