Like many millennials, I took out student loans to pursue my education. When I graduated from NYU, I still had $68,000 in student loan debt. As if that number wasn’t scary enough, I was shocked to realize that I was paying $11 per day in interest. The interest rates on my student loans were 6.8 percent, 7.9 percent and 2.3 percent. About $50,000 of my student loans were with the higher interest rates and were seriously costing me. I hated it. At the time, there was nothing I could do about it as student loan interest rates are fixed.
But over the past couple of years, there’s been a solution to this problem: student loan refinancing.
The lowdown on student loan refinancing
In years past, you might have gotten stuck with the student loan interest rate you had. But now it’s possible to refinance your student loans and get a better interest rate.
Student loan refinancing companies offer refinancing loans that can help you save money on interest. If you have good credit, you could get approved for a refinancing loan and lower your interest rate by a few points and potentially save thousands of dollars.
Once approved, the new loan would pay off your current student loans with the higher interest rates. After that, you would only have the one refinancing loan, instead of multiple loans, and have one lower interest rate.
Refinancing student loans can make your payments easier to manage while also saving you money on interest.
While this may sound like a great option for student loan borrowers, there are some key things to consider first.
The drawbacks of student loan refinancing
You might have heard of student loan refinancing companies like SoFi, CommonBond and more. All of these companies are private companies that offer student loan refinancing loans to eligible candidates with good credit. Depending on the lender, your repayment terms, rate, and more will all vary.
Things are more consistent with federal loans as your interest rates are fixed and there are numerous repayment plans available. Federal student loans are administered by the U.S. Department of Education and come with certain protections and repayment options for borrowers.
For example, if you are struggling to make your payments, you may be eligible for one of the Income-Driven Repayment plans, which limits your student loan payments to a small percentage of your income.
If you’re really struggling — like battling unemployment or illness — you have the option to defer your student loan payments. Through deferment or forbearance, you can postpone your student loan payments to a later date.
Having these options can be a godsend when you feel overwhelmed with your student loan payments.
Additionally, there are some student loan forgiveness options too. For example, there is the Public Service Loan Forgiveness program for borrowers who work in the public sector for ten years and make payments during that time. On top of that, any balance is forgiven on Income-Driven Repayment plans after 20 to 25 years, depending on the plan.
But what about if you refinance your student loans? Those options are no longer available.
Why? Because your original student loans from the government will be paid off and you will only have your refinancing loan from a private company. Since it’s a private company, the repayment terms and benefits to the borrower are different and wholly determined by the company.
Student loan refinancing companies don’t offer forgiveness and don’t come with Income-Driven Repayment plans. They may have some options to defer your student loans if you hit hard times, but it all depends on the company.
It’s also important to note that many refinancing loans are only available to consumers with good credit, repayment history, and a stable job.
Is student loan refinancing a good idea?
If you have federal student loans and are considering student loan refinancing to save money, consider your options carefully. How much money will you actually save? You may be able to fill out a prequalification form to see your prospective rate.
What will your repayment terms be? How will your monthly payments change? If it looks like you’ll save a good chunk of change, then evaluate if you think you will need to take advantage of Income-Driven Repayment Plans or student loan forgiveness in the future.
If you have a stable job with a good income and strong credit, you may not need these options and may benefit from refinancing. But if your job is on shaky ground, you might want to stick with your federal student loans.
Private student loan borrowers don’t have as much to consider as you will go from one private loan to another private refinancing loan. Private loans on the market don’t have the same protections as federal student loans so there’s less risk.
The key is to look at the immediate savings of refinancing alongside the benefits you are giving up. You also want to evaluate your current financial situation and make sure the new repayment terms are manageable. If refinancing makes sense, go for it, just be clear on what you’re giving up and know how refinancing will affect your financial situation.
You want to take the money you are saving on interest and apply it toward your student loans! If you realize refinancing isn’t a good idea, stick with the loans you have. Of course, that can change and maybe refinancing will make sense in the future.
The most important thing is to choose something that works for you and offers the benefits you need to pay off those pesky student loans!
Melanie Lockert is a personal finance expert, the blogger behind DearDebt.com and author of the book “Dear Debt: A story about breaking up with debt.” Melanie paid off $81,000 of debt and is now on a mission to help others do the same.
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