Student loan refinancing is a great way to streamline student loan repayment and lower interest rates if done properly. Refinancing uses a new loan with a new interest rate from a private company to repay some or all of your old loans. The repaid loans go away, and the borrower is left with one loan that has one interest rate and one payment. Refinancing student loans can be a great way to lower interest rates, monthly payment or both, but choosing which loans to refinance needs to be carefully considered. Refinance with Credible to compare interest rates without affecting your credit score.
One of the most important things to take into account when refinancing a student loan is the interest rate of the new loan versus the old loan. The way to achieve the best interest rate on your new loan is to have high credit and stable income. This makes you pose less of a risk to lenders so they feel more comfortable giving you the best rates. You also need to consider the length of the new loan versus the loans that you are refinancing. If your new loan has a longer payment term than your refinanced loans, you may end up paying more in interest, but have a lower monthly payment. If your new loan has a really short repayment term, you may have a higher monthly payment, and pay a lot less interest.
Many student loan refinance companies want you to refinance all of your loans, both federal and private. This is not always the best decision because some loans that you are refinancing may have lower interest rates than the new loan. While on average you may be saving money because the new loan has a lower interest rate than the average weighted interest rate of your old loans, you could save even more money by selectively choosing which loans to refinance. The way to save the most amount of money is to make your weighted average interest rate as low as possible.
You need to be careful when refinancing federal loans. Generally, federal loans have lower interest rates than private loans. Also, federal loans have many protections that will disappear when they are refinanced since they are paid off and you have a private loan to repay. These benefits include deferment, forbearance, and income based repayment plans such as REPAYE and PAYE. If you have income that is unstable, it may be best to leave federal loans alone because there are protections built into the loans. Private loans do not have many protections, and demand consistent payments every month.
Overall, refinancing your student loans can be an excellent way to lower monthly payment and/or interest rates on certain loans. This can save you a lot of money in the long run and/or provide you with lower payments. However, you need to be very careful in choosing which loans to refinance because oftentimes federal loans have lower interest rates than private loans. If you are a high income earner with excellent credit, you may be able to find a refinance loan that has a lower interest rate than all of your federal and private loans. Subsidized loan interest rates are very difficult for private lenders to compete with though, so pay attention to all of your interest rates.