When Is Refinancing Your Student Loans a Good Deal?
Is refinancing your student loans a good idea?
In some cases, yes, there are good reasons for refinancing your student loans, with getting a lower interest rate at the top of that list.
In others, however, refinancing your student loans doesn’t add up financially and won’t save you much money.
This is the first in a three-part series on refinancing student loans. This series takes a closer look at why and when refinancing a college loan is a good idea – and when it’s not.
The first story in the series considers when refinancing a student loan is worthwhile. The second story in the series looks at the disadvantages of refinancing a student loan, and when it doesn’t make good sense. The third and last story in the series lays out a “how-to” tutorial on getting the best deal on your refi student loan experience.
Keep in mind that refinancing federal student loans means a loss in many benefits that only federal loans offer. These include an option for potential loan forgiveness, income-driven repayment plans, generous deferment options if you become unemployed or have an economic hardship, and an option to discharge loans for death or disability.
Benefits of Refinancing Your Student Loans
There are plenty of good reasons to refinance your student loan, but they all depend on your unique personal financial situation.
If your student debt burden hamstrings you to the point where you can’t afford basic living needs, like affording rent, groceries or utilities, a cold, hard look at refinancing your student loan obligations could well be mandatory.
On the other side of the coin (literally), if you’re looking to refinance to afford an expensive purchase, like a European vacation or to buy a new set of wheels, you’re likely only going to add to your total personal debt burden.
When does refinancing a student loan offer the most benefits and make the most sense?
When you can get a much lower interest rate. Let’s face some basic economic facts: if you can get a much lower interest rate on your student loan, you should seriously consider that opportunity.
Again, the amount of cash you can save by refinancing your student loan depends on several key variables.
Chief among them are your credit health, the loan option you choose, the repayment term and your total debt.
If all of those factors fall into line in your favor, you might save some money by getting a lower interest rate.
But, borrowers often overestimate the savings from a lower interest rate. A one percentage point reduction in the interest rate on a student loan typically reduces the total payments by 4% to 5% on a 10-year repayment term, and 7% to 9% on a 20-year repayment term. Borrowers typically save more from a shorter repayment term than from a lower interest rate.
When you can make your loan repayment experience more manageable. By refinancing multiple, high-rate student loans into a single loan, with a lower interest rate, you’re giving your student loans the “Three E” treatment. You’re making your loans less expensive, more efficient and easier to manage. This yields a monthly payment that is more financially sensible.
Just be careful about refinancing federal student loans into private student loans. Private student loans tend to be more expensive than federal student loans and have inferior repayment options.
When you’ll repay your student loans faster. Applying basic math, there’s no doubt that by getting a lower interest rate, and by making steady, regular on-time payments, you’ll pay off your student loans at significantly faster rate.
How fast? Again, your mileage may vary depending on the quality of the loan and your ability to stay ahead of payment deadlines, but let’s consider a typical repayment scenario.
Let’s say you have a $30,000 loan balance, with an average interest rate of 6.76%, and you have a 120-month payoff timetable. Under that scenario your total payment is $41,355 and your total loan interest due is $11,355. Your total monthly student loan payment is $345, under this scenario.
What if you could cut that interest rate to 5.26%, by refinancing?
With the lower interest rate, your total loan payment falls to $38,643, your interest cost slips to $8,643 and your monthly payment balance falls to $322.
Let’s take the comparison one step further.
What if you could also add an extra $50 payment to each of those monthly payments over the course of your loan? There, your total loan cost drops to $37,097, and your total interest rate falls to $7,097. Remember, when you decrease your loan interest rate and keep the same monthly payment, more of your regular payments are applied to the loan principal, which speeds up your repayment timetable.
In that scenario, with regular, on-time payments, you could cut almost two years off your student loan repayment obligations.
When you bring aboard a cosigner and save even more cash. Make no mistake, refinancing a student loan isn’t always easy, especially for a just-out-of-school college graduate looking for financial relief from his or her student loans.
That’s where a creditworthy cosigner can save the day. A cosigner (usually a parent) with good credit can get you much better terms on a student loan refi deal than you likely could get on your own.
That access to good credit can get you a lower interest rate over the course of the student loan.
If you pay your loan regularly (36 straight months of on-time payment, for example) and satisfy credit criteria, you might qualify for cosigner release, freeing your cosigner from their repayment obligation. That’s a big potential selling point when you ask a cosigner for help.
Take a Closer Look at Student Loan Refinancing
If any of these student loan refinancing benefits resonates with you, by all means, start kicking some tires on various loan options, and see if you can get a good deal.
It could mean saving thousands of dollars off your student loan debt and paying down your college debt years before you thought possible.
If nothing else, it’s worth a closer look because, after all, what have you got to lose?