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- If you can get a lower interest rate on your loans, it might pay off to refinance.
- You may consolidate your student loans at the same time, which combines your loans into one.
- Federal student loans have some unique benefits, so only refinance after assessing your options.
If you are one of the millions of Americans with student loans, you are probably interested in anything that can save you money. In many cases, refinancing your student loans will do just that.
Refinancing is a fancy term for paying off your old loans with a new one. Essentially, you take a loan with a private lender and allow that lender to pay off your original loans. Then, you're responsible for paying the new loan, often at a lower interest rate.
But don't rush and refinance before you understand the long-term costs and ramifications. Follow these steps to decide if refinancing your student loans makes sense.
Should I refinance my student loans?
1. Review your student loans
Start by gathering all of the details on your current loans in one place. Make a list of your loan balances, interest rates, and minimum payments so you know the total you owe, what you have to pay each month, and how far you are from paying off each loan if you have more than one.
2. Note which loans are federal and which are private
While going through your loan list, also note if they are federal student loans or private student loans. Federal loans have some benefits like the ability to sign up for an income-driven repayment plan, deferment, or forbearance that may not be the case with private loans. Federal loans also qualify for the Biden administration's student loan forgiveness plan and the repayment pause.
Federal loans may also be subsidized, and you may qualify for additional forgiveness through the Public Service Loan Forgiveness program. With the private loans you'll receive when you refinance, you don't get any of those benefits.
3. Check out refinance options
Private lenders and loan companies offer loans to pay for your education as well as refinance loans that can repackage existing student debt. Getting a preliminary quote isn't hard: You just enter some basic information online. The more information you enter, the more detailed your quote will be.
Your options to refinance may vary based on your credit history and current debt load. Shopping around will help you find the best deal to refinance your loans. The most important place to look when shopping around is the interest rate. You should never refinance at a higher interest rate than you pay today. Only refinance if you will save money.
If you have a willing cosigner with excellent credit, it could be a path to a lower interest rate that saves you even more over the life of the loan.
4. Use a calculator to figure out how much each quote would save
Once you have your best refinance option laid out, compare to the list of loans from step three. If your refinance interest rate is lower than your current one, you will save money on every dollar you borrow over the remaining life of the loan, assuming you pay as scheduled either way.
This student loan refinance calculator from Credible does a good job of comparing monthly payments and total interest costs between an old loan and a refinanced loan. Don't just pick a loan for a lower monthly payment. Your total interest cost is the most important number in comparing your savings.
5. Focus on long-term savings over short-term gain
One of the most common reasons to refinance student loans is to overcome challenges making your regular monthly payments. A lower payment may be tempting today, but if the term is longer or the interest rate is higher, you could pay more in the long-term. With a focus on long-term savings first, you can make the best decision around refinancing your student loans.
source https://www.businessinsider.com/personal-finance/should-i-refinance-student-loans-save-money