Student loan debt is the second-highest consumer debt in the United States, just behind mortgages. Approximately 45 million borrowers owe $1.56 trillion in student loans.
You’ve heard of refinancing your house to get a low mortgage payment, but did you know you can refinance student loans? If you didn’t, then you may be wondering, is refinancing student loans a good idea? Should I refinance student loans? Refinancing student loans could save you money, if you have the right circumstances.
Keep reading to learn everything you need to know about refinancing student loans, so you can make the best decision for you.
How Does Student Loan Refinancing Work?
When looking at refinancing student loans, ask yourself if you can afford what this change will cost you right now. You can save money in the long run, but the costs of refinancing may be more than you can handle for the time being. Although, some refinance plans will help you have a lower monthly payment. When you refinance a student loan, you may end up paying less interest over the time of the loan because it will help you pay off your debt faster, which in the end means more money in your pocket.
Remember if you’re a parent with a child’s student loan in your name, you could put the loan in the child’s name, thus releasing you from the loan obligation too.
Pros And Cons Of Student Loan Refinancing
As you ask yourself, “Should I refinance my federal student loans?” take time to look at these refinancing student loans pros and cons.
Pros of Refinancing Student Loans
Student loan refinancing can save you money either in the long term, the short term, or both. These are the pros of refinancing your student loan:
You make one payment.
Refinancing can mean consolidating a loan, so you end up with one payment rather than multiple payments, and that makes budgeting easier. You can manage your debt more easily if you’re looking at fewer line items, so consolidating your student loans will create one line rather than multiple loan lines.
You spread your loan out over time.
When you refinance student loans, you have more options for how long you have to pay off that loan. The time you have depends on how much you owe.
You pay less each month.
If you’re struggling with cash flow at home right now, refinancing student loans could lead to a lower monthly payment, and thus more cash in your pocket right now. If you have a longer repayment term, you will end up paying less each month and have more cash to work with.
You pick your server.
With federal student loans, you do not pick the loan provider. If you refinance federal student loans, you’ll get to pick who lends you the money. Therefore, you’ll have more options for refinance student loans rates, giving you the ability to choose who gives you the best rate and service over time.
Cons of Refinancing Student Loans
With all of these wonderful benefits to refinancing student loans, you may wonder, “Is there a downside to refinancing student loans?” These are the cons of refinancing your student loans:
Saving money is not a guarantee.
While you can save money with student loan refinancing, you do not always save money. You may have a lower monthly payment and more time to pay off the loan, but if you do the math, you also may end up paying more in interest at the end of the loan term. Be sure you pay attention to these details before you take the plunge.
You lose federal loan benefits.
When you refinance federal student loans, you refinance with a private lender. Federal loans come with a host of benefits that private lenders do not offer, such as loan forgiveness and income-driven repayment. Income-driven repayment means your monthly payment amount depends on your level of income. Private lenders simply care that they receive their loan payment, so they do not offer perks like this.
You can lose money if you don’t have the right refinancing plan.
Don’t take refinancing your student loans lightly! You can find yourself in a dangerous place without the perks of federal loan plans if you make a wrong move with your refinancing.
Is It the Right Time to Refinance a Student Loan?
If you’ve determined that refinancing is a good idea for you, you may wonder, “When should I refinance my student loans?” To get the best refinance student loans rates, you need to have a high credit score. You, or your co-signer, should have a credit score at least in the 600s. However, lenders often seek out borrowers who have a score of 700 or higher.
Before exploring student loan refinancing, you also should have a stable job. You need to have enough income to cover your regular expenses and your new loan payment, plus any other debts you’ve incurred. So, once you have a stable job and a high credit score, you’ve reached the right time to refinance student loans.
How Much Can You Save By Refinancing Student Loans?
Is it worth refinancing student loans? Perhaps you’re living comfortably right now, and you’re wondering if you’ll really save any money by refinancing. Consider the rates you are paying on your student loans now, and then start to investigate the refinance student loans rates. Here’s how to do the math:
Let’s keep this basic. If you have a $100,000 student loan at an 8 percent interest rate, you will end up paying $46,000 over ten years. If you score a refinance with a 5 percent interest rate, you will pay around $27,000 and save yourself over $18,000.
Generally speaking, the more you owe on your student loan, the more you will save with refinancing.
How to Choose the Best Student Loan Refinance Offer?
You will be tempted to select the refinance offer with the lowest interest rate. If the interest rates are comparable though, look at what other perks the lender offers. For example, some lenders will refinance parent PLUS loans into a child’s name and others will offer flexible repayment options. In the end, choose the loan refinance offer that works best for you in the long run.
So, Is Refinancing Student Loans a Good Idea?
It may be, with the right conditions.
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