If you have a college or graduate degree, chances are that you also have student loan debt. 44 million Americans have some amount of student loan debt, and the national level of student loan debt is over $1.4 trillion…and rising. While student loan debt may be common, it doesn't make it any easier to pay. For many Americans, making monthly student loan payments can be a heavy burden, particularly as they juggle other financial responsibilities, such as rent or mortgage payments, car loans, daycare costs, or saving for retirement.
What Options are there for Those Struggling with Student Debt?
High monthly student loan payments have led many borrowers to explore options for reducing their student loan debt. While graduates with federal student loans may be able to take advantage of federal repayment plans, borrowers with private student loans typically do not as many alternatives. Private student loan refinancing, however, can help many people with student loans, both federal and private, reduce their interest rates and monthly payments—and allow them to pay off their student loans much more quickly.
What is Student Loan Refinancing?
Refinancing is the process where a borrower applies for a new loan that is used to pay off old student loans. It can be used a combination of private and federal student loans and borrowers can consolidate multiple old loans into one more manageable loan. Because refinancing involves applying for a new loan, it requires that the applicant have a strong credit history, a steady income, and a history of making on-time payments on current student loans.
How Does Student Loan Refinancing Help?
Refinancing can be incredibly beneficial if you currently have high interest rates on any of your student loans, or if you have any variable interest rates on your loans. When you applied for your student loans, you were likely much younger, and did not have a good credit history. As a result, you may have needed a cosigner or you might not have been able to get a good interest rate on your loans.
Refinancing will allow you to significantly reduce your interest rate, obtain a fixed interest rate on your loan, or release your cosigner from your loans. If you now have a good job, a credit score of at least 660, and have been making regular, on-time payments on your student loans, you will likely qualify for refinancing.
If your loan is approved, you will be given an entirely new interest rate—which could range from as low as 2% to as high as 9%—to replace the interest rate of your previous loans. The proceeds of this loan will then be used to pay off your old loans, and then you will make payments on your new loan.
The main benefit of refinancing your student loans is that you will typically save a substantial amount of money on interest if you have a high interest rate on your current loans. Shaving even a single percentage point off of your interest rate can save you thousands of dollars on your student loans. Moreover, many refinanced loans have shorter repayment terms, which may result in you having slightly higher monthly payments—but will ultimately mean that you pay less money for your loans in the long run.
What Should I Be Aware of When Refinancing My Student Loans?
If you decide to refinance your loans, you should consider whether it makes sense to refinance your federal student loans along with your private student loans. While you may be able to obtain a lower interest rate on these loans, you will be giving up the many benefits associated with federal student loans, such as the option of income-driven repayment plans or having the loans discharged upon death or disability.
Importantly, refinancing typically does not cost money because many lenders do not charge origination or application fees. With that being said, you should remember that this is normally free. Do not respond to solicitations via email, letters, or phone calls; these are often scams that are attempting to charge you money for something that you can do for free yourself. Online refinancing calculators will allow you to determine if you will save money through refinancing based on the rates that you are currently paying for your student loans.
Final Thoughts & Next Steps
Refinancing can be a great option for anyone seeking to reduce the total amount of money that they owe on their student loans. A refinanced student loan can result in a lower monthly payment, as well as paying less interest over the life of your loan, ultimately saving you thousands.
If you meet the criteria for student loan refinancing and would like to lower your interest rates, consider if it would be a smart option for you.