Curious about refinancing your student loans? Find the whole process completely overwhelming? I know first hand that it can feel that way. But it is actually really simple and not that big of a deal after all. Refinancing your federal student loans is a strategy that a lot of federal student loan borrowers use to pay off their student loans. Borrowers typically refinance with a private lender for two main reasons: (1) they typically enjoy lower interest rates than with federal student loans and (2) they are usually in a position where they can pay off their student loans fairly quickly (in 15 years or less). So how does refinancing your student loans work? Basically, the private lender pays off your federal student loans and then you pay back the private lender at a lower interest rate than you were paying to the federal government.
Figuring out how to navigate your student loan debt is like trying to figure out what to eat for lunch when you’re already hangry. (anger induced by hunger).
There are so many different options, that it leaves you (or at least, me) feeling like sticking my head under a rug and sobbing. (I get dramatic when I’m hungry). And to make matters worse, each student loan option is needlessly complicated. Its like trying to order a basic meal (a #1– a plain hamburger with fries and a Diet Coke) and then having your waiter assault you with sundry of questions. Well do you want special sauce with that? Do you want onions? What about grilled onions? Lettuce? Tomato? What about trying something crazy on it, like pineapple? Jalapeno? And before you know it, you’ve collapsed on the ground, too hungry to make any decisions. In each of the federal student loan forgiveness options, you have to follow the rules with precision in order to have your loans forgiven. So, first, you have to know what those rules are before you can make a decision. But the rules can be hard to understand. And your hungry. And understanding things when your hungry is hard. So, in our student loans simplified series, we are breaking down each of the federal student loan repayment options in bite sized pieces to help you understand and make the best decision for you.
Here is everything you need to know about refinancing your federal student loans.
You will lose your federal loan protections.
If you refinance your student loans with a private lender, you will lose federal loan protections, such as opting for income-driven repayment if you find yourself jobless or otherwise in a financial bind in the future.
TIP: even though you are losing some federal protections, many private lenders offer services such as payment deferment in the event that you lose your job or otherwise start having difficulty making payments.
You could save THOUSANDS of dollars in interest.
Depending on the balance of your student loans, your current interest rate, and credit score, you could literally save thousands of dollars on your student loans by refinancing. Because our student loan balance is so high, we are actually saving *hundreds* of thousands of dollars by refinancing. Isn’t that crazy? We had several Grad PLUS loans with interest as high as 7.9%. It wasn’t hard to find interest rates that were almost half that! You can check what kind of interest rate you would qualify for here (without it impacting your credit score).
You can choose a fixed or variable interest rate.
When you are ready to refinance your federal student loans, you can choose a fixed or variable interest rate. A fixed rate is a rate that will stay the same over the life of your loan. For example, if you have a loan and the private lender offers you a fixed rate of 4.5% for a 10 year term, that means that over the 10 years, that interest rate will not change. On the other hand, if a lender offers you a variable rate of 3.9%-7% on the same loan, that means that your rate actually could change. Fixed rates are a safer bet for most people, but if you can make extra payments on your new loan to pay your student loans off quickly (while your interest rate is low) on a variable rate, that is a decent way to save even more money on your student loans.
You can choose the amount of years to pay off your loan
Most private lenders offer different interest rates depending on how much time you think you will need to pay off your student loans. The lender will typically offer a lower interest rate if you think you can pay off the loan in a shorter amount of time. For example, the following three offers from SoFi– in this hypothetical, the lowest interest rate is 3.25% for a 5 year term and the highest is at 4.375% for a 10 year term.
Many private lenders offer some protections, such as payment deferment or flexible payment plans.
If you are really worried about losing some of the protections that you get having federal student loans, you can worry less. Most private lenders have started offering options for students who get behind on their student loan payments.
The better your credit score, the better your new interest rate will be.
If you have really bad credit, refinancing your student loans might not make a lot of sense (cents) right now. But the better your credit score is, the better your interest rate will be, and that can make refinancing your student loans an attractive option.
Refinancing your student loans is not the same as consolidating your student loans.
There is a common misconception that refinancing and consolidating student loans are the same thing. This is because the procedure of these two options is similar in that both options replace your old loans with a new loan and new terms. But don’t be deceived! These options are actually quite different. Consolidating your student loans simply replaces your old loan with a new one and new terms but it DOES NOT LOWER YOUR INTEREST RATE. It simply combines all of your federal student loans and takes an average of the interest rate on all of your loans. There are several reasons why you would opt to federally consolidate your loans (for example, if you have FFEL loans and want to qualify for certain federal repayment plans that you can’t qualify for with FFEL loans). On the other hand, the main reason that you would refinance your student loans with a private lender (NOT consolidate) is to opt for a lower interest rate to save more on the total balance of your student loans. So, definitely don’t get those two bad boys confused.
Who should refinance their student loans: Borrowers that are comfortable sticking with their current jobs, are fairly secure financially, have good credit, and want to pay off their student loans as fast as possible (or as cheap as possible).
Overall, refinancing your student loans can be a solid option if you want to pay off your loans quickly and or save money in the process. As long as you are comfortable that you can make the payments and confident that you won’t want to fall back on any of the other federal student loan repayment options (such as student loan forgiveness) refinancing is an excellent repayment plan. Speaking from personal experience, it is honestly not that scary and TOTALLY worth it.
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This is the final post in our student loan series. Curious about any/all of the other federal student loan repayment plans? You can read all about them here:
EVERYTHING YOU NEED TO KNOW ABOUT THE STANDARD STUDENT LOAN REPAYMENT PLAN