In life, nothing is guaranteed. Oftentimes things change, and your student loan payments may just be one of those things. Recent increases to variable interest rates, after a very long period of staying static, have left many student loan borrowers in a state of shock. When rates increase, so do monthly payments on variable rate loans, and after sitting at historical lows for nearly a decade, market rates have been on the rise these past two years.
With a laundry list of bills to pay every month, your student loan payment may become unmanageable for your current lifestyle. There are a few ways that you may be able to reduce the amount of your student loan payments that include repayment assistance programs and repayment plans. Another way to potentially lower your student loan payment is by refinancing. Replacing your existing loan with shiny new terms and a lower bottom line may seem like the perfect no-brainer solution, right? Before making a hasty decision, it is always best to look at facts to determine what will work best for you. Here are some questions to ask yourself when you are considering refinancing your student loans.
What is my main goal for refinancing my student loans?
You may have one or multiple reasons as to why you would want to refinance. Lower interest rates may be able to help you pay off the loan faster, save hundreds or even thousands in the long term, and/or reduce your monthly payments. Refinancing, even without a rate decrease, can simply make life easier by combining all of your student loans into a single monthly payment. However, by lengthening your repayment term, you could actually increase your overall costs over time, even if reducing your monthly payment. So, what is your goal? Do you need to reduce your monthly payment to help you stay above water? Are you wanting to pay off the loan off faster so that you can free up some funds for other priorities? Whatever the reason, you must do your research with various financial institutions to determine who will best cater to your goals, if anyone is able to at all.
Can I combine both federal and private student loans?
If you have federal student loans, you have probably heard of the Federal Consolidation Loan program. This program allows you to combine all of your federal education loans into one easy-to-manage monthly payment, often with an extended term that lowers your monthly payment. This program does not reduce your interest rate (but will fix the rate on any variable rate federal loans, which are rare these days) and you can't combine any private student loans with your federal student loans under this option. With the federal consolidation loan program, you keep all of the existing benefits on your federal loans - like income-driven repayment, deferment, and forbearance. This is very well worth considering if you think you have potential to take advantage of these benefits in the future.
With a Refinance Loan, you can combine both federal and private education loans. However, once you give up federal loan benefits by refinancing your federal student loans in the private market, you can't get them back. It is critical that you understand what benefits your federal loans have - and what you would lose - before refinancing them. In general, we don't recommend refinancing Subsidized and Unsubsidized Federal Direct Loans, but Federal PLUS loans don't carry as many benefits, and the potential savings are greater with refinancing, so it is worth exploring.
If you only have private student loans, you can refinance them with the same or another lender if you think you will have more favorable rates and terms with your refinance loan than your original loans.
What will my new interest rate be?
A lower interest rate could save you thousands of dollars over the long haul. Your current credit score and income may be able to qualify you for a lower interest rate than when you first secured your student loan. Over time interest rates change so it's important to do some digging to find out what your current interests are - and what your new ones would be - before agreeing to anything. There are some circumstances where you will be able to refinance with a lower monthly payment, but it may come at the cost of a longer term (which often means more finance charges) and/or a higher interest rate. Is the long term cost worth it to you for the short-term relief of a lower monthly payment?
What is my credit score? Will I need a cosigner?
Your current credit score will greatly determine whether you need a cosigner to refinance your student loans. Obtain your credit score through the credit bureau (or your credit card provider might even provide it on your monthly statement). How does it look? If your score is 700 or above, you are in a good spot to refinance on your own. However, if your score is quite a bit lower, you may need to have a cosigner to secure a new loan. Even if you have a high credit score, adding a cosigner to your loan can result in a lower interest rate, since there is less credit risk to the lender for a loan with two borrowers instead of one.
Keep in mind most refinancing loans carry risk-based pricing. That means the lower your credit score, the higher your interest rate. Some lenders will also set your interest rate based on other factors, such as your debt-to-income ratio, free cash flow, degree earned, income, etc.
Does this lender offer flexible repayment options?
The whole point of refinancing your student loan is to make life easier for you, right? Be sure to seek out a refinancing option that is flexible if you need flexibility. There are so many repayment options out there that can take the stress out of repaying your student loan.
Life happens and there are a lot of factors that can determine your future finances. When you see the need to make changes to your student loan payments, do all the research you can so that your decision can be an informed one.
Still not sure if refinancing is right for you? Download our Guide to Student Loan Refinancing to get all the facts so you can make an educated choice.