If you are like the average 2016 college graduate, you have around $37,000 in student loan debt. You have more loans than you care for, and you probably do not want to take out another. But, there is one loan you should consider that could actually save you money. Refinancing your private student loans through a new lender is the best way to reduce your student loan burden. We will break down everything you need to know about refinancing so that you can confidently answer the question, should I refinance student loans?
What is Private Refinancing?
Under private refinancing, you secure a new loan to pay off your current loan(s). When refinancing is worth it, this new loan comes with a lower fixed interest rate that saves you money over the life of the loan. Refinancing also lets you change your loan term, which will save you even more on interest and get you out of debt faster. Not to mention, securing a fixed rate keeps your monthly payments predictable for the duration of the term.
Refinance Rates are Competitive
If you are trying to determine if you should refinance your student loans, one of the main things to consider is the interest rates. For a competitive interest rate on your private loans or on your private and federal loans combined, turn to private refinancing. Most private lenders offer fixed interest rates as low as 3%. That is much lower than the current federal consolidation rates of 4% to 7%. It is also likely much lower than your current weighted average interest rate.
Keep in mind that not everyone is offered the same interest rate under refinancing. Refinance companies look at your credit score, employment history, repayment history, and current income when you apply. The higher your credit score and the more money you earn, the better chances you have securing the lowest advertised rates. Adding a cosigner to your refinance loan is another way to get a more competitive rate.
Finding a Good Refinance Rate
When it comes to student loan refinancing, a good rate is relative. For some, a good rate may be 6.5%, but for others, 6.5% is not worth it. The goal is to secure an interest rate that is lower than your single loan’s interest rate or your group of loans’ weighted average interest rate.
Understanding Weighted Average Interest Rate
If you have more than one loan, you need to calculate your weighted average interest rate. This involves more than just averaging your loans’ interest rates. It takes into account the amount of each loan for the most accurate depiction of your debt. Use our weighted average interest rate calculator to help. You will need your current loan amounts and interest rates to use the calculator.
Where to Refinance
Once you know your current loan total and weighted average interest rate, you are ready to find a refinance lender. Some of our top picks are CommonBond, LendKey, and SoFi. Many banks and credit unions also offer refinancing services. Look into a few places to see what offers you get. Most companies run a soft credit pull, which will not affect your credit score. That means that you have nothing to lose by simply getting a quote. Plus, you will get your quote within a few minutes.
How to Make Sure You Get a Good Deal
Your refinance quotes will show you the new loan term and the new interest rate. Use our refinance calculator to see how much money refinancing will save you compared to what you pay now. Just plug in those numbers and your current student loan balance, student loan term, and weighted average interest rate (or just average interest rate if you are only refinancing one loan).
If you see savings in the green column, then that refinance deal will save you money. If it saves you money, it is nearly always worth it.
How Much Money Can Refinancing Really Save Me?
Depending on how much you owe, refinancing could save you thousands of dollars. If it will save you that much, then the answer to the question, “should I refinance student loans” is yes.
Read through the examples below to see just how refinancing saves people money.
|Refinancing Example #1|
|Like most graduates, Shannon owes $37,000 in student loan debt. She has a mix of federal and private loans with a weighted average interest rate of 7%. Shannon currently has a 15-year loan term. Her credit score is good and she makes good money. If she refinances with a 5% interest rate and keeps her 15-year loan term, she will save over $7,000 in interest. Plus, she will pay $40 less each month.|
|Refinancing Example #2|
|Robert owes $26,000 with a weighted average interest rate of 6.5%. His current loan term is 15 years, but he is planning to pay it off in 10. He has a decent credit score, but it is not stellar. If he refinances to a 10-year term and secures a 6% interest rate (just a ½ percent decrease), he will save $6,129 in interest. Best of all, he will be debt-free five years sooner.|
Do I Have to Refinance All of My Loans?
All federal and private student loans are eligible for private refinancing, but you do not have to refinance everything together. Some people choose to refinance only their private loans. With their federal student loans, they opt for federal consolidation. This is especially important to know if your loans have different interest rates. It might make sense to refinance student loans that have the highest rates but keep the ones with the lowest rates.
The Differences between Federal Consolidation and Private Refinancing
Federal consolidation is similar to private refinancing in that it lumps your loans together into one larger loan. However, only federal loans are eligible for federal consolidation. Plus, the interest rates on consolidated federal loans are not competitive. The interest rate is just your current loans’ weighted average interest rate rounded up to 1/8th of a percentage.
Compared to private refinancing, the big downsides to federal consolidation are that your loan term is not shortened and your weighted average interest rate gets a little higher.
Federal consolidation does save you money in other ways. It makes your loans eligible for federal student loan repayment programs and student loan forgiveness programs. The different programs result in reduced monthly payments, forgiveness after a set number of years, and assistance paying off interest.
If Refinancing My Federal Student Loans Right For Me?
Before refinancing your federal loans, consider your financial stability. Private refinancing means giving up loan forgiveness options, including disability discharge, and giving up income-driven repayment plans. This means you cannot lower monthly payments down the road or apply for loan forgiveness if you become totally and permanently disabled.
If you have a stable job, steady income, and good health, then you have nothing to worry about. Refinancing will only save you money and get you out of debt faster.
Should I Refinance Student Loans?
Private refinancing is the way to go if it saves you money and you can afford the new monthly payments. If it does not save you money, then stick with your current loans. You can always look into refinancing again after paying down more of your loan balance or improving your credit score.