Loans
March 24, 2015

Should You Refinance Your Student Loan?

Simple. Thrifty. Living.

With refinancing becoming as common as taking out a loan, lenders are constantly sending out unsolicited refinancing offers that cover everything from mortgages to car loans. Thanks to lower interest rates, many consumers are taking advantage of the benefits of refinancing, but do these benefits apply to student loans as well?

According to statistics from the Federal Reserve Bank of New York, almost 12 percent of current student loan balances are at least 90 days past due — a delinquency rate that is higher than for any other type of household loan. Going by these statistics, it’s apparent that there are millions who would welcome any help at all in meeting their student loan payments.

Financial experts agree: Depending on the type of student loan you’re carrying, it can pay to refinance your student loan under certain circumstances. Before you decide to refinance, however, here are some points to consider:

Some student loans, such as Grad Plus and Parent Plus loans, charge as much as 9% interest, so if you’ve taken out multiple student loans, prioritize by refinancing these high interest loans first.

Some federal student loans offer attractive income-based repayment programs. If you refinance your loan through a private lender, you’ll lose these repayment options, which may mean higher monthly payments.

Before you sign with a private lender, you’ll need to decide whether you want to choose a fixed rate loan where your interest stays the same, or a variable rate loan that allows you to take advantage of interest dips — but which can also leave you vulnerable to interest hikes. While current interest conditions should have a bearing on your decision, generally speaking it’s safer to go with a fixed rate loan.

When you took out your student loan, your credit score may have been much lower than it is now. If you’ve built a good, strong credit history since then, and if you’re earning good money, chances are you can get refinancing with excellent terms and a much lower interest rate.

Once you decide to refinance, you can choose among a variety of repayment options, including extending the life of the loan (which means you’ll pay less every month), or reducing the term of the loan and paying more each month. Depending on your choice, your interest rates may vary as well, so consider the big picture — and your ability to make the payments — before you make your final decision. You can also take out a personal loan to pay off the total student loan debt at a cheaper interest rate, which will also save you money in the long run.

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