Should I refinance my student loans?
This is one of the most common questions that student loan borrowers ask.
Repaying student loans on a streamline repayment term is no easy task. Millions of borrowers are struggling to clear their student debt from federal student loans and private student loans. At present, according to NerdWallet, student loan debt has risen to an estimated $1.6 trillion.
What’s more, NitroCollege released a report indicating that the average student loan debt amount was just north of $37,000.
Debtors are trying everything to clear themselves of their loan amount. Income-Driven Repayment Plans, REPAYE plans, HRAs, HSAs – you name it.
One of the most commons ways is to reduce their high interest loans into lower interest ones. This process is often referred to as refinancing student loans to lower monthly payments.
To refinance means to replace existing student loans with a new one that has a lower interest rate. Many people don’t get the best student loans with the ideal loan benefits for their situation. They only realize this later. This is why refinancing makes sense.
To that end, getting a lower rate as a repayment option has its pros and cons.
But before we get into that, using a student loan refinance calculator is key if you do decide to refinance.
Let’s look at how it works.
Student Loan Refinance Calculator: How It Works
The student loan refinance calculator (sometimes called a loan consolidation calculator) seen above gives you a detailed overview of your refinanced loan.
To use the calculator, you’ll need to input some information about your existing student loan, including:
- Loan Balance
- Interest Rate
- Years Remaining On Loan Repayment
- Your Credit Score
Once you’ve populated the relevant fields, the student loan refinance calculator will prompt you to select an interest rate. Make sure you know whether it’s a fixed-rate loan or a variable-rate loan.
In order to help you choose a rate, a list of reputable lenders will pop up. For each of these lenders, their Annual Percentage Rate (APR) will appear. That includes both each lender’s fixed and variable APR respectively.
Upon choosing a lender, click ‘Check Rates’ to get a sense of the interest rate you have at your disposal.
Then, enter the details on your new refinance loan. Here, you’ll have to input the remaining balance on the loan, the new interest rate, as well as your loan’s new term.
Then, hit ‘Calculate’ and you’ll see the details surrounding your refinanced student loan, including your estimated monthly payments. Hopefully the outcome is something that better fits your income and savings. This way, you won’t have to participate in deferment on any federal loans you have.
Refinance Student Loans: Should You Do it?
A student loan refinance calculator is a useful tool.
But the real question is “Should I refinance my student loans?”
There is no hard and fast rule when it comes to refinancing.
It depends on your financial situation. For some people, doing so would work in their benefit and reduce the life of the loan(s) they have. For others, apart from it not being a wise decision, they might not even be eligible for loan refinancing. It often requires a good credit history so make sure you get a credit report.
Here, we’ll provide a breakdown of when you should refinance your student loans:
- You Have Private Student Loans – If your loans are private, you should consider student loan refinancing. This is because you have nothing to lose and everything to gain. By refinancing a private loan, you will be able to rework your debt at a favorable cost by placing its repayment under a different company. Because private loans cannot benefit from federal loan programs like student loan forgiveness, the only way to get a better bargain would be to refinance. This is especially true for teachers or nurses who would otherwise apply for a special student loan forgiveness program.
- Your Student Loans Have High Variable Rates – A report from the Federal Reserve Board members showed that interest rates on loans will rise over the coming years. As a result, if you have a variable interest rate on your student loan, repaying the balance will become more financially demanding. Refinancing your loan will allow you to get a fixed interest rate. That way, you won’t have to worry about fluctuations in the market.
- You Have a Good Credit Report – Some people have tried refinancing their loans but were unsuccessful. This is usually because they have bad credit. If your credit score has improved since the last time you applied, try again. This time, you’ll stand a better chance of having your request approved. Ideally, you have excellent credit and this isn’t a hurdle for you.
- You Want To Save Money – Refinancing student loans is a strategy used to save money. The key is to refinance at an optimal rate so you can cut back on spending wherever you can. You don’t need to have a flawless credit score to be eligible. As long as you can get a better interest rate than what’s on your existing loan, you’ve made one step in the right direction.
Keep in mind that you can often find a lender that allows cosigners on student loan refinancing. By having a cosigner, you can often get a better loan terms on any new loans.
Student Loan Calculator for Refinancing: Worth it?
That said, there are instances in which refinancing student loans aren’t in your best interest.
This will apply to persons who:
- Are Expecting A Drop-In Income – If you have federal loans and are expecting a loss in income, don’t refinance your loans. This may happen if you will be changing careers or have a fast-approaching termination date on your work contract.
- Are Applying For Student Loan Forgiveness – If you have applied for student loan forgiveness, you cannot refinance your loans.
- Have Declared Bankruptcy – In theory, you can refinance a student loan even if you’ve declared bankruptcy. It’s just a lot more complicated, not to mention difficult. Most lenders call for you to have a four to ten-year gap between the time of refinancing your loan and requesting bankruptcy.
- Defaulted On Their Loan – If you have a student loan default on your record, lenders will be less inclined to give their stamp of approval on your loan refinance. This is because it calls into question your ability to repay loans.
Should I Refinance My Student Loans? The Verdict
If you do decide refinance your student loans, then a student loan refinance calculator will be an essential tool. With it, you can keep track of your repayment plan.
You should also consider other student loan payment solutions.
Programs that offer employer student loan repayment services are one such solution.
Weigh your options and choose wisely.
You can reclaim your financial freedom by making smart decisions.