There is currently $1.44 trillion in student loan debt in America. Additionally, as of 2018 Q3, 11.5 percent of aggregate student debt was 90+ days delinquent or in default. The fact is that people are having a hard time paying off their student loans.
If you’re up to your elbows in debt and want some relief, you might’ve asked yourself, “Should I refinance my student loans?”
Refinancing is an option for you no matter what type of student loans you have, but just because it’s an option, doesn’t mean it’s the best option for you. Since this question isn’t a simple “yes” or “no,” here’s what you need to know about refinancing, reasons people choose to do it, and whether it makes sense for your situation.
What is refinancing?
Student loan refinancing is the process of securing a new student loan at a new interest rate and term. In refinancing, your old federal or private student loans are paid off by the new lender and a new private student loan is started through the new lender. Student loan refinancing is normally done through private companies, banks or credit unions. Should I refinance my student loans?
When refinancing federal loans, you’ll lose some protections in the refinancing process.
Refinancing your student loans is not the same as consolidating your loans. With consolidation, you combine all of your federal student loans into one loan. Private loans aren’t eligible for consolidation.
There are no interest rate limits with consolidation loans. The fixed interest rate is based on the weighted average of the interest rates on the loans being consolidated, rounded up to the nearest one-eighth of 1%. Because of this, consolidating federal loans doesn’t provide any interest savings. there are no interest savings.
Why do people refinance student loans?
The main reason that borrowers refinance their student loans is to potentially save thousands of dollars in interest over the life of their loans. Refinancing through private companies can lower your interest rate, which in turn will lessen the amount of interest you are paying.
As of July 1, 2018, the interest rates on federal student loans range from 5.05% to 7.6%. If you refinance your student loan, you might receive a much lower interest rate, saving yourself tons of money in interest.
4 top reasons refinancing might be right for you
Refinancing your student loans is a big decision to make, and it could make a huge financial impact on you and your family immediately. Here’s when refinancing your loans could make sense for you.
1. You have a large amount of student loan debt
The average student loan debt for college graduates in 2017 was $28,650 — that’s a lot of money. And at Student Loan Planner, we regularly work with clients who have $100,000 and $400,000 in student loan debt. When you have that much debt, any kind of decrease in your interest rate impacts the amount of interest you pay.
Let’s say you have $150,000 in Direct Plus loans from grad school at the interest rate of 7.6%. If you have good credit, you could potentially lower your interest rate to 5%. That would drop your monthly student loan payment from $1,788 to $1,590. Over a 10-year repayment period, you would save $23,685 in interest fees.
2. You aren’t pursuing student loan forgiveness
Public Student Loan Forgiveness (PSLF) has been the talk of the student loan world the last couple of years. One of the things you lose out on by refinancing your federal student loans is access to federal student loan forgiveness programs.
Although loan forgiveness sounds like a great option, it requires working 10 years in a qualifying public sector job (likely at a non-competitive salary) which might not work for your long-term career goals.
Similarly, if you’re also not working toward student loan forgiveness through an Income-Driven Repayment (IDR) plan, refinancing could make sense. IDR loan forgiveness involves a service commitment of 20 or 25 years so if you don’t want to spend that much time paying off student loan debt, you might decide to refinance your student loans.
3. You have excellent credit
When you refinance your student loans, one of the biggest contributing factors to what kind of terms and interest rate you’ll receive is your credit. If you have average credit, you might get a decent interest rate that’s worthwhile.
However, if you have excellent credit, you can score some of the lowest interest rates on the market, which saves you tons of money in interest over the life of your loan. With a 10-year refinanced loan at fix rates, excellent credit could lower your interest rate another .75% over average credit.
Use our student loan refinance calculator to see your potential savings.
4. You have a stable income
An important factor when repaying student loans is making sure you’re creating a repayment plan that doesn’t stretch your finances too much. If you have a consistent, stable income and savings built up — and you don’t foresee needing to fall back on federal protections, including income-based repayment options, loan deferment, and forbearance — you might be a good candidate for refinancing.
When refinancing might NOT make sense for you
As many reasons as there are to move forward with refinancing your student loans, there are also other reasons student loan refinancing isn’t the best option. Make sure you understand both sides of the story before making any decisions. Here’s when refinancing might not be right for you.
You want to be eligible for IDR plans
IDR plans provide relief when paying off loans through lower monthly payments. When you choose to refinance your loans, you lose access to IDR plans. With IDR plans, your monthly payments are based on your income and family size.
Each IDR plan has repayment terms and is based on different percentages of your discretionary income. There are four available IDR plans through the federal government:
- Income-Based Repayment
- Income-Contingent Repayment
- Pay As You Earn (PAYE)
- Revised Pay As You Earn (REPAYE)
You will actually pay more interest over the life of your loan through an IDR plan than with a standard repayment plan. However, if your current monthly payment is too high to pay, an IDR plan could be the solution to your problem.
Your refinancing rate isn’t much lower
Direct PLUS loans benefit the most from refinancing because of their 7.6% fixed interest rate. But what if you have other federal loans, like Direct Subsidized Loans? Your interest rate is only 5.05%.
If you have average credit (i.e. a credit score around 650) and are looking for a 10-year fixed term, your interest rate could go up to 5.25%. In this case, it doesn’t make sense to refinance only to lose access to federal protections and end up with a higher interest rate.
You’re paying off your loans soon
If you’re further along into your repayment term, it might not make sense to refinance your student loans. Although you might save some money in interest, it could also mean adding time to your repayment plan potentially negating any savings from a lower rate. Unless you see a significant drop in your interest rate, it wouldn’t make sense to refinance in this situation. You’d be better off concentrating all your financial efforts into paying off your existing debt.
Student loan refinancing is not the best choice for everyone. Sometimes the best thing to do is to spend more time and energy to just pay off your loans as quickly as possible and get out from under your debt.
Should I refinance my student loans?
Now that we’ve looked at the pros and cons of refinancing your loans, consider what options make the most sense for your situation. Are you ok giving up access to federal protections like deferment, forbearance, and access to income-driven repayment plans? Are you worried about stretching yourself too thin financially?
To help you figure out the best decision for you, we created a free Refinancing Quiz. However, if you still aren’t sure about what to do with your student loans and want more help, you can book a consultation with one of our student loan planners now.
We’ll listen to your situation, ask the right questions, and work alongside you to come up with the best repayment strategy for you. We charge a one-time fee for our thorough review and found that 90 percent of our clients save an average of over $62,000 over the life of their loan repayment.
The decisions you make about your student loan debt can have a long term impact on your life. Take the time to get it right by contacting letting us help.
Have you refinanced your student loans? If you had the choice to do it again would you?