With millions drowning in debt, it’s no wonder so many Americans are refinancing their loans. Refinancing can be a great way to get a better interest rate and save money in the long run. And if student loans are cramping your style, maybe you’ve thought of joining in the refi madness yourself! But is refinancing your student loans smart?
When You Shouldn’t Refinance Your Student Loans
Student loans come in all rates and sizes—and the same is true of refi deals! So, before we talk about the smart way to refinance yours, let’s talk about the reasons you might need to take a hard pass on a refi.
If any of the following apply to your current situation, your best bet is to leave them as they are. Do not refinance if:
- It’s going to cost you any money to get it done. Application or origination fees could wipe out any savings you might get in the end. You’d be better off putting all your funds toward becoming debt-free fast, instead of wasting money just restructuring the debt.
- Doing so would saddle you with a higher interest rate than you already have. Keep in mind that a lower monthly payment doesn’t necessarily mean you’re winning financially. And if lowering that payment raises your interest rate, you’ll be setting yourself back in two ways: paying more and staying in debt longer.
- The deal requires you to sign up for a longer repayment period. Don’t do anything that postpones your date with debt-freedom. Any refi that places that date further into the future is an absolute no-go.
- You’ve recently declared bankruptcy. Most lenders aren’t as willing to offer a refinance after bankruptcy. If that’s you, you’re probably hurting in more ways than one. The good news is the debt snowball is a tried-and-true method for getting out of debt, regardless of the interest rates!
- There’s any chance that your new single-payment setup would make you lose your motivation to pay off your debt fast. Do you like subscriptions that let you set it and forget it? One reason people look to refinancing is to have fewer payments to keep up with. And that is convenient. But a refi isn’t worth it if it slows your momentum toward getting rid of the loans entirely. Again, you should be looking for ways not only to save time and money, but to speed up your progress toward having no payments at all.
If none of the above apply to you, chances are that refinancing is not only safe, but it could be a good option right now.
When You Should Refinance Your Student Loans
For many people, student loans feel like a roadblock that delays their dreams. And refinancing is often a smart way to get over those obstacles. But we only recommend a refi if all of the following are true for you:
- It’s completely free to make the change.
- You can keep a fixed rate, or you can replace a variable rate with fixed. (The last thing you want to do is give your lender the option to jack your monthly payment way up without notice!)
- You don’t have to sign up for a longer repayment period. (And hey, if the new loan shortens the term of repayment, that’s even better!)
- Your new interest rate would be lower than your current interest rate.
For example, imagine you have a student loan of $25,000 with a variable interest rate that’s currently sitting at 7%. You’d probably like to get rid of it, but so far you haven’t exactly been attacking the debt. So, you’re only making the minimum monthly payment of $225. At that rate, it’s gonna take you 15 years to pay off. That’s nearly four presidential elections away!
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A refi on the right terms could get things moving much more rapidly in the right direction! Let’s see what would happen if you found a lender who could refinance (with no fees) to a fixed rate of 5% on a 10-year timetable. We’ll chart the difference here:
|Original Student Loan||
Refinanced Student Loan
|$40,447 ($15,447 in interest)||
$31,819 ($6,819 in interest)
Wow! By paying an extra $40 a month, you’re knocking the loan out five years earlier and saving nearly $9,000 in interest over that period. And there’s no law saying you can’t send more than the minimum after you refinance. In fact, that new interest rate and the closer payoff target will probably motivate you a ton. Going from old loan to refi is like going from dial-up to WiFi!
Consolidation vs Refinancing
Here’s another term you might run into as you get after your student debt: consolidation. It’s related to (but different from) refinancing. While refinancing can get you a new rate on a mix of either private or federal student loans, consolidation is only available for student loans that were arranged through a federal government program. Another difference? While consolidation is something only the government can help you with, only a private company can help you refinance.
Consolidation’s something to keep in mind if you have multiple federal student loans. It just means taking all of your different loans and rolling them into one big loan. It could be a good move for you, but all of the same conditions for a smart refi apply to consolidation as well.
The main thing to know about student loan consolidation is that the only way to do it for free (which is also the only way it would make sense to pursue) is through the government. And you can only do it once (except for a couple of rare exceptions).
Should You Refinance Your Student Loans?
As with most financial decisions, the question of whether to refinance your student loans will depend on your personal circumstances. One thing’s for sure, being in debt sucks! And here’s something that helps: leaving it behind forever, as soon as possible.
For many people, refinancing helps them move through the Baby Steps faster. How? You could replace a variable rate and all of the worry it causes, with a fixed rate and some peace of mind. A refi could also lower your interest rate, allowing you to save a lot of money as you pay your loan down. Or it could shorten the timetable for the life of the loan, moving your payoff date way up. That speeds up your debt snowball! And if a refinance gets you one—or maybe even all of those advantages—you might get so pumped up about paying the loan off that you attack it with even more intensity than ever before!
Ready to see how refinancing might save you time and money? You can get a new student loan rate in minutes—with no fees to apply.