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Refinancing can help you get the ball rolling when it comes to repaying your student loans. Today, I’m going to help you decide whether or not you should refinance your student loans. I’ll also be sharing some tips & tricks that will help you save both time and money when making this pivotal decision! Lastly, I’ll be totally transparent about why I didn’t refinance my student loans.
If you’re new here, thanks for stopping by! I’m Shonnita, a public educator based in Houston, Texas. Here we explore the strategies, tools, and tips to help you amp up your side hustle game, become more productive, as well as pay off that student loan debt faster! If these topics interest you, keep on reading!
Before we get into the nitty-gritty, there are two key terms that you should be familiar with as we discuss student loans.
Consolidation vs. Refinancing
Consolidation is related to but slightly different from refinancing. Refinancing is meant for you to get a new interest rate or lower interest rate on your existing private or federal loans. Consolidation means that you combine your current loans into one loan. So, for example, if you have a mixture of high and low-interest rate student loans, you can combine them into one loan, which may give you a lower interest rate!
Why would you want to refinance your student loans?
Better Interest Rate
A better interest rate = more money that will go towards your principal balance instead of the interest. In many cases, the interest rate is a major factor to consider! Whether the interest rate is too high and hard to manage or is capitalizing over the principal balance, the interest rate is essential to deciding whether or not you should refinance your student loans.
Another crucial factor to take into consideration is the variable interest rate. A variable interest rate is when the interest rate fluctuates over time depending on the market. This means that your monthly payments may fluctuate unpredictably as well. So, if you’re trying to maintain a consistent budget each month, these unreliable fluctuations may hinder your plans. If you refinance, it may become easier to make extra payments on your loans. This will help you reach the ultimate goal of paying off your student loans! Furthermore, refinancing can help you get a longer term on your student loan payments. This would lower your monthly bill towards your student loan. However, keep in mind that it would also extend the length of your payment term. We’ll get more into this later.
Too Many Lenders
If you manage several small student loans, you know that it can be hard to manage multiple lenders with different interest rates and principal balances. Often, it’s easier to see everything in one place by refinancing or consolidating your loans under just one lender. Also, unlike home mortgages, rest assured that there is no fee to refinance your student loans!
Get a Lender with Better Customer Service
In some cases, the reason for refinancing may be as simple as transitioning to a lender who has better customer service! This switch will save you both time and stress throughout the entire process.
Freedom of Choice
When you are first issued your student loan, you have no choice regarding your lenders. However, you may now be in a position where you can shop around and see which lenders offer you the best repayment options for your budget and situation. When you refinance your loans with a new lender that gives you a low-interest rate and loan term that meets your financial needs, you’ll have the freedom to work with whoever you want over the timespan of your loan. In addition, this will give you time to check out the consumer ratings of the lender and go through the various websites like the Customer Financial Protection Bureau, The Better Business Bureau, Trust Pilot, and the FTC!
Release Your Co-Signer
You may want to refinance to release your co-signer. Like many people, myself included, you may have lacked established credit when you graduated high school. Because of this, it’s not uncommon for parents or legal guardians to co-sign student loans so that the student gets financing. In some cases, parents can take out a parent plus loan to help pay for college. The parents are co-signers on a loan in your name in other cases.
If you graduated in an economic downturn as I did, this might have caused lots of extra stress between you and the co-signer of your student loans. After all, we all know that if you’re not able to make payments towards your student loans, it can hinder your cosigner’s ability to borrow additional funds for any reason in the future. Because of this, you may want to consider refinancing to relieve that person from co-signing your original student loan.
Why would you want to think twice before refinancing your student loans?
- It can change your loan term time.
If you extend your loan term, you may end up paying more money in the long run and on interest. For instance, if you refinance your loan from a 10-year loan to a 20-year loan, it would increase the overall cost of your debt by giving interest more time to accrue and capitalize. Therefore, even though your monthly payments would decrease, you would be paying more money in the long run.
- It’s irreversible.
Once you combine your student loans, you can’t uncombine them. So even though you would be able to refinance another time, you wouldn’t be able to go back into your original federal loan servicing program. Also, once you refinance your student loans, you’ll lose the federal protections of those loans. These protections may include income-driven repayment plan options and student loan forgiveness.
- You may not be eligible.
Refinancing your student loans may not be an option for you. Many refinancing companies require you to have an excellent credit score (typically above 660) to qualify for an interest rate that’s low enough to justify consolidation or refinancing. Often, you also have to be a US citizen and have completed the degree you took out the original educational loan for.
Why I didn’t refinance my student loans…
- I don’t have a low debt-to-income ratio.
While my student loan is the only debt I have, it far exceeds my annual income. In my previous post, I mentioned that I don’t have any other forms of consumer debt. Unfortunately, in credit terms, this also means that I don’t have any open lines of revolving credit (which is needed to maintain an excellent credit score). Since I paid off my consumer debt before beginning this journey, my initial credit lines have gone to zero. When this happens, your line of credit closes off entirely until you choose to charge something else to a line of credit. Since I decided not to charge anything else by opening any new lines of credit, my credit score went down.
- I would need a co-signer.
If I refinanced my student loans, I would need a co-signer. However, I already have a co-signer, which is why I’m paying off this particular loan, I don’t need any more co-signers! So, I plan to pay off my student loan debt to relieve my current co-signer on my student loan. (Keep in mind that my outstanding student loan debt shows up on their credit report as well!)
- I have both federal and private student loans.
Federal loans offer amazing repayment rates and student loan forgiveness. I am not willing to sacrifice these benefits for a lower interest rate. Due to The Cares Act, my federal loans have been put on administrative forbearance, which has helped me buckle down and focus on my private loan more than ever.
The repayment period for any given student loan refinance exceeds the time I intend to repay my student loan. Most refinancing lenders tend to offer student loan refinancing in terms of 5, 7, 10, 15, or even 20 years. So, restructuring or refinancing my student loans would, at this point, just be kicking the can down the road.
The more uncomfortable I am with my current debt and loan terms, the more likely I will pay it off faster.
Also, to be quite honest, I don’t think I need it! My loans are mostly consolidated into two manageable, separate loans, one federal and one private loan.
I hope that these pros and cons help you decide whether or not you should refinance your student loans. This isn’t a one size fits all situation! Whatever you decide isn’t good or bad, it’s just about what works best for you, your current situation, and your lifestyle.