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:
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 |
|---|---|---|
| 5 years | $193.33 | $1,599.80 |
| 10 years | $106.07 | $2,728.40 |
| 15 years | $79.08 | $4,234.40 |
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.
Getting Started
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.
Allison Martin is an accomplished finance writer who has written for publications including The Wall Street Journal, MoneyTalksNews, The Simple Dollar, and Credit.com. Her work has been featured on Fox Business, Yahoo! Finance, MSN Money, and ABC News. She enjoys writing about personal development, entrepreneurship, personal finance and is a Certified Financial Education Instructor (CFEI).
