Should I refinance my education loans?
Refinancing your college loans is a significant financial decision that can save you money, but it’s not the right choice for everyone. Here’s a breakdown of factors to consider to help you decide:
Reasons to consider refinancing:
- Lower interest rate: If you can qualify for a lower interest rate than your current loans, you can save thousands of dollars over the life of the loan.
- Improve credit score: A good credit score can lead to lower refinance interest rates. Refinancing could be beneficial if your credit has improved since you took out your original loans.
- Simplify payments: Refinancing allows you to consolidate multiple loans into a new loan with one monthly payment.
- Switch to a Fixed Rate: Refinancing to a fixed-rate loan can provide more predictability if you have a variable interest rate loan and are concerned about the rate increasing.
- Removing a Co-signer: Most loans carry a co-signer release of 24-36 months based on eligibility. If eligible, removing a co-signer from the note earlier can benefit the co-signer’s credit and ability to borrow.
- Pay off debt faster: A lower interest rate can allow you to put more money towards the principal balance, enabling you to pay off your debt sooner.
- Steady income: Lenders will evaluate your income and debt-to-income ratio to ensure you can afford the new loan. A steady income can increase your chances of being approved and getting a good rate.
- No need for federal loan protections: Refinancing may be a good option if you don’t require the flexibility and protections offered by federal loans, such as income-driven repayment or forbearance.
When refinancing may not be the best option:
- Federal loan benefits: Refinancing federal student loans with a private lender means losing access to federal protections and benefits like income-driven repayment plans, loan forgiveness programs (e.g., Public Service Loan Forgiveness), deferment, and forbearance options.
- High-interest rate: Refinancing might not be worthwhile if you cannot secure a lower interest rate than your current one.
- Bankruptcy or default: If you have recently defaulted on loans or declared bankruptcy, you will unlikely qualify for refinancing.
- Fees outweigh savings: For borrowers with low loan balances, the cost of fees associated with refinancing may outweigh the interest savings.
- Unstable income: If your income is unpredictable, it’s best to stick with federal loans, as they offer more flexible repayment options.
- Pursuing loan forgiveness: Refinancing will make you ineligible if you pursue a federal loan forgiveness program.
In summary:
Refinancing can be smart if you can secure a lower interest rate, have a stable financial situation, and don’t require the protections offered by federal student loans. However, it’s crucial to carefully consider the potential loss of federal benefits and assess your circumstances before deciding.
To make an informed decision:
- Prequalify with multiple lenders: Compare rates and terms that different refinance companies offer.
- Use a student loan refinancing calculator: Estimate your potential savings based on different interest rates and repayment terms.
- Evaluate your financial situation: Consider your credit score, income, and overall debt levels.
- Understand the trade-offs: Weigh the benefits of a lower interest rate against the loss of federal loan protections.
By carefully evaluating these factors, you can determine if refinancing is the best way to manage your college loans effectively.
Call use at Get College Going. Were happy to review best practice options for you and make recommendations on a ender or credit union.