You’re not alone if you’re dealing with student loan debt. According to the Federal Reserve, approximately 30% of all adults incurred some debt to pay for their education.
If you feel like you’re not making any progress even though you make your payments on time every month, the problem is likely your interest rate. A high interest rate can make it difficult to pay down the balance.
One of the most commonly-recommended solutions is student loan refinancing, where you pay your existing loans for a new one with different terms. The possible benefits of student loan refinancing are numerous, helping you save money, get out of debt earlier, and free up cash for other goals.
Top 5 Benefits of Student Loan Refinancing
To refinance your loans, you apply for a loan from a new lender for some or all of your outstanding student loans. If you qualify for a loan, you can adjust your loan terms. If you’re researching refinancing, you may be asking, “Why should I refinance my student loans?” Refinancing can make a lot of sense for the following reasons:
1. You Can Save Money
One of the most appealing benefits of student loan refinancing is the ability to save money. Depending on the interest rates on your existing loans and the new rate you qualify for, the savings can be significant. How significant? Consider this example.
The average amount of student loan debt is $39,341. If you had that much debt with a 10-year term at 6% interest, you’d repay a total of $52,412 by the end of your loan term. Interest charges would increase your overall cost by about $13,000.
If you refinance your debt and qualify for a 10-year loan at 4.25% interest, you’ll pay a total of just $48,360 by the end of your loan term. By refinancing with a lender offering a lower rate, you’ll save over $4,000.
Use a refinance calculator to find out how much money you can save by refinancing your student loans.
2. You Can Get Out of Debt Faster
If you want to tackle your debt and pay it off sooner, extra payments are key. However, high interest rates can lessen the impact of additional payments since more interest will accrue over time.
One of the best reasons to refinance student loans is the ability to qualify for a lower rate so more of your payments grind away at the principal rather than interest charges.
For example, let’s say you had the same original loan as in the first example. A 10-year loan at 6% interest would have a minimum monthly payment of about $437. If you increased your payment by $50 to pay $487 each month, you’d pay off your loans 16 months earlier, and you’d pay $50,518 you’d save nearly $1,900 in interest charges.
But if you refinanced and qualified for a 10-year loan at 4.25% interest, your minimum monthly payment would drop to $403. If you were determined to pay off your loans as soon as possible and increased your payments to $487 per month, you’d pay off your loans 24 months earlier, paying a total of $46,424.
3 .Your Payments are Streamlined and Combined Into One
You likely have multiple federal and private student loans. It’s not uncommon for undergraduate students to have 4 or more different loans by the time they graduate, making it difficult to keep track of your payments and due dates.
When you refinance your debt, you can combine all of your loans into one loan. Why is that a good thing? You’ll have just one monthly payment to make and one simple due date to remember.
4. You Can Alter Your Payment Plan & Loan Terms
One of the most popular reasons to refinance student loans is the option of changing your loan term and payment plan. When you refinance, you can choose a new repayment term. For example, College Ave offers loan terms ranging from five to 15 years.
Lenders usually reserve the lowest-possible rates for borrowers with excellent credit profiles that also choose the shorter loan repayment terms. If you want the lowest rate, look for a loan with a term that is five to eight years in length.
By contrast, a longer loan term can be attractive because you can dramatically reduce your payments. You’ll pay more in interest, but you will have more money each month to put toward other goals.
Use the student loan calculator to see how changing your repayment schedule can affect your monthly payments and total repayment cost.
5. You Can Add or Remove a Co-Signer
If you have private student loans, you likely have a parent, relative, or close friend as a co-signer on the loan since the majority of private student loans are co-signed. That can be a big burden; having your loans on their credit reports can affect their ability to qualify for other kinds of credit, and they are held responsible for the payments if you miss any.
You can refinance your loans and, if you meet the lender’s criteria on your own, remove your cosigner from the loan.
If you can’t qualify for a new loan or a lower interest rate on your own, adding a cosigner to your refinance loan could help you qualify for a lower interest rate.
Should I Refinance My Student Loans?
Refinancing can be an effective way to manage your education debt, but there are some drawbacks to weigh against the benefits of student loan refinancing:
- You’ll lose out on federal loan benefits: If you refinance federal loans, you’ll no longer be eligible for income-driven repayment plans or federal loan forgiveness programs
- You may not be eligible for a lower rate: Not all borrowers will qualify for a loan with a lower interest rate than they have now. If your loans already have a relatively low rate, refinancing may not make sense.
- You may need a cosigner to qualify for a loan: To qualify for a loan, you usually need good to excellent credit and a reliable source of income. If your credit history is too thin, you may need a cosigner.
There are many reasons to refinance student loans, such as wanting to save money, lower your monthly payment, or to remove a cosigner from the loan. If you’ve done your homework and want to refinance your loans, you can get a rate quote from College Ave in under a minute and it doesn’t affect your credit score.