When Does It Make Sense To Refinance Student Loans?

Our contributing author, Travis Hornsby, CFA, is Founder and CEO of Student Loan Planner. He lives with his wife in St. Louis, MO, where he loves thinking up new student loan repayment strategies and frequenting the best free zoo in America. As one of the nation’s leading student loan experts, he has consulted on $500 million of student debt personally. Please note that contributing opinions and claims are that of the author. They are not always in strict alignment with our own opinions. – Joe

If you used student loans to pay for college or graduate school, you likely have many years of repayment ahead of you that might hinder your pursuit of other major goals.

And although some federal student loans might be forgivable, not everyone is eligible for loan forgiveness. For many borrowers, choosing to refinance student loans can be a great option to provide various types of assistance during repayment.

When you refinance, this means a new lender pays off the balance of your loans, effectively becoming your new lender. You then make payments to the refinance lender, ideally at a better interest rate or with altered repayment terms that makes paying off the debt easier.

Refinancing student loans isn’t always the best way to lower your payments or give yourself some relief from your debt. Take a look at these eight situations when a student loan refinance makes sense.

1. You have private student loans

Private student loan debt is a cause of many borrowers’ decision to refinance their loans. Since private student loans usually aren’t eligible for loan forgiveness programs, refinancing there isn’t a downside to refinancing a private student loan.

If you refinance federal student loans into a new private loan, however, you’ll lose out on potential loan forgiveness or income-driven repayment programs.

2. You need more cash in the short term

If you find it hard to pay the minimum monthly amount that’s due on your student loans, you might need a lower monthly payment. Refinancing is one way to lower your monthly loan payments, leaving you more wiggle room in your budget and reducing stress.

A refinanced loan might offer a lower interest rate, which in turn can lower the required monthly payment. You also might be able to secure different loan terms, such as making the repayment period longer.

Keep in mind that if you choose to refinance for a longer loan term, this increases the total amount you’ll pay over the life of the loan. You’ll gain the short-term benefit of lower monthly payments, which may be a necessary lifeline. Just be aware of how lower payments and/or longer repayment terms impact the total amount paid toward your student loans.

3. Your credit score improved

It’s a great sign if your credit score has gone up since you first took out your student loan. The great thing about raising your credit score is that you might be eligible for a significantly lower interest rate on loans.

A higher credit score tells lenders that you’ve shown responsible borrowing habits in the past, which makes you less of a default risk to them. Lenders often reward a higher score with lower interest rates, meaning you’ll pay less overall in interest fees. Lenders usually offer easy calculators to determine whether refinancing is worth it in that case.

4. Savings outweigh the cost of refinancing

There aren’t typically fees involved when you refinance your student loans. Unlike a home mortgage refinance that often costs homeowners thousands of dollars, refinancing student loans with most lenders is free. But you should always read the fine print and ask potential refinance lenders if they charge any fees before signing for a new loan.

If a lender you’re considering charges fees to refinance your student loan, keep shopping around. You should be able to find a better deal for yourself with most private lenders.

5. You can switch a variable-rate to a fixed-rate loan

A variable-rate loan allows your lender to change the interest rate during your loan’s repayment period. If you’re paying a variable rate on your loans, it can cause stress because you can’t always count on the same loan payment amount month over month. Your payment goes up if the interest rate increases.

The opportunity to convert your loan to a fixed interest rate might be an appealing reason to refinance, although you might end up with a higher rate. That might be worth it, given the extra peace of mind that comes from knowing your monthly payments won’t suddenly increase.

6. You’re dissatisfied with your current lender

Customer service is crucial in the business of lending, just as in any other business. If you’ve had a poor experience dealing with your current lender, that’s a compelling cause for refinancing with a different lender.

There are plenty of student loan refinance companies out there, and customer satisfaction reviews are easy to find online. Do some research and obtain quotes from several different potential new lenders to find the right fit for you. Refinancing with a different company that treats you properly can help ease the stress of loan repayment.

7. You want to simplify your loan repayment

Financial responsibilities extend far beyond the repayment of your student loans. And if you’ve got loans from several different lenders, you could be making monthly payments in different amounts to each of those lenders. That gets complicated and can increase the odds of your having a late payment or making some other error.

Although refinancing is not the same as student loan consolidation, a loan refinance can also bring multiple loans under the umbrella of a single loan and lender. This can take a weight off your shoulders. You’ll only have to make one monthly payment to cover all of your student loans — much simpler than keeping track of different lenders, amounts, and due dates.

8. You’d like to release a cosigner

Having someone cosign your student loans is a lifeline to many college students. However, after a few years of loan repayment, you might be confident about your ability to independently repay your debt, and no longer want a cosigner attachment to your loan. And as long as your income, credit score, and payment records qualify, refinancing can help by removing your cosigner from your new loan.

You’ll need to do your research on how to release your cosigner in the event of a refinance. You can take complete control of your finances and relieve your cosigner of their burden, freeing them to pursue their own financial goals.

Final thoughts

Refinancing student loans offers several key benefits to borrowers, like lower monthly payments or more favorable terms on the loan. If one or more of these circumstances apply to you, you might consider refinancing your loans.

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