Student loan refinancing is the process of taking out a new loan from a private lender to consolidate or pay off your existing student debt at a lower interest rate. You are then responsible for paying off the new loan using one monthly payment. The benefit of refinancing is that it can combine multiple loans into one simple payment and usually involves a lower interest rate, saving you hundreds or even thousands of dollars in interest over time.
For example, if you currently have $40,000 worth of student loans at a 6.5% interest rate with a 10-year term, and a private lender is offering to refinance at a 4% interest rate, this would save you $5,905 over the same 10-year period. 💸
Sounds great, doesn't it? Being offered a lower interest rate on your student debt can sound like an attractive option, and it might be! But depending on your type of student debt (public vs. private) and financial situation (income, job security, etc.), you may want to think twice before refinancing, even if the interest rate would be beneficial because of other risks involved.
We hope this article is helpful in learning what to consider before you decide.
1️⃣ Are you eligible to refinance your student loans?
Most financial providers will require a credit score of over 600 and a steady income before approving you for a refinancing offer. Not sure what your credit score is? Use Truebill to review your credit score and report here [insert link].
2️⃣ Do you have federal or private student debt?
Whether you have federal or private student debt is one of the most significant considerations to make when you're thinking about refinancing your student loans. This is because refinancing involves using a private lender, which will strip you of certain benefits that come with your federal loans. These include:
Income-drive repayment plans that make it more affordable for you to meet your minimum monthly payments. This could be important if, for example, you were to lose your job or experience a reduction in income.
Public student loan forgiveness if you work in public service to have a portion of your debt forgiven after ten years. This includes any U.S. federal, state, local, or tribal agency, public school teachers, military, and non-profit organizations. For more information on what types of jobs qualify, please click here.
Federal protections in case of emergency, for example, the pause on federal student loan repayments and 0% interest through May 1, 2022, in response to the Coronavirus pandemic.
Refinancing will cause you to lose the benefits above because it involves using a private lender. You may want to think twice, particularly if your job is not secure or you think you might have trouble meeting minimum payments in the future.
3️⃣ Would you prefer an income-driven repayment plan?
If you have federal student debt and want to lower your monthly payments, consider whether an income-driven repayment plan may be a better option. If eligible, income-drive repayment plans determine a lower monthly payment based on your "discretionary income" without losing the benefits of federal student loans listed above. On the flip side, the lower monthly payments without reducing the interest rate require extending your loan payoff period from the standard federal repayment period of 10 years to 20 or 25 years, depending on the type of plan. As a result, while your monthly payment will be more affordable, you end up paying more money in interest over time.
Unfortunately, income-driven repayment plans are only applicable to federal loans.
In summary, if you are looking to lower your monthly payment, you might consider an income-driven repayment plan instead. If you are looking to pay off your loans as soon as possible and/or pay the least amount of money over time, then refinancing might be the right option for you.
4️⃣ Is the rate fixed or variable?
Any refinancing offer you receive will include either a fixed or variable interest rate. A fixed rate means the interest rate applied to your loan will stay the same over the life of the repayment period, while a variable rate means the lender can increase or decrease the interest rate at any time. In the case of variable interest rates, this means that even though an interest rate may start lower than your current interest rate, the lender can change it shortly thereafter. For this reason, we suggest playing it safe and considering fixed rates only.
5️⃣ Is the lower monthly payment extending your debt timeline?
Similar to income-driven repayment plans, if a private lender offers to lower your monthly payment without lowering the interest rate, this means they are extending the debt payoff period, and you will end up paying more in interest over time. For this reason, we recommend comparing multiple offers before deciding to refinance your loans. Truebill’s partner, Credible, can help you compare multiple offers from lenders at the same time without impacting your credit score.
6️⃣ Are you comfortable with the new loan provider?
Once you decide whether refinancing is right for you, you want to make sure you are comfortable with the financial institution that will serve as your new loan provider. Questions to ask yourself might include, how responsive were they to questions during the loan approval process? Do they make any exceptions if you were to experience something unexpected, like a loss in income? Have you read any reviews from borrowers that have used them in the past? All of these will help you feel confident in your decision when selecting a lender.
We hope this article helps decide whether student loan refinance makes sense for you.