How to Refinance Your Student Loans and Why It’s Important

Valuist has been on a largely unplanned hiatus, due to the mostly planned pregnancy of my wife and upcoming birth of our daughter- A daunting and exciting experience, to say they least!

However, in 2018 I plan to take Valuist into new territory and expand and improve our coverage on money making, saving and uncovering the greatest value everywhere.  I’m also focusing on promoting new voices and featuring more compelling guest writers, in an effort to broaden the scope of this project.

To kick things off, here is an excellent article by Dan and June of DINKs (Dual Income, No Kids) on how to refinance student loans, and why you should look into it.

Although it’s an important investment, going to college is oftentimes extremely expensive – and it’s only rising in cost. As a result, student loan debt has become a staggering problem in the United States.

In 2012, almost three-quarters of students at four-year universities graduated with student loan debt, and in 2016 the average balance climbed to $30,000. While there are several options out there to help graduates manage their loan debt, one of the most effective ways is to refinance your student loans.

How Does Student Loan Refinancing Work?

When you refinance, you apply for a new loan with a new interest rate, term, and repayment schedule. The new loan pays off the existing one and sets up a schedule in which you pay according to the new loan’s terms. While a refinance can help you significantly, many students aren’t even aware the option is available.

Many lenders offer refinancing, and federal loans can be combined with private loans in most cases to create lower monthly payments. While some lenders are traditional banks, online lenders are getting in on the student loan refinancing market as well, and they’re becoming highly popular among graduates. Their easy online set-up, soft credit pulls, and 100% online experience with responsive customer service is often a lot more desirable than dealing with traditional providers.

There is one potentially negative aspect of the refinancing process – application eligibility. Refinancing through a private bank is typically only offered to creditworthy applicants; in fact, the average credit score was reported to be near 760.

What are the Positive Benefits?

Refinancing offers several great benefits. As mentioned, it can lower your monthly payment by extending your repayment term, or it could lower your payment simply by lowering your interest rate. In fact, when you refinance, you are usually able to be more flexible about how you structure your loan, meaning you can put yourself into a better position for repayment.

Refinancing can also mean consolidating your multiple loans into one payment—and that means putting them all under one interest rate as well. Some lenders even allow you to change between a variable and fixed rate. Those lower payments can mean the difference between making a huge student loan payment and being able to set something aside for retirement and saving money for life milestones.

If you needed a co-signer for your original loan, refinancing can release them from the loan and set it up as a solo endeavor for you. While it might sound scary, many students have their parents on their loans as co-signers; releasing them from the loan can help ease any tensions arising from the co-signing.

What are the Potentially Negative Impacts?

Not everything about a refinance loan is positive. Through refinancing, you trade in certain federal benefits that don’t come with private loans.

Most student loans come with a grace period that allows you to plan for the monthly payments before repayment kicks in. If you have federal loans and find yourself in a temporary financial crunch, you can also request a forbearance, or temporary pause in required payments. With a refinance, there is no grace period, deferment, or forbearance option available. Payments start right away—and they don’t get deferred while you’re in school, so if you might go after an additional degree, you may want to wait before refinancing.

Going through a refinance also means you could lose federal benefits like loan forgiveness, income-based repayment, and other perks that come with federal loans. If you are pursuing a career in public service, plan to volunteer with the Peace Corps, or think you may need an income-based plan for repayment, don’t refinance your loans.

The biggest drawback to a refinance might be the fact that it may cost you more in the long run. Refinancing to drop your interest rate will save you money but doing it to drop your monthly payment means you’ll be charged more interest because of your longer repayment term.

Conclusion

Refinancing your student loans can be a great idea, or it can be detrimental to your financial situation. In order to know which will be the case for your situation, look at your loans. If you’re carrying federal loans, make sure you won’t need the federal benefits before giving them up in a refinance. In addition, make sure you don’t qualify for loan forgiveness or cancelation. If you’re looking for a small monthly payment, you’ll want to take a look at the federal income-based programs instead.

If you initially did private loans, or you have a mixture of private and federal, a refinance could help you save money by lowering your interest rate. Since private loans don’t have the same perks as federal, if you need a smaller monthly payment a refinance can keep you on top of things.