When to Refinance Student Loans

2020 has been an unprecedented year in more ways than one. With unexpected market turbulence in March, many people have been on edge when it comes to their finances. However, in the midst of the pandemic, there is one silver lining: interest rates continue to stay low. For student loan borrowers, now may be the time to refinance at a lower interest rate. However, before you choose to move forward with refinancing, it’s important to determine whether it’s the right decision for your unique financial situation.

What to Expect with Refinancing

As a borrower, you have the option to refinance some or all of your student loans whether they’re federal or private. When you refinance, your goal will be to not only consolidate multiple high-interest loans for ease of tracking payments but to refinance them at a lower interest rate and save money in the long run. 

Refinancing companies are private lenders who will determine your unique refinance rate based on your current credit history and whether or not they deem you a risky borrower. The process itself is relatively straightforward:

  1. First, you compare refinancing lenders to ensure you get the lowest available rate. 
  2. You’ll select a lender and let them know you’re ready to move forward with the rate you were pre-approved for. 
  3. The lender will help you contact your previous loan providers to buy out your old loans and consolidate them under their company. 
  4. Once you refinance, you’ll have one consolidated payment for all of the loans you refinanced at your new rate. 

Before you refinance, there are three considerations you should take into account.

#1: Determine How Much You Will Saving

For some borrowers, refinancing may not actually save them money. This is particularly true for borrowers who have federal student loans at a relatively low-interest rate. It’s also true for borrowers who are close to paying off their loans. In these cases, refinancing might not offer lower monthly payments, or lower overall interest paid. Using an online student loan interest calculator, you can determine how much you’ll actually save - either in your monthly payment or in total interest paid - if you decide to refinance.

#2: Federal or Private?

Often, federal loans have loan forgiveness programs available depending on your profession. For example, if you are a physician or an educator, you may qualify for federal loan forgiveness. In these cases, refinancing your federal loans may not be in your best interest, as the total balance will be forgiven once you meet the forgiveness conditions. In most cases, the conditions involve a certain number of payments made, or total years worked in a particular field. Private loans, on the other hand, often come with higher interest rates and may be better candidates for refinancing. 

#3: Understand Your Terms

When you refinance, you get to select a new loan term. It’s important to pay attention to the loan term you commit to. If your original loans are set to be paid in full in four years, but your refinanced loan has a seven-year term, the benefits of refinancing might be deceiving. In these cases, even if you’re lowering your interest rate and your monthly payment, you’re still paying for a longer period of time and could end up paying more than you would have if you didn’t refinance. 

Develop a Plan

It’s important to remember that you don’t have to refinance all of your student loans. If you’re saddled with a variety of loans, you could consider refinancing:

  1. Your high interest, private loans.
  2. Federal loans with a high-interest rate that don’t qualify for repayment programs. 
  3. Loans with a longer repayment term that you could refinance for a shorter term and save money on interest or monthly payments.

However, if you have federal (or private) loans with a low-interest rate, you don’t have to refinance them. There’s no rule that says you must refinance all of your loans. At the end of the day, you need to build a custom refinancing plan that helps you to achieve your ultimate financial goal: becoming debt-free. 

Do you have questions about your student loan refinancing? We’re here to help. Get in touch with us today by clicking here!

Wood Smith Advisors, a woman-owned Registered Investment Advisor (RIA), is a fee-only financial services firm that partners with its clients to simplify their financial lives. We focus on women, entrepreneurs, and individuals with complex financial situations, providing objective and competent advice, education and services to help them develop and build their businesses and reach their financial goals. We can be reached by clicking here.

"Finance Made Simple" blog posts are intended for educational purposes and not for specific advice. Each person’s situation is different. Consult your financial advisor for advice relating to topics discussed.

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