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How and When to Refinance Your Student Loans

How and When to Refinance Your Student Loans
Fiona Staff12/9/2022

According to the Federal Reserve, there is more than $1.74 trillion in outstanding student loan debt in our country, which falls on the shoulders of about 15% of Americans. That’s a lot of debt to carry around, which can take graduates years (or decades) to pay off! 

While many of those borrowers have been approved for federal student loan forgiveness in recent months, this forgiveness is limited to select balances and loan types. Depending on how much you owe overall, any federal forgiveness you might receive could feel like a drop in the bucket.

Those borrowers with remaining debt or debt that isn’t eligible for forgiveness — especially those with private student loans — will instead be faced with paying down that balance for many years to come. Refinancing or consolidating those loans can reduce your total out of pocket cost and make it easier to get out of debt, but when is the right time to think about refinancing?

What It Means to Refinance Your Student Loans

In order to refinance, or refi, your student loan(s), you’ll need to take out a new personal loan, which can replace a single student loan or be used to consolidate and replace multiple loans at the same time. This new loan serves to pay off any existing balances you choose, after which those accounts will be closed out. You’ll then repay your new loan as agreed until the debt is totally satisfied.

There are many benefits to refinancing your student loan debt:

  • Rather than chasing multiple due dates and balances each month, refinancing can consolidate those debts into one single loan with one monthly payment.

  • By lowering your interest rate or adjusting your repayment terms, you can adjust your total monthly student loan payment to fit your budget.

  • Depending on your current interest rates and creditworthiness, a refinance can reduce your overall interest rate and save you money on your debt repayment.

  • If you have another borrower on your loans (like a cosigning parent), refinancing on your own can remove their obligation to your debt. 

When to Refinance 

According to one survey, the average student loan borrower takes more than 21 years to pay off their educational debt. That’s a long time to be saddled with the exact same loans and terms you might have agreed to as a teenager.

While the specifics can vary from one borrower to another, there are some times when refinancing should probably be on your radar.

If your credit has improved

Many borrowers begin taking out student loans in their undergraduate years, when they are as young as 18 with limited credit history. As a result, they likely don’t qualify for the most favorable loan terms and interest rates.

If your credit score has improved since you first took out your student loans, refinancing can unlock notably lower interest rates, especially if you have private loans. Rate-shop to see what’s available to you — even dropping your overall APR by a couple percentage points can save you thousands over the course of your repayment.

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If market rates have gone down

Market interest rates have a tendency to fluctuate over time, which gives you the opportunity to drop your APR even if your credit score hasn’t changed much. If overall personal loan rates have gone down since you took out your student loans (or last refinanced), consider getting pre-approved for a new refi. You might be surprised by the savings!

When you need to remove a co-signer

Many college students will require a cosigner in order to qualify for student loans, especially with a limited credit history. If your parents, grandparents, or another trusted adult co-signed for your loans, they are financially tied to that debt until it’s repaid.

Rather than continue burdening your co-signer with that debt — for an average of over 21 years! — you can release them from the obligation as long as you qualify for a refi on your own. 

When juggling multiple loans gets difficult

In order to cover their ever-growing educational costs, student borrowers may need more than one federal and/or private student loan per semester. Multiply that by eight semesters of school (or more), and it’s easy to see how you could graduate with multiple loan balances.

Each of those loans can have its own monthly payment amount, due date, and balance to track. Rather than juggle each of these, you can refinance multiple loans into one single refi. Then, you only need to track one balance, one due date, and one monthly payment amount.

When you want (or need) to adjust your monthly payment

Once you begin repaying your student loans, you’re generally locked into the same monthly payment for the duration of the loan term. Failing to make those payments — in full and on-time, each and every month — could lead to late fees, credit score drops, and even loan default.

If your monthly student loan payments are putting a strain on your budget, a refi allows you to make adjustments. Simply refinance your loans into a new loan with a lower interest rate, longer repayment term, or both, and you can lower your total out-of-pocket cost. 

Bottom Line

Refinancing student loans can be a great way to save money and make your educational debt more manageable. While there are a few things to consider before refinancing (especially if you have federal student loans), there are also some instances when refinancing simply makes sense for most borrowers. 

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