If you’re swamped with student loan debt and paying hefty interest charges every month, it can feel like you’ll never make any progress.
Experian reported that the average student loan balance is $35,620. Some federal student loans have interest rates as high as 7.08%, making your loan principal grow substantially over time — and forcing you to pay back far more than you initially took out in the first place.
Student loan refinancing can be an excellent tool for making student loans easier to manage, accelerating your debt repayment, and saving you money — but you likely have a lot of questions about the process before hitting “apply.”
Whether you want to know when to refinance student loans for the most savings or how to choose the right finance for your financial goals, here’s what you should keep in mind when shopping around for the best lender.
Student loan refinancing: Brief overview
Student loan refinancing is a process for handling your education debt. If you have existing federal or private student loans, you apply for a loan with a private lender and use it to pay off your existing loans.
The refinanced loan has different terms than the old student loans: You’ll have a new interest rate, minimum payment, and repayment term. After you refinance, you’ll have a different lender, and you’ll have just one loan and only one monthly payment to remember.
7 questions to ask before refinancing your student loans
Refinancing can be an incredibly effective strategy for paying off your loans. But before submitting your loan application, review these seven questions to ensure you understand the ins and outs of student loan refinancing.
1. What are the benefits of student loan refinancing?
Refinancing your loans has several key benefits:
- You can lower your interest rate and save money: If you have a good credit score, you may qualify for a loan with a lower interest rate than you currently have now. Over time, that lower interest rate could allow you to save hundreds or even thousands of dollars.
- You can pay off your student loans faster: If you refinance, opting for a shorter loan term will help you qualify for the lowest possible interest rate offer. With a lower rate, more of your monthly payment will go toward the loan principal, and you’ll pay less in interest charges. You’ll pay off your loans years ahead of schedule, letting you be debt-free sooner while paying much less in total interest.
- You can reduce your monthly payment: With a lower interest rate, a longer repayment term, or a combination of both, you can reduce your monthly loan payment and get more breathing room in your monthly budget.
2. What are the downsides of refinancing?
While there are advantages to student loan refinancing, there are some downsides to keep in mind.
If you have federal student loans and refinance your debt, your loans will become private loans. You’ll lose out on federal benefits and protections like income-driven repayment plans, eligibility for Public Service Loan Forgiveness, and the ability to enter into federal forbearance or deferment.
Also, not everyone will qualify for a refinancing loan. You typically need good to excellent credit or have a creditworthy cosigner who can apply for a loan with you.
3. When is refinancing a good idea?
If you’re trying to decide when to refinance student loans, it makes sense when you’re in a secure financial position. When you have a stable job and can comfortably afford your monthly payments, taking advantage of student loan refinancing allows you to save money on interest charges and pay down your debt faster without taking on much risk.
4. Are student loan refinancing and consolidation the same thing?
Student loan refinancing and student loan consolidation are very different processes.
With student loan refinancing, you work with a private lender to take out a loan for the amount of your existing debt. You can qualify for a lower interest rate and can save money over the life of your repayment term.
Student loan consolidation is only for federal student loans. You take out a Direct Consolidation Loan from the federal government and consolidate your federal loans together. Your interest rate isn’t lowered; instead, it’s the weighted average of your current loans rounded up to the nearest one-eighth of one percent. You won’t save money by consolidating your debt, but you’ll have one simple payment each month, and you can extend your repayment term if you wish.
5. Should I choose a variable or fixed interest rate when I refinance?
When you refinance your student loans, many refinancing lenders offer you the choice between fixed and variable-rate loans.
Fixed-rate loans have the same interest rate — and the same monthly payment — for the duration of the loan. They’re a good choice if you want to know exactly how much you’ll pay every month and want to lock in a specific interest rate.
Variable-rate loans usually start with a lower interest rate than fixed-rate loans. However, the interest rate — and the monthly payment — can change over time. Over the years, it can become much higher. Variable-rate loans are smart if you want to tackle your debt aggressively and want to take advantage of the lower initial interest rate, so more of your payments go toward the principal.
6. Do I need a cosigner?
Each refinancing lender has its own borrower requirements. In general, you’ll need to have good to excellent credit and a reliable source of income. If your credit score isn’t high enough, you may need a cosigner to qualify for a loan, or to get offered a low interest rate than you have currently. If that’s the case, make sure you ask a friend or relative if they’re willing to cosign the loan with you ahead of time.
7. What additional benefits does the lender offer?
Lender benefits and other features can vary widely company to company, so make sure to comparison shop before applying for a loan. For example, some lenders offer economic hardship programs for 12 months or more over the life of your loan if you lose your job or have a medical emergency.
Ask for student loan refinancing help
Student loan refinancing can be a useful way to accomplish your goal if you want to pay off your student loans as quickly as possible. But refinancing your debt is a major decision, and there are many nuances that depend on your unique situation.
If you need help navigating through the process or understanding the different aspects, consider setting up a time to talk to a Student Loan Advisor before refinancing your debt.
You can set up a free student loan refinance consultation with Purefy’s award-winning team of Student Loan Advisors. Simply schedule a time that works for you and get personalized refinancing advice for your unique situation and needs.