It’s no secret. Student loan debt is out of control. As of September 2016, this figure had reached a whopping $1.4 trillion. (Source)
Even worse, results from a recent survey administered by SoFi found that 40 percent of millennials would rather come clean with their partner about an STD than disclose their student loan balances. Yikes!
The good news is refinancing your student loans could provide some relief. But is it the best option?
Should you refinance your federal student loan?
It depends on your situation. Some benefits and drawbacks to consider:
- You may qualify for a lower fixed rate if you have excellent credit. This could save you a bundle in interest.
- Your monthly payment could be lower if the loan term is extended or interest rate is reduced.
- Credit rating is considered when your loan application is processed.
- Your new loan term may be much shorter since federal loans tend to have longer repayment periods.
- Some private loans have variable rates, so your payment could change over time.
- Refinancing with a private lender will cause you to forfeit your access to flexible repayment options, disability, death and discharge benefits offered by the federal government.
- Repayment begins once you’re approved; there is no grace period.
It may not make sense to refinance if you
- Have a low fixed interest rate since you’re already paying a smaller amount than you’d qualify for through refinancing, in interest.
- You recently graduated or are facing employment challenges and need more flexible repayment options, like the income-based or income-driven plans offered by the federal government.
- You have less than perfect credit since private lenders run a credit check when evaluating your loan application.
However, you may want to consider refinancing if you
- You have a steady source of income, excellent credit, and are looking to take advantage of cost savings.
- You want to ax student loan debt in record time, and the flexible repayment options and other federal loan perks won’t be of any benefit to you.
Let’s say you have a 30-year $10,000 federal loan with a 6 percent fixed interest rate. Your monthly payment will be $59.96. And you’ll pay $11,585.60 in interest over the life of the loan.
But if you refinance through a LendKey lender for a 5 percent fixed loan with a shorter term, you’ll save a ton in interest. To illustrate:
|Repayment Period||Monthly Payment Amount||Total Interest Paid|
In this case, it would be in your best interest to refinance your federal student loan.
Should you refinance your private student loan?
The answer to this question also depends on your situation.
You may want to steer clear of refinancing your private student loan if:
- Your credit is in shambles, and you’re struggling to get on your feet.
- Your lender has agreed to work with you by setting up a payment arrangement or approving you for forbearance until you find work.
Consider refinancing your private student loan if:
- Your credit rating has improved, and you have steady employment. These changes should qualify you for a lower rate.
- You could qualify for a lower interest rate if you have steady employment and excellent credit.
- Refinancing could lower your monthly payment if the loan term is extended or the interest rate is steeply reduced.
- The interest rate you are offered will depend on your credit rating.
- If the lender offers the same rate but agrees to extend the term to reduce the monthly payment, you’ll pay more in interest.
- Possible forfeiture of the tax deduction for student loan interest.
- The repayment period begins promptly.
Obviously, the higher your credit score, the better. But, what if your credit score is not great? A friend or relative with good credit who is willing to guarantee your loan can really help.
However, the first step is to find out what your credit score is. You can get your credit report and score for free from Credit Karma. Once you know what your score is, it’s easier to filter lenders based on their minimum credit score requirement. You may also find that you can qualify on your own.
To get started, use SuperMoney’s loan comparison tool to explore your options. You can search lenders based on their qualification criteria, such as credit score, type of loan, and state of residence.