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So many people focus on refinancing their homes while interest rates are low that they completely overlook the fact that refinancing student loans is also a money-saving option.
While scholarships are available for students who can demonstrate need or academic excellence, it can be very difficult to land enough free money to pay for the entire cost of earning a degree. If you are not one of the lucky ones who was awarded a full-ride scholarship, you may have no other option but to turn to student loans to pay for the rising cost of tuition.
Unfortunately, over your student career, you can easily rack up six figures in debt without even realizing it. One strategy to pay off this debt is to refinance.
What Does Student Loan Refinancing Entail?
It is not common for a student to take out one single loan when they are borrowing to cover educational and living expenses while in college. Instead, the student will take out one loan and then secure another separate loan through Federal lenders or through private lenders when their funds have run dry. While Federal Direct loans and Perkins loans do have low interest rates that are not based on creditworthiness, for students who have excellent credit, there are lower-interest options.
When you refinance, you are taking out an entirely new loan with a private lender and paying off the old loan with the new proceeds. You will in turn pay the lower interest rate for the period of the term, which keeps your payments low and will ultimately lower how much of the money that you pay towards interest charges.
Can You Refinance Your Federal Loans and Is It Wise?
Refinancing is not for everyone. In some scenarios, refinancing could actually do more harm than good. You need to first learn if you have a Federal or a private loan. If you have a Federal loan and want the protections that are written into these loan contracts, refinancing is not an option. This is because you will have no option but to refinance to a private loan since the U.S. Department of Education does not have a refinance program in place.
When is it Time to Consider a Refinance?
If you are currently employed and you have job security, you may be eligible for a refinance as long as you have good to excellent credit with no recent defaults. Private student loans have rigid underwriting requirements and you will not have the option to postpone payments for hardships or other valid reasons. Only consider the refinance if you have a high interest rate and you want to lower it. The result could be to reduce how much you spend per month or even to shorten how long you will be repaying the loan.
The average college graduate will walk the line with close to $30,000 in student loan debt. With the interest rates going down, it is possible to save as much as $8000 in interest over the life of a loan by lowering your interest from 6.8% to 5.5%. Always review the terms of the new loan before you sign any documentation. After doing this, you can decide if the money that you save from refinancing student loans is worth the investment of the time it takes to do so.
