Are you struggling to pay off your student loans? If the answer’s yes, you’re not alone. As of 2018, 69% of all college graduates had student loan debt, and the average loan amount was $29,800. In total, Americans owe more than $1.5 trillion dollars in student loans.
At Addition Financial, we have a lot of members who are paying student loans. One of the most common questions we hear is:
“Should I refinance my student loans?”
The truth is that, in many cases, refinancing is a great idea. There are some exceptions, but here are four significant benefits of refinancing your student loans.
#1: You May Qualify for a Lower Interest Rate
The first benefit of refinancing your student loans is that, if your credit is decent, you may be able to qualify for a lower interest rate than the one you have now. While a lower rate won’t save you money on the principal of your loan, it will reduce the total that you pay.
It’s important to note that this isn’t a guaranteed benefit. The interest rate you qualify for will depend on:
- Your credit score
- Your income
- Your debt-to-income ratio
The best way to find out if you can save money with a lower interest rate is to apply for refinancing and see what you qualify for. Then, you can make an informed decision about whether to refinance your student loans.
#2: You May Be Able to Reduce Your Monthly Payments
Interest rates aren’t the only concern when you’re paying off one or more student loans. You also need to worry about the size of your monthly payment and how it fits in with your budget. If your current payment is stressing you out, it may be that refinancing can help you reduce your payment.
It’s possible that consolidating and refinancing your loans can save you money both in the short and long term. Here again, the size of your monthly payment will depend on several factors, including your principal balance, your credit score and your interest rate. Getting a quote will show you whether you can qualify for a lower monthly payment than the one you have now.
#3: You May Be Able to Pay Off Your Loan More Quickly
It can be frustrating to look to the future and realize that you’ll be paying off your student loans for years to come – especially if you’ve got a high balance. Carrying a big student loan balance can impact your ability to buy a new car or a new home.
The good news? Refinancing those student loans might help you pay them off more quickly. With the potential of a lower interest rate, you might be able to pay a little extra each month. The key here is to talk to your lender and make sure that if you pay extra, it’ll be put toward the principal of the loan.
#4: Refinancing Student Loans Can Help You Plan for the Future
If you can qualify for a lower interest rate or a monthly payment – or both – then there are other benefits that come with refinancing your student loans.
A lower monthly payment or interest rate could help you:
- Start a retirement fund
- Save for a downpayment on a home
- Buy a new car
- Start your family
We recommend crunching the numbers before you sign on the dotted line. It’s important to know how much you can save and what your budget will allow before you move forward.
When Is It Not a Good Idea to Refinance Your Student Loans?
Refinancing is often the right choice for new college graduates, but not always. Here are a few scenarios when you’ll be better off not refinancing.
- You want access to federal repayment options. Currently, there are four income-based repayment options available. They go away if your switch your federal loan to a private loan.
- You want to have the option of applying for student loan forgiveness. Here again, refinancing with a private lender removes this option.
- You can’t qualify for an interest rate that’s significantly better. If you’re hoping to get a lower interest rate and can’t qualify, there’s not much point in refinancing. Your best bet is to table the option for now – leaving federal repayment and loan forgiveness open – and work on improving your credit score before you try again.
- You won’t reduce your monthly payment by much. If your primary goal is to save money on your monthly payment, a small reduction won’t make much difference. You can leave your loan alone and try to refinance again in the future, leaving your federal options open.
Refinancing isn’t right for everybody. Crunching the numbers and going through the application process will help you figure out if it’s right for you. Refinancing student loans is a good option for many people. It can potentially help you save money both now and in the long run – helping you step into the future with minimal debt.
Ready to learn how Addition Financial can help with student loan refinancing? Click here to learn more!
Posted on Sep 4, 2019
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