Private student loans can be an effective way for parents and students to help cover the cost of a college education. But when it’s time to graduate, it may not make sense to hold onto your original loans.
Refinancing your private student loans could provide some significant benefits that can help you save money and give you more control over your repayment plan.
Read on to learn why you should refinance student loans in the first place, when to refinance private student loans, and both the benefits and drawbacks of that decision.
What is private student loan consolidation?
Consolidating student loans involves combining multiple loans into one new loan with a different lender. In many cases, though, you can refinance just one loan.
Private student loan consolidation specifically refers to using this process to refinance loans originated by a private lender as opposed to federal student loans. Of course, it’s also possible to consolidate federal student loans with a private lender, and you can even consolidate both federal and private loans at the same time.
Depending on your situation, consolidating your private student loans could save you money on interest and allow you to customize your repayment plan based on your financial situation and your goals.
Why refinance student loans in the first place?
Whether it’s private or federal student loans, refinancing your debt with a private lender can help you get ahead with your student loan payoff strategy. Here are some of the major benefits to consider.
Lower interest rates
Depending on your credit and financial situation, you may be able to get a lower interest rate than what you’re paying on your existing loans. Especially during a time of low market interest rates, you could save a significant amount of money.
For example, let’s say you have $30,000 in student loans with a weighted-average interest rate of 5% and a 10-year repayment plan. In this scenario, your monthly payment would be $318, and you’d pay $8,184 in interest in total.
If you were to qualify for a refinance loan with a 3% interest rate and the same 10-year plan, your monthly payment would drop to $290, and your total interest charges would add up to $4,762 — that’s a savings of $3,422.
So if you’re trying to figure out how to lower student loan interest, refinancing is your best bet. Even if you’re lowering your rate by just 1%, it can be worth it.
If your situation makes it hard for you to keep up with your monthly payments, or you can afford to pay off your student debt early, refinancing could give you the control you need to tailor your student loan repayment plan to these needs and goals.
In general, most student loan refinance lenders offer repayment terms ranging from five to 20 years. So if you have a 10-year repayment plan, which is pretty standard, shortening it to five years would save you both time and money as you eliminate your debt.
On the flip side, if you’re wondering how to lower student loan payments to create more room in your budget for other necessary expenses, you could opt for a longer repayment term, which would lower your payment amount. Just keep in mind that if you go this route, you’ll end up paying more in total interest.
Choice of lender
When you originally took out your private student loans, you may not have had a lot of choices in lenders. But now that you’ve started your career and had time to build your credit, you may have a wider selection from which to choose.
Carefully consider all of the features each lender provides to see if one provides a better fit than the others.
Remove a cosigner or refinance in a child’s name
It’s not uncommon for a student to need a cosigner to get approved for a private student loan. Alternatively, some parents may have applied for the loan with the plan to refinance the debt into their child’s name after they graduate.
In both cases, refinancing could make it possible for you to make these changes.
When to refinance private student loans
This move isn’t for everyone, so it’s important to know when to refinance private student loans. Here are some situations where it might make sense for you:
- Your credit and income have improved since you got your first private student loans, and you can qualify for a lower interest rate.
- Market interest rates have dropped, making it easier for everyone to score lower rates.
- You’re struggling to keep up with your monthly payments and need a lower one.
- You want to pay off your debt more quickly with a shorter repayment period.
- A parent cosigned your private student loans, and you want to refinance in your name only.
- You took out private student loans to help your child pay for school, but now want to refinance the debt into their name.
If any of these situations apply to you, carefully consider how refinancing can help you achieve your goals.
Compare student loan refinance rates and save the most money
As with any financial product, it’s rarely a good idea to take the first offer you see. Each lender has its own criteria for determining eligibility and interest rates, and many lenders also have varying interest rate ranges that they offer.
As a result, it’s wise to take some time to shop around and compare multiple lenders to ensure you’re getting the best deal based on your situation.
In general, student loan refinance companies allow you to get prequalified before you submit an official application. This process only requires a soft credit check, so there’s no impact to your credit score, and it allows you to view a tentative offer based on your credit profile and other information.
Because doing this with each individual lender can be time-consuming, consider using Purefy’s rate comparison tool to shop around. You’ll share the same type of information and undergo a soft credit check, then you’ll be able to view loan offers from different lenders all in one place.
Comparing student loan refinance rates can be key to helping you decide if consolidating private student loans is right for you. It can also help you maximize your savings.