If you went to college, there’s a good chance you probably left with substantial student loan debt. In fact, 69% of all students graduating from bachelors programs had student loans. On average, graduates leave school with nearly $30,000 in debt, a significant burden to deal with on an entry-level income.
If you want to take charge of your debt and get some relief, student loan refinancing can be a smart strategy. Below, find out how refinancing works and what you should consider to make the most of this strategy.
About student loan refinancing
When you refinance student loans, you work with a private lender — like Purefy — to take out a loan for the amount of your current federal and private student loans. Then, you use the new loan to pay off your old ones. Going forward, you have just one loan and one easy monthly payment.
Your new loan is different from your old ones. You’ll have an entirely different interest rate, monthly payment, repayment term, and even a new due date.
When refinancing your student loans makes sense
How can taking out a new loan benefit you? Refinancing can help you in the following situations.
1. You want to pay off your debt early
Your student loan debt can be a real problem, keeping you from pursuing goals like traveling, buying a home, starting a business, or even getting married. To get more freedom, paying off your debt as quickly as possible is key, and refinancing can help you achieve that goal.
When you refinance your student loans, you can qualify for a lower interest rate. With more of your payment going toward the principal rather than interest, you can cut your repayment term by months or even years.
2. You want to save money
High-interest rates on your student loans can cause you to pay back thousands more than you originally borrowed. Student loan refinancing helps combat that problem by helping you save money.
When you refinance, you can get a lower rate and a shorter repayment term, giving you significant savings.
For example, pretend you took out $30,000 in student loans at 7% interest. With a monthly payment of $348 and a 10-year repayment term, you’d repay a total of $41,799. Interest charges would cost you over $11,000.
But if you refinanced your debt and qualified for a 10-year loan at just 4% interest, you’d have a monthly payment of $304 and you’d repay just $36,448. By taking just a little time to refinance your loans, you’d save over $5,000.
3. You need a lower monthly payment
If you can’t afford your monthly payment, refinancing can help you, too. When you refinance, you can opt for a longer loan term. You’ll pay more in interest fees over time, but by extending your repayment term, you can reduce your monthly payment, giving you more breathing room in your budget.
For example, if you had $30,000 in student loans at 7% interest and a 10-year repayment term, your monthly payment would be $348. But if you qualified for a loan with a 5% interest rate and extended the repayment term to 15 years, your payment would be just $237. By refinancing, you’d save over $100 each month.
4. You want to remove a co-signer from the loan
When you were in college, you probably didn’t have much income or an established credit history. To qualify for a student loan, you likely needed a co-signer to apply for the loan with you. While a co-signer can be beneficial, your co-signer is responsible for the loan, too. Co-signing a loan can make it difficult for your parent or relative to qualify for other types of credit, such as a mortgage or car loan.
When you refinance, you can put the new loan solely into your name, eliminating the co-signers responsibility.
5. You want to transfer parent student loans to the student
If your parents took out a student loan in your behalf, you may want to take over the responsibility for the loan once your career is established. But federal and private lenders don’t allow you to transfer loans to someone else.
However, you can do so by refinancing the loans into your own name. Going forward, you’ll be responsible for the loans, and your parents have no obligation to repay them.
4 times refinancing may not be a good idea
While refinancing can be beneficial, it’s not for everyone. There are some situations when it just doesn’t make sense to refinance your student loans.
1. Your job isn’t secure
If you work in an industry with high turnover or your employer is facing financial difficulties, refinancing probably isn’t a good idea, especially if you have federal student loans.
With federal loans, you have benefits like loan forbearance, deferment, and income-driven repayment plans. If you’re facing a financial hardship, like a reduction of income or job loss, you can take advantage of those benefits. However, once you refinance your federal loans, you’re no longer eligible for those perks.
2. You plan on pursuing loan forgiveness
If you work for a non-profit organization or a government agency and you have federal loans, you may qualify for loan forgiveness through Public Service Loan Forgiveness (PSLF).
However, private student loans are not eligible for PSLF. If you think loan forgiveness is an option, it’s a good idea to skip refinancing your debt.
3. You’re applying for other forms of credit
When you apply for other forms of credit, such as a mortgage, lenders will look at your credit report and recent credit inquiries to decide whether or not to approve you for a loan. If you recently financed, that can affect their decision, making it difficult for you to qualify for other forms of credit.
4. You can’t qualify on your own
Student loan refinancing lenders don’t work with everyone; each lender has their own eligibility requirements regarding income and credit score. If you’re just starting out or your income isn’t stable, you might not qualify for a loan on your own.
Instead, you may need to have a co-signer in order to get a loan. Asking someone to co-sign a loan with you is a big favor to ask, so it may not be something you want to do.
How to get the best rate
If you decide that student loan refinancing is right for you, make sure you get quotes from multiple refinancing lenders to ensure you get the lowest interest rate and most favorable terms. You don’t have to comparison shop on your own. With Purefy’s Find My Rate tool, you can get offers from several lenders at once, helping you make an informed decision.