If you have student loans, you know the interest charges are killer. It accrues daily and can quickly balloon the size of your loan. In order to save money, you might consider student loan refinancing.
When you refinance student loans, you can potentially get a lower interest rate that saves you thousands of dollars. While refinancing can save you money as you’re paying off student loans, it is irreversible and there are questions you should ask yourself before doing it. Here are six questions to consider before refinancing your student loans.
1. Do I have federal or private loans?
One important question to ask is whether you have federal or private student loans. Why? If you have federal student loans you have generous federal protections, like student loan forgiveness and income-driven repayment. When you refinance federal student loans, you’ll give up these protections, because your federal loans become private loans.
If you have private student loans and are thinking of refinancing with another private student loan lender, there’s less risk of losing borrower protections. When thinking about student loan refinancing, you want to consider the types of loans you have.
2. Is my job stable?
Another question to ask before refinancing your student loans is if your job is stable. It’s tough to decide if any job is, in fact, secure; however, if you know your job is not fairly stable then student loan refinancing is likely not a good fit.
Student loan refinancing is a good idea for borrowers who have a stable job. That’s because federal student loans offer deferment, forbearance and income-driven repayment. If you lost your job or had financial hardship, you could manage your student loans with these options.
As mentioned above, when you refinance federal student loans, they become private loans and you lose access to federal benefits. That’s why having job stability is important if you’re going to refinance student loans.
3. Do I want student loan forgiveness?
The good news about federal student loans is that they offer student loan forgiveness in specific cases. If you work at a nonprofit, you could score student loan forgiveness with Public Service Loan Forgiveness (PSLF). On top of that, if you’re on an income-driven repayment plan and still have a balance after 20 to 25 years your federal student loans will be forgiven.
If you want student loan forgiveness, refinancing isn’t right for you. Even if you only have a slight feeling that you might want to work toward, then think critically if student loan refinancing is right for you.
4. Do I have good credit?
Here’s the deal. Not everyone can refinance student loans. Refinance student loans are from private financial institutions so you’ll need good credit to be approved. Of course there are various eligibility requirements by each lender, but all of them likely require that you have a strong credit score. A good credit score is 670 or above, according to data from Bankrate.
If your credit isn’t strong, it might be wise to hold on refinancing until it improves. You may be able to boost your credit score by making your payments on time and keeping balances on your credit cards low.
5. How quickly can I pay off debt?
The good and bad thing about student loan refinancing is that you can shift your repayment term. Your repayment term is how long you have to pay back your loans. Refinancing may offer longer terms than your current options. This can be great, because it may lower your monthly payments; on the other hand, you’ll pay more in interest over the life of the loan.
Ask yourself how quickly can you pay off your debt. You’ll want to compare the repayment term options with your current loans and prospective lenders. Ideally, you’d use refinancing as a tool to help you start paying off student loans, quickly.
Refinance student loans could lower your interest rate and save you money, which could also help you make extra payments toward the principal balance.
6. How much can I save?
The main reason you’d want to refinance your student loans is to save money on your interest rate. But not all rates are the same and how much you can save will vary. Do your research and compare rates for multiple student loan refinancing offers.
Many lenders let you check your rates before applying, so calculate how much you could possibly save before taking the plunge. Seeing how much you can save and evaluating the protections you might give up — for example with federal loans — can help steer you in the right direction.
Refinance student loans
Refinancing student loans can be a good financial move, but once you do it there’s no going back. You’ll give up all of the federal student loan protections you have so consider it, carefully. Asking yourself these six questions can help you make an informed decision that’s right for you.
