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There are a bunch of perks to refinancing student loans, including lowering your interest rate and combining your loans for simpler repayment. But as with any financial move, it’s important to think through everything before making changes to your student debt. So before you apply, here are six questions to ask when refinancing student loans to decide if it’s the right move for you.
- 6 questions to ask when refinancing student loans
Perhaps the best perk of refinancing is lowering your interest rate, which can help you save lots of money.
Let’s say you owe $35,000 at a 7.0% rate. Over 10 years, you’d pay $13,766 interest.
But if you can refinance that loan down to a 4.5% rate, you’d pay $8,528 in interest over 10 years. That’s a savings of $5,238!
This is called pre-qualification, and it doesn’t impact your credit. It will give you a good sense of what rates you could get, although you won’t lock one in until you submit a full application.
If you can qualify for low rates, refinancing could save you money on your student loans.
To qualify for the low rates of a refinanced student loan, you’ll either need to meet a lender’s underwriting requirements or apply with a cosigner who can.
Lenders look for strong credit and a steady income as reassurance that you’ll be able to pay back your loan.
If you don’t have the best credit yet, you could do one of two things:
- Take steps to improve your credit and apply again in the future.
- Apply with a creditworthy cosigner.
Adding a cosigner to your application can help you get approved or qualify for better rates, but it does mean you’re sharing debt with someone.
That person’s credit could get damaged if you fall behind on payments. So consider whether you need a cosigner, who that person would be, and whether cosigning on debt would work out for your relationship.
Some refinancing lenders will release your cosigner from your loan after a couple years of on-time repayment. CommonBond, for example, will let you apply for cosigner release after 24 months of consecutive payments.
So if you’re applying with a cosigner but don’t want that person on the hook for your debt forever, prioritize a refinancing lender that offers cosigner release.
Note that cosigner release isn’t guaranteed; you’ll still need to meet a lender’s criteria and apply for it.
Before refinancing, you should also ask yourself if you need any federal repayment plans, such as Income-Based Repayment.
Refinancing federal loans turns them private, meaning you’ll no longer be able to access federal plans like income-driven repayment. And most lenders don’t offer income-driven plans, so you can’t really change your repayment plan unless you refinance again.
Some private lenders offer forbearance (the chance to pause payments) if you lose your job, and Earnest will let you skip one payment each year.
But you probably won’t have as much flexibility for repayment, so make sure to ask yourself if you need federal repayment plans before refinancing federal student loans with a private lender.
Another one of the important questions to ask when refinancing student loans is whether you’re working toward loan forgiveness now or in the future.
As mentioned, refinancing federal student loans turns them private, so they’ll no longer be eligible for federal forgiveness programs, such as Public Service Loan Forgiveness.
If you are pursuing one of these programs — or want to in the future — you should probably avoid refinancing federal student loans.
But if your answer to this question is no, then you don’t need to worry about losing access to these programs.
Finally, one of the last questions to ask when refinancing student loans is whether this move will help you achieve your financial goals.
Maybe your goal is saving money on interest. If you can snag a lower rate through refinancing, then yes, it could be the right move.
Or perhaps your aim is to adjust your student loan payments. By choosing a short term, you could get out of debt faster. By choosing a long term, you could lower your monthly payments so they’re not as burdensome.
Most lenders offer repayment terms of 5, 7, 10, 15, and 20 years so you can choose the one that works best for you. Just remember that lowering your monthly payments means you’ll be in debt longer and pay more interest overall.
Reflect on your goals for student loan repayment, and ask yourself whether refinancing will help you achieve them.
If so, start the process by checking your rates with a few different lenders. Make sure to shop around so you can find the best possible offer!
Want better rates? Here are the best banks to refinance student loans:
|Variable rates start at...||Fixed rates start at...||Repayment terms||Welcome bonus||Check your rates|
|4.54%||4.49%||5 - 20 years||$200||Visit LendKey|
|4.99%||4.47%||5 - 20 years||$200||Visit Earnest|
|4.22%||3.97%||5, 7, 10, 15, and 20 years||$120||Visit Laurel Road|
|4.53%||4.40%||5 - 20 years||$100 or $200, depending on the amount you refinance||Visit Credible|
|5.09%||4.74%||5, 7, 10, 15, and 20 years||$100||Visit SoFi|
|4.53%||4.83%||5, 7, 10, 15, and 20 years||$100||Visit ELFI|