Are you slowly chipping away at your student loans and wondering if you’ll ever manage to pay them off entirely? Or maybe you’re struggling trying to make your monthly payments and wish your payments were lower? Repaying student debt is a long journey – but there are ways to become debt-free more quickly and easily. One of those ways is by refinancing your student loans.
Refinancing your student loan debt can potentially lower your interest rate and your monthly payments, allowing you to repay your debt faster and save money. But not everyone should refinance their student loan debt.
Here are 4 reasons why you should refinance student loan debt and 2 reasons you shouldn’t:
1. To get a better interest rate
The biggest reason to refinance student loan debt is to get a lower interest rate on your loans. If you have a good job and a good credit rating, you can likely qualify for a lower interest rate. Why pay more if you don’t have to? Not only will it save you money over the life of your loan, but you might be able to pay off your loan faster if you’re making extra payments since more of your payments will go towards the principal rather than the interest.
2. To get shorter or longer repayment terms
When you refinance your student loan debt, you can change the repayment terms. For example, if you took out private student loans over a 10-year term and you have eight years left, you might want to refinance your student loan debt over a longer term. Student loan refinance lenders allow you to refinance your loans over anywhere from 5 years to 25 years depending on the company. By refinancing over a shorter term, you'll pay more on a monthly basis, but you might qualify for a lower interest rate which will help offset these extra costs. If you refinance over a longer-term, you will have smaller monthly payments, but pay more in interest over time.
3. To get a lower monthly payment
If you're currently struggling trying to make your monthly payments, then lowering your monthly payment is a great reason to refinance your student loans. There are a few ways that your monthly payment could be lowered by refinancing your student debt. One way is by changing the repayment terms in order to repay your loan over a longer period of time. Another way is because if you qualify for a lower interest rate your payments will be lower even if you keep the same repayment term length.
3. To remove your co-signer
If you took out private student loans with a co-signer, you might want to refinance your student loan debt in order to remove your co-signer. While many lenders offer the option of co-signer release after a certain number of on time payments, you might want to remove your co-signer before that or your lender might not offer that option.
4. If you're starting a business
If you plan to start freelancing or launch a start-up or a business, then it might make sense to refinance your student loans before you do so. One reason to do this is because your budget could benefit from the lower monthly payments as you get your business off the ground. Another reason to refinance your student loans before starting a business or beginning to freelance is that it might be much more difficult to do so after you quit your day job. It can be complicated to qualify for student loan refinance when you're self-employed because you have to prove your income – often with several years’ worth of tax statements showing self-employed income which you might not have.
Reasons you shouldn’t refinance your debt:
1. If you have mostly federal loans and need income-based repayment, student loan forgiveness, or other protections
When it comes to refinancing your student loans, you can choose to refinance your private loans, your federal loans, or both. But refinancing your federal student loans means that you will no longer be able to access a number of protections and benefits that only federal student loans offer such as forgiveness programs and income-driven repayment plans. There are also other benefits that you miss out on if you refinance your federal loans - so be sure to think it through before doing so.
2. If you don’t yet qualify for low rates
Most people who have a good job and good credit find that they save money by refinancing their student debt. But if you cannot save money on your interest rate by refinancing your loans, it might not make sense to do it just to get lower monthly payments by extending your loan terms. You’re likely better off improving your credit and refinancing your loans when you can get a lower rate.
Refinancing student loans can be a huge benefit for some people at the right time. It can save thousands of dollars and often makes repayment simpler when multiple loans are consolidated into one. Before signing on the dotted line, though, be sure to know what you are giving up by refinancing.
Jacob runs his own personal finance blog over at Dollar Diligence. Through meticulously watching his money and extreme frugality, he was able to pay down over $25k in student loan debt in just 15 months. You can learn more about his story and follow him here.
By Jacob Evans @DollarDiligence Follow Him On Twitter!