If you've borrowed money to pay for college, at some point you may want to consider refinancing those student loans. For some borrowers, refinancing offers an opportunity to save money and better manage their budget. For others, it may not be the best choice. Read on to help decide whether refinancing is for you.
- Avoid rate changes: If you're currently have a variable interest rate loan, consider refinancing into a fixed rate. This is especially true if you're in repayment on multiple loans with varying interest rates. When rates change, so do your monthly payments, so getting a fixed rate loan will help you keep a predictable budget for your student loan payments.
- One payment: If you're repaying multiple loans to multiple lenders, you're probably already a little frustrated at how tough it is to stay organized. Refinancing will roll those existing loans into a single loan. That means you only communicate with one lender, you only make one payment, and you only manage that payment through one website.
- Flexible repayment terms: Federal student loans do offer tons of flexibility - options for repayment plans, grace periods, and deferments. While you will give up your federal student loan benefits when refinancing, your new loan may come with some benefits of its own. Just be careful to understand what those are, and be sure you want to give up your federal benefits before making the switch, because there is no going backwards. Discuss what you need with your new lender before refinancing, and make sure you understand where you'll have flexibility if and when you need it.
- Release a cosigner: If you borrowed with a cosigner, this is your chance (and your cosigner's chance!) to let you take over repayment on your own. This is especially important because your student loans can be a burden on a cosigner - they impact credit and borrowing ability, and they often require a decades-long commitment. Just keep in mind that without a cosigner, you may receive a higher interest rate than if you add a cosigner on to your refinancing loan. Sometimes a switch from mom & dad to your new spouse can do the trick.
- You may pay more over time: For some borrowers, refinancing will lengthen the repayment period, which may reduce your monthly payment, but will likely increase the total amount you pay in financing charges over time. For others, you'll actually increase your interest rate. Make sure to compare both of these numbers before refinancing!
- Loss of federal benefits: Your federal student loans come with lots of benefits, although for some borrowers these benefits won't be all that helpful. If, for example, you need income-driven repayment or believe that you're going to qualify for Public Service Loan Forgiveness, you probably want to stick with your original loans and repayment. For lots of borrowers, these benefits don't really figure into the equation, so refinancing could be a better option.
- Keep an eye on your grace period: If you refinance before you start repayment, you'll lose your grace period. That can be a pretty big deal for new graduates just starting out in the working world, so keep an eye on that benefit. If, on the other hand, you've already started working and are in a good position to start repayment, don't delay. That grace period just puts off the inevitable for a few months.
- Credit matters: Refinancing will require a credit check, and in order to qualify for a good rate or even get approved, you'll need good credit. If you're leaving college with a pile of credit card debt, late payments, or no credit at all, you may need to work to repair your credit score before applying for refinancing loans. Alternatively, you can consider bringing on a cosigner, like a parent, who has good credit.
Take all of these factors into consideration before you refinance, so that you can make an educated decision. For some students, refinancing will mean losing out on benefits. For others, it's a faster, easier, and cheaper way to repay student loans.
Want more info on whether refinancing is right for you? Download our Guide to College Loan Refinancing.