By Connie Schlosberg
Student loan affordability may be elusive to anyone dealing with a pile of debt. One option that may be available to you is refinancing your student loans. You won’t be able to reduce the total amount you owe but you may be able to lower your interest rate and/or payment. Let’s look at student loan refinancing to see if it’s right for you.
Should you refinance your private student loans?
Private student loans typically feature variable interest rates supported on your credit history. Once you initially apply for private student loans, your credit profile may be limited, and you are considered a higher credit risk by lenders. That said, your student loan interest rate can be high.
You may qualify to refinance your existing student loans with a new loan at a lower rate if you graduated, have a job, and have excellent credit. (Check out these best practices for managing student loans.)
Before you decide to refinance your student loans, here are some factors to think about:
Two Items to Consider Before Refinancing Your Private Student Loans
Examine carefully the APR (annual percentage rate).
Even though the monthly payment on the new student loan may be lower, the interest rate could potentially be higher. This can happen when the loan term is distributed over more years.
Think about the tax consequences.
Is your new refinanced loan still considered a student loan? Ask the lender if your new loan is still a student loan. If it isn’t, you may not be entitled to a student loan interest tax deduction.
Should you refinance your federal student loans into private student loans?
Although interest rates are considerably low, the Unsubsidized Stafford Loan (the most common type of federal student loan) interest rates have not gone down. You may qualify to refinance your existing federal student loan with a new lower interest rate loan if you have excellent credit. However, before you consider this option, please be mindful of the risks.
Three Things to Consider Before Refinancing Your Federal Student Loans
Review carefully if you’ll be changing from a fixed rate to a variable rate student loan.
Federal student loans have fixed interest rates so your monthly payment will remain the same. If you move to a variable interest rate student loan, your interest rate could (and most likely will) rise higher over the lifetime of the loan.
Find out which benefits you may forfeit by switching to a private student loan.
If you have trouble paying your federal student loan debt, you have several choices available to you that you probably won’t have with private student loans. One of those choices is Income-Based Repayment (IBR). Another is student loan deferment. Also, if you work in specific jobs such as teaching, you may be eligible for loan forgiveness on your federal student debt. Once you convert your federal student loan to a private student loan, you won’t be eligible for federal loan forgiveness programs or a loan discharge, which may be available to you if you should become permanently disabled.
Understand all the consequences of converting a federal student loan to a private one before signing the refinance loan.
Your student refinancing lender should divulge which benefits you will forgo by switching to a private student loan. If you don’t understand something, ask your lender. Nonetheless, if you feel secure in your job, have emergency savings, and are not in credit card debt, you should give it serious consideration if your goal is lower payments.
Tip! If you’re wondering how much student loan debt you have, try this debt analyzer tool before you decide.
Bottomline: refinancing your student loans could help lower your monthly payments, but always weigh the benefits and risks before you commit to a new student loan.
Where can you refinance your student loan debt?
Once you decide to refinance your student loans, check out these lenders. DebtMD partners with many student loan lenders who are dedicated to helping you get a handle on your student debt. All lenders are highly vetted by us and must meet certain standards and qualifications to partner with us. Your data is always secure, and we respect your privacy. You always have the choice to select the student loan lender who will benefit you the most. To access our directory of providers, click here.