As a student loan borrower, you’ve likely heard about the benefits of refinancing your debt: you can save thousands, reduce your monthly payments, and get out of debt faster. But you may be worried about making the right decision and evaluating your loan options.
Here’s what to do if you’re wondering, “Should I refinance student loans?”
7 questions to ask when refinancing student loans
Refinancing can be an excellent tool for managing your student loans, but it’s not for everyone. And, refinancing rates and terms can vary from lender to lender. When you get a quote from a lender, they may not offer the best student loan refinance rates, hurting refinancing’s effectiveness.
When deciding to refinance student loans, ask yourself the following questions to ensure you’re making a smart decision.
1. Do you qualify for a lower rate?
Why refinance student loans? One of the top reasons is to reduce the interest rate on your debt. Depending on the type of loans you have and when you took them out, your interest rates could be 7% or higher. With such a high interest rate, interest will accrue rapidly on your loan, causing the loan principal to grow over time.
If you get quotes for refinancing, look for an interest rate that is significantly lower than you have now. A more competitive rate will make managing your loans easier and more affordable.
2. Will a longer loan term reduce your monthly payment?
When you refinance your loans, you can opt for a longer loan term. For example, if you currently have a 10-year term, you could select a loan term of 12, 15, or even 20 years. With a longer loan term, you could get a smaller monthly payment, freeing up more room in your budget.
Before refinancing your debt and selecting a longer loan term, keep in mind that you’ll pay more in interest over time than if you stayed on a 10-year plan.
3. Do you have federal student loans?
If you have federal student loans, you have access to benefits like income-driven repayment plans, federal deferment and forbearance, and loan forgiveness programs. And — due to the CARES Act passed in response to the coronavirus pandemic — your federal loan payments are suspended until January 31, 2021 and your interest rate set to 0%
Because the interest rate is capped at 0% right now, refinancing federal loans may not make sense. Once you refinance, your loans become private debt and aren’t eligible for the CARES Act protections.
4. Will you save money over the life of your loans?
If you refinance your loans and qualify for a lower interest rate, you may save a substantial amount of money. A lower rate means less interest will accrue, and more of your monthly payments will chip away at the loan principal.
For example, if you had $35,000 in student loan debt at 6% interest and a 10-year repayment term, you’d pay over $11,600 in interest charges by the time you paid off your loans.
If you refinanced and qualified for an eight-year loan at 4% interest, you would dramatically reduce how much interest accrues. With a shorter loan term and lower interest rate, you’d pay $5,956 in interest charges — by refinancing your loans, you’d save over $5,600.
|Original Loan||Refinanced Loan|
|Repayment Term||10 Years||8 Years|
5. Will you pay off your student loans faster?
When considering refinancing, calculate how long it will take you to pay off your loans. Because you can get a lower interest rate and a shorter loan term by refinancing, you can accelerate your debt repayment. Depending on the rate you qualify for and term you select, you could pay off your debt months or even years ahead of schedule.
6. Do you have a cosigner?
If you currently have a cosigner on your student loans, that person shares responsibility for the loan. It also affects their credit score, and can limit their ability to qualify for other types of credit. When refinancing, you may qualify for a loan on your own, removing your cosigner’s obligation. By taking your cosigner off the loan, you can give your friend or relative peace of mind.
7. Do you like the lender?
Lender terms and policies can vary widely. When evaluating a quote for student loan refinancing, make sure you research the lender and their policies regarding fees, prepayment penalties, and financial hardships. If you currently have a lender with added fees and limited benefits, refinancing can help you get access to more perks — and allow you to save money.
For example, lenders like Earnest and PenFed offer forbearance or financial hardship assistance if you experience a financial hardship. If you lose your job or have major medical expenses, you can temporarily postpone your loan payments without becoming delinquent on your account, giving you time to recover.
Comparison shopping for student loan refinance rates
Before submitting an application for student loan refinancing, do your homework to ensure you get the best student loan refinance rates. You can manually compare rates and terms from different lenders, but that can be time-consuming.
A better option is to use Purefy’s Compare Rates tool. With this approach, you fill out one simple form — it takes just two minutes to complete and doesn’t impact your credit score — and get rate quotes from the top refinancing lenders. Once you find a loan option that works for you, you can move forward with the loan application process and get a decision right away.