30 Sep 3 Reasons to Consider Refinancing Student Loans
by Cecelia Dwyer, College Ave
While the job market and overall financial prospects for recent grads may be brighter than those only a few years back, the average Class of 2016 graduate will still shoulder over $37K in student loan debt, and the cost of college continues to rise.
So what’s your strategy when it comes to managing your student loan debt?
For many graduates entering (or a few years into) their professional life, refinancing student loans is an option worth considering.
Here are 3 reasons to consider refinancing student loans:
1. OVERALL COST SAVINGS
One of the main benefits of refinancing student loans is the ability to reduce the total cost of your debt by securing a lower interest rate.
A few factors influence your ability to get a lower interest rate now by refinancing than you were able to get when you first took out your loans.
Lenders typically use market benchmarks and indexes when setting interest rates. If the variable(s) a lender uses to set interest rates are more favorable now than they were before, then interest rates should also be more favorable. In other words, think of it as the price of gas – if the cost of a barrel of oil goes down, the price per gallon at the pump also goes down.
Most private student lenders require a risk evaluation to assess the borrower’s anticipated ability to repay the loan. This usually includes a credit and income check. The lower the risk (or higher ability to repay), the lower the interest rate offered.
When most people first apply for their student loans, they’re 18-24 years old with little to no credit history or income. In fact, you likely needed a cosigner in order to get the loan.
Once you graduate, secure an income, and begin building a credit history, your “risk profile” improves. However, without refinancing, your interest rates will continue to be based on your initial risk profile, and you will not benefit from your newly improved one.
A favorable outcome in one (or both) of these factors could result in a lower interest rate, leading to thousands of dollars in savings on your student loans.
In addition, when you refinance student loans, you select new repayment terms. Selecting a shorter repayment term, combined with a lower interest rate, will result in even more savings on your student loans.
2. NEW MONTHLY PAYMENT
Sometimes, things happen that you don’t expect and you need to adjust. Refinancing student loans can give you the flexibility you need to get a new, monthly payment that fits your budget better.
When refinancing student loans, you will select a new repayment term (the amount of years you take to repay the loan). Without considering other factors, simply selecting a repayment term that’s longer than what you currently have will result in a lower monthly payment. But keep in mind that also means you’ll probably pay more in overall interest charges.
In some cases, your lender may also give you the option to pay only the interest charges on your loan for a period of time. Generally, this type of option will increase the total cost of your loan over time, but it gives you the flexibility you need when your budget is at its tightest in the first few years post-graduation.
3. SIMPLER LIFE MANAGEMENT
Let’s face it. Even with modern conveniences, we’ve created new inconveniences. Managing personal finances can quickly become difficult and overwhelming. Juggling multiple online bills and their associated logins, pins, and passwords is a hassle. Not to mention separate, staggered due dates to keep track of.
By refinancing student loans, you can consolidate all of your loans into one new loan, allowing you to manage one payment and due date with one service provider.
When life is moving fast, it’s nice to know that your student loan debt – which has a critical impact on your credit score over time – can be managed in one payment. It’s not the only reason to refinance, but for early career professionals looking to get their finances in order, it’s one less thing to worry about.
To be clear, you should know that refinancing may not be available to everyone. A lender will find you to be a more desirable candidate if you have a good credit score and repayment history. Demonstrating a steady income will help too.
When considering refinancing student loans, it’s important to evaluate the benefits of your current loan(s), especially federal student loans. Federal student loans can offer borrowers special forgiveness, deferment, and forbearance options for reasons such as economic hardship or active military service that could be forfeited when refinancing. These are options worth exploring and understanding before making a decision.
Just because you had to take on debt for college doesn’t mean you have to overpay for your education. By exploring and calculating your refinancing options, you’ll have a better idea of where you can save and where you can stretch your budget.