With the rising interest rates on student loans, more and more borrowers are considering alternatives that can help them save money. One of these options is to refinance.
Although refinancing works for many people, it’s not always the best option for everyone. Generally, refinancing is a good idea for those who have the income and credit score to secure better rates. Here’s what you need to know to decide if it’s the right option for you:
What Is Refinancing?
Refinancing is the process of consolidating a private or federal student loan debt with a private lender. The lender will then pay off all your existing loans and offer you new terms.
When Should I Refinance?
You should seriously consider refinancing in the scenarios below:
- You have a good credit score. A higher credit score means that you’re more likely to qualify for lower rates for your loans.
- You have private student loans, so you don’t stand to lose the benefits that federal loans usually come with.
- Your loan has a variable interest rate. Even if variable interest rates can be beneficial, you don’t want to end up paying more if the rates suddenly rise. Refinancing to a fixed rate is the safer choice in this case.
- You have multiple loans. Remembering multiple due dates can be tough. To avoid delays and penalties, consider refinancing, so you only have to make one payment every month.
- You meet the minimum loan balance. Some lenders require a minimum loan balance — which can be as high as $10,000 — before they approve your refinancing application.
When Should I Avoid Refinancing?
It’s to avoid refinancing under the following circumstances:
- If you have federal loans, refinancing may mean that you’ll lose out on certain benefits such as deferment, forbearance, special repayment plans, or public service loan forgiveness.
- You can’t find lower rates than what you already have. Stick with your current loans until you can find a lender that offers more advantageous terms and rates.
- The origination and application fees are higher than the potential savings. Some lenders charge a percentage of your total loan amount to process your refinancing application. You might wind up paying more instead of saving money.
How Much Will I Save by Refinancing?
Refinancing can potentially save you thousands of dollars throughout the life of your loan. The amount you save will depend on how much you’re currently paying and how much you’ll be paying when you decide to refinance.
Should I Refinance My Student Loans?
Refinancing student loans works on a case-to-case basis. It may work for some people, but it may not be the right choice for others. Refinancing may be the right option if you have a good credit score and if you’re able to find a lender that offers better terms. However, you should think twice about refinancing if you could potentially lose out on the benefits and protections afforded to you by your existing loan.