Student loan debt feels like the new normal, right? Nearly everyone I know has some amount of student loan debt. And these loans aren’t for an insignificant amount of money: the average graduate has over $31,000 in debt and student loan debt in the US is a staggering $1.4 trillion. That’s trillion – with a T.
If you’ve been meaning to get a handle on your loans, but just haven’t made the time for it yet, I’m going to be blunt: your window of opportunity to refinance is closing. Interest rates are going up and soon it’s not going to make sense anymore.
I’m a pretty big fan of refinancing student debt — in the right situation — because this was one of the things that really motivated me to pay off my debt. The process doesn’t take long and is pretty painless, but it’s not right for everyone. We’ll go through some things you should consider to help you decide whether you should pursue refinancing.
Also, if you’ve previously refinanced but you qualify for a lower rate now (because either rates have dropped since you refinanced or you’ve become a more attractive candidate), you can refinance again. If there are no origination fees it won’t cost you anything to refinance those loans as often as you like.
What is student loan refinancing?
Student loan refinancing allows you to consolidate multiple loans to one new loan with a lower interest rate. If you have both federal and private student loans, you can consolidate them to a private loan.
The goal of getting a lower interest rate is to save money. If you have a $35,000 loan with a 6.8% interest rate and a repayment term of 10 years, you’ll pay $13,333 in interest. If you refinance that loan down to a 5% interest rate, you’ll pay $9,548 in interest — a savings of $3,785.
Don’t confuse student loan consolidation with student loan refinancing. When you consolidate your loans without refinancing you combine multiple loans into one loan, but keep the average interest rate that you were paying. Consolidation on it’s own doesn’t save you money, it just makes things simple by reducing the number of loans you need to keep track of.
Should you refinance?
Refinancing isn’t right for everyone. If you’re not sure whether it’s a smart move for you and your money, ask yourself these questions:
Can you refinance to a lower, fixed interest rate?
If the goal of refinancing is to save money, make sure that the rate you’ll be offered during refinancing is lower than the rate you’re currently paying. You’ll also want to refinance to a fixed rate loan. If you refinance to a variable rate loan as interest rates go up, the interest you pay on your loan will rise as well.
Will you be able to afford the new payment?
The shorter the loan term, the better the rate you’ll get when refinancing. When I refinanced my 10-year student loan, I was able to get a much lower interest rate by refinancing to a 5-year term. Luckily, my refinancing coincided with getting a raise at work, so I didn’t have to worry about being able to afford the new, higher monthly payment. But it’s important to be realistic with yourself and what you can afford to put toward your loan payment each month.
Are you giving up any federal benefits that you need?
This is the most important thing to consider first, before refinancing. Federal student loans come with a host of benefits that can be really helpful. There’s the option to pause loan payments if you lose your job. They offer income-based repayment plans if you’re struggling to make your monthly loan payments. And there is the student loan forgiveness program which borrowers in some public service professions can have their loans forgiven after a certain amount of time (though the current stats on qualifying for forgiveness are pretty bleak).
Aside from loan forgiveness, federal benefits are there to help you manage difficulties in loan payments, not to actually save you money.
Are you a good candidate?
When you refinance student loans you submit an application that includes your income, credit score, and credit history. Private lenders want to be sure you’re a low-risk candidate who will make payments on time. If you don’t have steady income or your credit is less than stellar, it might be worth it to press pause on refinancing and work on becoming a stronger applicant.
What to look for when refinancing
The nice thing about refinancing is you can shop around for a lender that’s a good fit for you. And with a slew of new online lenders, the process is incredibly easy.
Easy application process
Most applications for refinancing can be completed in less than 15 minutes and are done completely online. If you’ve been putting off refinancing because it feels like a chore, look for a lender that has an easy process.
Low, fixed rate
The goal of refinancing is to save money, so shop around to try and find the lowest fixed rate loan possible. Even a difference of 0.5% can mean saving thousands over the life of your loan. If you’re trying to figure out how much you’ll save, this calculator will be your new best friend.
No origination fees
I haven’t seen any private lenders requiring application or origination fees for refinancing, but I wanted to include it just in case you come across one. When you refinance you shouldn’t be charged an application fee or a loan origination fee. If a lender mentions them, drop them and look for a better, cheaper option.
In order to remain competitive, many private lenders are now offering perks, like loan deferment, that used to only come with federal loans. If you’re unable to pay your loans, your lender may let you stop making payments for 12 months or more (though the loan will still accrue interest).
The loan refinancing rate is getting competitive, so lenders are becoming more creative with the perks they offer. For example, SoFi offers resume prep, career coaching, and an entrepreneurship program.
To get you started on your refinancing journey, here are a few to consider:
SoFi: When I refinanced my business school loans, SoFi was one of the first online lenders to enter the refinance space. I used them and was incredibly impressed with how easy the process was, how much money I saved overall, and the span of services they offer. They’ve expanded their offerings to include personal loans and mortgages and once you’ve had one loan with SoFi, you’ll get a reduced rate on your next loans.
CommonBond: Interested in doing good while you refinance? CommonBond has partnered with Pencils of Promise to provide schools, teachers, and technology to students in the developing world. In addition to refinancing, they also offer loans to students, which can be a better option than some of the other traditional private lenders.
LendKey: Prefer to borrow from a credit union or community bank? LendKey might be the answer. LendKey is a marketplace that connects qualified borrowers with their partner credit unions and banks. They also offer borrowing options for all types of loans, so you’re not just limited to student loan refinancing.
Earnest: Do you like things to be really customizable? Earnest has a precision pricing tool that will customize your payment and timeline based on your budget. And I love that they spell out their eligibility requirements upfront.
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