Should you refinance your student loans? That’s what we’re answering today.
Today, almost 45 million Americans hold more than $1.64 trillion in student loan debt.
The average student loan debt is $32,731. 3 million senior citizens are still paying off their student loans. As many as 40% of borrowers could default on their loans by 2023.
Through one of these private lenders, you could refinance federal student loans or private student loans for better interest rates and terms.
With a better interest rate, you could not only save money, but you could also use those savings to make extra payments on your loans and get out of debt faster.
Or, if your payments are too burdensome, you could select a longer term to obtain a lower monthly payment on your student loans.
3 questions to determine if you should refinance federal student loans
When you refinance your federal student loans with a private lender, you forfeit most federal student loan protections.
These loan protections are; income-driven repayment, postponement of payments, subsidized interests during deferment, or loan forgiveness.
Student loan refinance companies can refinance both federal and private student loans.
Is refinancing their federal student loans is worth it?
1. How much money can you save by refinancing federal student loans?
When you refinance federal student loans, you give up benefits such as income-driven repayment plans and loan forgiveness
So, it’s important to analyze if the risk/reward of refinancing makes sense.
Refinancing your federal student loans may get you a better interest rate if you qualify, and save you money, but how much could you save by refinancing?
Student loans most likely to benefit from refinancing include Grad PLUS and Parent PLUS loans.
These loans have relatively high-interest rates ranging all the way into the double digits, depending on the year you obtained them.
Most student loan refinancing companies allow you to check your prospective rate before filling out a full application.
Prequalifying lets you shop for your best terms and calculate how much you could save without hurting your credit.
2. Do you plan on using any federal repayment options?
The federal government has created several income-driven repayment plans.
These lower monthly payments, to make repayment more manageable for federal student loan borrowers.
These programs include Income-Based Repayment and Pay As You Earn plans.
But some of these plans are need-based and only available to certain eligible borrowers.
There are downsides to an income-driven plan such as paying more in interest or getting hit with a tax bill after loan forgiveness.
By opting to refinance your federal loans, you are no longer eligible for any of these repayment plans or loan forgiveness programs through the federal government.
If you have a high debt load, it is usually a safer bet to keep your federal loans, along with the option to apply for alternative repayment plans if needed.
If you are confident in your ability to repay your loans over your given repayment term and are seeking to maximize savings, and you also have a good credit score and a healthy income, refinancing your federal loans could be a wise option.
3. What are the potential new repayment terms from refinancing?
If you’re thinking of refinancing your federal student loans, it’s crucial to compare your repayment terms.
So be sure to look at your:
- How long you will be paying your loan
- Interest rate
- Monthly payment
For federal student loans, you can have anywhere from 10 to 30 years to repay your loans.
Refinancing companies typically offer repayment terms ranging from five to 20 years.
Also, note that federal loans are fixed-rate loans and guaranteed to maintain the same interest rate during repayment.
Private lenders, on the other hand, offer both fixed and variable interest rates.
These options can either hurt you or help you, depending on current and future interest rate market conditions.
It is typically a safer bet to choose a fixed-rate loan, but you can also realize additional interest savings with a variable rate loan in a low-interest rate market.
If you do choose to refinance your federal student loans, understand what impact it may have on your monthly payment as well.
You’ll want to make a side-by-side comparison of your repayment terms to understand if refinancing will truly benefit you in the end.
Deciding to refinance your federal student loans can be a big decision.
There’s no doubt that refinancing can be helpful for private student loan borrowers, but given the repayment flexibility and loan forgiveness options the federal government provides, it’s a tougher decision to make regarding federal student loans.
So what do we recommend?
If you recently graduated, are underemployed or thinking of changing jobs, we recommend keeping your existing federal loans due to the generous repayment options available until you stabilize your employment situation.
However, If you are in a comfortable and secure financial and employment position, have good credit and are seeking to eliminate your student loan debt as fast as possible, we recommend examining refinancing as a viable option.