Should I Refinance My Student Loans?

Student loan refinancing has gained popularity over the last several years as students have looked for alternative ways to lower their payments and escape student loan debt faster.

Just like refinancing a mortgage, student loan refinancing is the process in which you take out a new loan to pay off your old loans. The goal, of course, is that the new student loan has a lower interest rate, lower payments, or a combination of the two that make it more attractive than your old loans.

Given the state of today’s interest rates, student loan refinancing could help a lot of borrowers.

When Student Loan Refinancing Makes Sense

There are several circumstances when a student loan refinance makes a lot of sense.

First, if you have private student loans, you should always be looking for the lender with the lowest interest rate. Since private student loans act more like car and home loans, it never hurts to shop around. Refinancing options vary by bank, but you can typically find 5, 10, and 20 year repayment terms at most banks.

If you have a 10 year loan and are looking for lower payments, finding another 10 year loan at a lower interest rate, or possibly extending out your loan to 20 years would help with that.

Second, if you have a good credit score and can afford your payments, but had to take on a cosigner when you initially look out your loans, refinancing your loan could possibly allow your cosigner to be released from the original loan. Plus, you get to take advantage of any lower rates and payments as well.

Finally, if you have multiple loans, you could refinance all of them into a single loan, and have a single payment, with possibly a lower interest rate.

When You Should Avoid Student Loan Refinancing

There are circumstances, however, when student loan refinancing doesn’t make sense. If you have Federal student loans, and are taking advantage of repayment programs that are specific to your student loan (such as Pay As Your Earn or Income Based Repayment), you may not be better off refinancing your student loan.

Also, if you are planning on taking advantage of a student loan forgiveness program, such as Public Student Loan Forgiveness or Teacher Student Loan Forgiveness, you need to remain with your qualifying Federal student loan program with the proper repayment plan.

Important Reminders

Once you refinance your student loan, you have a new loan altogether and your old loan is gone and paid off. So, if you had a Federal loan and refinance it, you lose all of the benefits that the Federal loan offered.

That’s not always a bad thing – many times you can get better repayment terms on your newly consolidated loan – especially if you never qualified for a student loan forgiveness program to being with.