Should You Refinance Your Student Loans?
I recently started doing a ton of research on the student loan crisis in America because it's a topic that many of my readers, as well as friends, talk to me about. Many of them are drowning in more than $100,000 of debt and are not sure if or when they will see a life raft. On top of this, there is an ongoing debate as to whether refinancing your student loans is a good option. The answer? It might not be the best solution for everyone, but it's important to understand the pros and cons before you make any rash decision about your finances.
A quick note: this post may contain affiliate links which help keep this blog up and running. For more information, see my disclosure policy.
What does it mean to refinance your student loans?
Student loan refinancing involves swapping your current student loans for a new loan with a lower interest rate. By refinancing your student loans, you can often reduce your monthly payments, or otherwise renegotiate the terms of your debt.
If you have arrived here and already know that you want to refinance your student loans, I recommend checking out LendEDU and completing their 3-minute questionnaire to see how you could potentially save thousands of dollars on your student loans.
What are the benefits of refinancing your student loans?
- If you qualify for a refinance, you could lower your interest rate and potentially reduce your monthly payments.
- You may be able to renegotiate the terms of your original loan(s) and a release a co-signer.
- You can use the interest savings to aggressively pay down your principal and get out of debt faster.
refinancing is not a good option for everyone
You should be aware of the following:
If you refinance a federal student loan with a private lender, you will likely miss out on the following options:
- Income-based repayment plans
- Loan forgiveness programs
- Deferment or forbearance under federal rules
- In the event of your death, you will lose federal student loan forgiveness.
- You need to be in good financial standing in order to qualify (see below for more details).
What does this mean for your situation?
Questions to ask yourself before you consider refinancing your student loans
Do I have a healthy income? If you are currently in between jobs or not in a stable spot career-wise, it might not be the best time to consider this move.
What is my debt-to-income ratio? Even if you are earning a decent salary, lenders will want to know how wisely you are spending your take home salary each month. Enter: the debt-to-income ratio calculation or DTI for short! You can figure out your DTI by taking your total monthly debt payments (include rent payments) / gross monthly income. A lower number is a good indicator to lenders.
What is my credit score? It’ll be easier to get approved for a student loan refinance if you have a solid credit score. There are many free options to check your credit score such as Credit Karma or Mint. These sites will also give you the low down on which factors are impacting your credit score more than others.
How confident am I that I will be able to pay off my loans? If you refinance a federal loan with a private lender, you must be confident that you can keep up with payments and aggressively pay down your debt before giving up the protections that come with federal student loans.
Finding the right bank to refinance your student loans
Still with me? If you've determined that you have a healthy income, a low debt-to-income ratio, a good credit score and you're ready to pay down your debt aggressively, then the next step is to find the right bank to work with you. Instead of researching these individually, you can use LendEDU to compare rates for up to 12 respected companies for FREE.
No, it isn't a scam and there isn't a catch.
LendEDU was actually founded by two 20-somethings, one of whom (Nate Matherson) was saddled with $50 grand in debt himself. When he wanted to refinance his loans, he realized that the process was stressful, to say the least.
Traditionally, if you wanted to refinance and potentially lower your interest rate, you would have to complete long applications for each lender. This not only took a ton of time but you would have to pull your credit each time.
So Nate and his college roommate, Matt Lenhard, created LendEDU - which is pretty much like the Kayak of student lending. With LendEDU, a single application gives you the chance to compare rates without hurting your credit score. How awesome is that?
Other things to know:
- It takes only 90 seconds to complete the application.
- You can compare rates from up to 12 respected companies like SoFi and Citizens Bank where you can potentially lower your interest rate & your student loan payments.
- Refinancing to lower rates can save some borrowers upwards of $20,000 over the life of their loan!
- And there's no cost to you :)
To beat a dead horse, if you've determined that you've got a 1) healthy / stable income 2) good credit score 3) low credit utilization 4) desire to get out of debt quickly, then click on this link to complete LendEDU's 90 second questionnaire.
And now, onto your final step! Once you've found the right bank that fits your needs, then it's time to get aggressive with your debt freedom goals!
THE DEBT SNOWBALL V. AVALANCHE
Let me be real with you, I've used both of these options and for different reasons! You've got to do what works best for YOU to achieve your goals. Let's look at each of these in turn:
- Order your debts from smallest to largest.
- Ignore interest rates or payoff dates.
- Attack the smallest one first!
- Throw any extra money at your smallest debt first while continuing to make minimum payments on the rest of your debts. (This is important!)
- Once you finish paying off debt numero uno, it's time to roll the amount you were paying on this debt into the next one on your list.
- The idea is to build momentum and keep move forward quickly.
With this method, you'll focus on targeting your highest interest rate debt first while continue to making minimum payments on the rest of your debts. It's logical, because this is your most expensive debt! You'll throw any extra income at this debt until it's extinguished before moving on to the next one. Usually, with this method, you'll find that you pay off your debts quicker and save more money on interest. But remember, unlike the snowball method, you may have to wait a long time before you can start celebrating the small wins if your highest-interest debt is the biggest one.
The good news? Either option, will set you on the right path toward paying off your debt!
Get it done
Don't put off taking control of your student debt.
Here's a summary of your 3 smart steps:
- Determine whether refinancing your student loans is the right move for you.
- If it is, then go ahead and complete the 90-second LendEDU questionnaire before you close your browser.
- Once you see what lower rates you qualify for, figure out whether you'd like to start a debt snowball or avalanche.
Need more help? Drop a line in the comments below to let me know how you're doing with your student loan debt. Or, send me a personal message. I'll get back to you within 24 hours.