If you are a college graduate with student loan debt, you might be wondering if you should refinance your student loans. After all, the average college graduate is leaving with over $30,000 in debt! There are several reasons you could do this, so let’s take a look at a couple to help you make a decision.
1 Lower Monthly Payments
Before deciding to refinance your student loans it is important to know what your monthly payments are going to be. In addition, you need to know how much you can comfortably afford to pay each month toward your student loan debt. Everyone’s situation is different, so you will need to take into consideration how much you currently make and what other outstanding debts you might have. Keep in mind if your current student loans are federal, you would forfeit those loan protections. For instance, the monthly payment amount of a federal student loan could be income-based which makes your monthly payment amount lower based on your monthly income. If you refinance it might make your payments go up instead of down because other financial institutions don’t take your monthly income into consideration. Check your figures before making any changes.
2 Reduced Interest Rate
Another reason to refinance your student loans might be to get a reduced interest rate. Most student loans, however, if they are federal, already have somewhat lower interest rates, usually around 5% or so. If your loans are private instead of federal, they probably carry an interest rate that is a bit higher, around 10%. There are lenders that now offer interest rates around 2% to 3%, and if you meet the criteria requirements, you may be able to secure a loan with a different lending institution and save yourself some money. For reference, it will be easier to meet the credit requirements with a cosigner. How much can you save? That depends on how much you currently carry in student loan debt. Find out your student loan payoff amount to help you crunch the numbers and arrive at an answer.
3 Shorter Loan Repayment Period
Then length of time it takes you to pay off your student loans is dependent on how much you are paying each month and how big your loans are. Once again, federal loans are usually offered at a lower rate which means a longer loan repayment schedule. Private loans usually have a shorter loan repayment period, but of course that is due to either higher payment amounts or higher interest rates and sometimes both. Refinancing your student loans might gain you a shorter loan repayment period so you don’t have to drag out your payments for years. Instead, you could shorten the term and save on what you would pay in interest, or keep your payments lower with a longer term depending on what works best for you. Use the monthly payments you currently make as a guide to help you make your decision. If you are currently struggling to make your monthly payments, perhaps refinancing to a similar loan repayment period with lower payments is a better option.
These are just a few of the things you need to consider before deciding if you should refinance your student loans. Before you decide, research thoroughly before making any permanent decisions that will affect you and your finances for years to come.
What other factors should you consider in order to decide if you should refinance your student loans?