05.5.2022 Jodi Anderson
Yes, refinancing student loans can save you money. “Can” being the operative word. Several factors can make refinancing great for some folks and not the best solution for others. Refinancing student loans can accomplish different goals for different people and in some cases more than one goal can be achieved depending on the individual circumstances. We have outlined three common goals our customers have conveyed.
#1 Goal – SAVE MONEY $$$
If you are trying to save money by reducing the overall interest you will repaying over the course of your current loan or loans, the below example illustrates how this particular goal can be achieved.
Interest Rates:
Interest rates can vary widely from loan to loan and whether or not a refinance loan is right for you will often depend on the interest rate you currently pay and the interest rate on your new refinance loan. Depending on your individual situation, refinancing higher rate loans into a new lower rate loan can save you thousands of dollars over the life of the loan. You may also be able to avoid costly interest rate increases in the future if your current loans are variable rate and you refinance with a fixed rate loan. Savings example below:
How will you get the best interest rate to maximize savings?
- Good credit rating, a higher FICO score and other factors will likely result in lower rates
- Having a cosigner with good credit
- Being current on all existing accounts
- Some programs offer residency discounts
- Ask for Auto-pay option which can also reduce your interest
Loan Term:
Another key factor to determine whether refinancing is right for you is the amount of time to pay back your loans. Generally speaking, the longer the term, the higher the total loan cost will be but the lower the required monthly payment.
If you extend the term of your loan beyond the length of your current repayment schedule, you may still save as a result of the lower interest rate, but savings will be decreased as you will be paying interest for a longer period of time. Let’s use the same example above and assume a 4.39% interest rate and a 15-year repayment term, your total amount to repay would be $102,547 and your interest charges would be $2,350 less than a 10- year loan at 7.09%.
On the other hand, if you are in a position to shorten your repayment term and lower your interest rate from 7.09% to 4.39% then your interest savings using the same example with a 5-year repayment term would be $21,200.
#2 Goal – REDUCE MONTHLY PAYMENT AMOUNT
Upon entering repayment, accumulation of multiple loans at varying rates can result in a higher than comfortably affordable monthly payment and refinancing can help you to reduce your monthly expenses.
In some cases, just a decrease in interest rate and selecting an equal or shorter repayment term length can reduce your monthly payment as well as reduce the total interest paid throughout the course of the loan. This scenario is a Win/Win.
However, for those needing to extend their payment term in order to lower their monthly payment amount to meet there monthly budgetary needs, total interest savings over the term of the loan can decrease or even increased depending on the amount of additional payments required to payoff the loan with the extended term length.
#3 Goal – SIMPLIFYING MONTHLY PAYMENTS
Similar to the scenario above, after leaving school and beginning repayment you may have multiple loans with multiple lenders or servicers and monthly due dates. Some borrowers prefer to combine all the loans (hopefully with the benefit of reducing interest rates overall) and making just one monthly payment to one servicer to simplify their monthly bill payment and have a clearer view of paying down their student debt. In many cases, this is the primary goal for parents with multiple federal PLUS loans.
IMPORTANT TO REMEMBER
Refinancing student loans does not have to be an all or nothing solution. Some may choose to refinance private loans only and keep their federal loans as is, and not forfeit any unique benefits offered as a part of the federal program that may work in your favor in the future. It is important to do your research before refinancing to make sure you are getting the best deal for you.
If you have similar goals to those listed above and are considering refinancing, below are some additional resources to begin your research process.
Frequently Asked Questions | The Lowdown on Student Loan Refinancing [Infographic] | Refinancing with RISLA – Rates & Program Details
