The average student from the Class of 2018 will shoulder over $29K in student loan debt by the time they graduate. As the cost of college continues to rise students are likely to continue borrowing. If you’re in school or already graduated, you’re probably looking for the best way to pay off your loans quickly. But what’s the best strategy for managing your student loan debt? Many graduates entering the work force are wondering the same thing.
While the best way to deal with debt is to pay it off as quickly as possible, consolidation and refinancing student loans are realistic long-term options worth considering. If you aren’t sure which one will work best, remember that the biggest difference between student loan refinancing and consolidation is the types of loans you can pay off with them. You can only consolidate federal loans, but you can refinance federal and private loans. In this article, we’ll discuss the specific benefits of refinancing.
Here are 3 reasons to consider refinancing student loans:
1. Overall Cost Savings
One of the main reasons to refinance your student loans is to save money. When you refinance your student loans, you can reduce the total cost of your debt by securing a lower interest rate. By refinancing you combine all of your existing loans into one new loan. You’re then responsible for paying just one monthly payment toward the new loan.
The new larger loan will have its own set of terms and payments. If you refinance with the right lender, you can reduce the total cost of your debt by securing a lower interest rate. A few factors influence your ability to get a lower interest rate than your original loans had. Consider these two factors:
Lenders typically use market benchmarks and indexes when setting interest rates. If the variables a lender uses to set interest rates are more favorable now than they were before, then the interest rates you get should also be lower. If you choose to refinance your loans at the right time, you could end up saving a lot of money in the long run. In other words, think of it as the price of gas–if the cost of a barrel of oil goes down, the price per gallon at the pump also goes down.
Most private student loan lenders require a risk evaluation to assess the borrower’s ability to repay the loan. This usually includes a credit and income check. The lower the risk (or higher ability to repay), the lower the interest rate offered. When most people first apply for student loans, they’re 18-24 years old with little to no credit history or income. In fact, you likely needed a cosigner in order to get the loan.
Once you graduate, secure a steady income, and begin building a credit history, your risk profile improves. However, without refinancing, your interest rates will continue to be based on your initial risk profile, and you will not benefit from your improved creditworthiness. A favorable outcome in one (or both) of these factors could result in a lower interest rate, leading to thousands of dollars in savings on your student loans.
You’ll see that just a few percentage points off your interest rate can make a huge difference. You can also reduce the total cost of interest by selecting a shorter repayment term for your new refinanced loan. If you pay your loan back more quickly, interest will have less time to accrue. Selecting a shorter repayment term, combined with a lower interest rate, will result in even more savings on your student loans.
Tip: Use the College Ave refinancing calculator to see how much you could save by refinancing your student loans.
2. New Monthly Payment
Refinancing student loans can also give you the flexibility you need to get a new monthly payment that fits your budget better. When refinancing student loans, you will select a new repayment term (the number of years you take to repay the loan). Aside from other factors, simply selecting a repayment term that’s longer than what you currently have will result in a lower monthly payment. But keep in mind that also means you’ll probably pay more in overall interest charges.
3. Simpler Life Management
Managing personal finances can quickly become difficult and overwhelming. Juggling multiple online bills and their associated logins, pins, and passwords is a hassle. Not to mention separate, staggered due dates to keep track of. By refinancing your student loans, you can simplify those payments and keep them all in one place. That new loan helps you manage just one payment and due date with one service provider.
Many graduates choose this option because it makes dealing with student loans easier to understand and stay on top of. Managing on-time payments has a critical impact on your credit score over time, so you want to make sure you’re always making your payments. For early-career professionals looking to get their finances in order, refinancing your loans means you have one less thing to worry about.
Reasons Not to Refinance Your Loans
When considering options for your student loans, it’s important to evaluate the benefits of both private and federal loans. If you’re debating whether to refinance or consolidate, you should also consider the risks of doing so. Federal student loans offer borrowers special loan forgiveness, deferment, and forbearance options for reasons such as economic hardship or active military service. If you choose to refinance your federal student loans, you will forfeit those federal benefits.
If you want to combine only your federal loans, you can take out a Federal Direct Consolidation Loan. It will maintain your existing payment terms and give you a weighted average fixed interest rate. The drawback is that you won’t be able to secure a new lower interest rate or lower monthly payment through refinancing, but you will only have one monthly bill and payment.
Just because you had to take on debt for college doesn’t mean you have to stay in the red for the rest of your life. By exploring and calculating your refinancing options, you’ll have a better idea of where you can save and where you can stretch your budget. Consider refinancing carefully before you decide which is the right path to take.
Visit our Student Loan Refinance Calculator