Why Refinancing Your Student Loan Can Benefit Established Professionals
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It’s no secret that many Americans are struggling to repay their student debt. According to the U.S. Department of Education, in March 2023, about 44 million U.S. borrowers collectively owed more than $1.6 trillion in federal student loans. If you’re among those millions, you may be wondering if you ought to refinance your student loan. Doing this can often result in better loan terms, which can help you repay your debts and better leverage income from your professional career.
What is student loan refinancing?
Student loan refinancing is offered by financial institutions such as credit unions and other specialized lenders as a way to help borrowers pay off their debts more quickly, or to consolidate loans to simplify repayment. Essentially, the process allows the borrower to take out a new loan to pay off their existing debt, replacing the original loan terms with an updated agreement. This often enables borrowers to get a lower monthly payment, a different term length, lower interest rates, or a more convenient payment structure.
Though student loan refinancing is sometimes referred to as student debt consolidation, they are not the same thing. Consolidation refers to combining your federal student loans into one new federal loan, with a new term. Unlike refinancing, though, it does not necessarily provide a lower interest rate, as the new rate will be the weighted average of the interest on the loans being consolidated. Though consolidation may make you eligible for some income-driven repayment plans and loan forgiveness programs, it is not typically regarded as a money-saving option.
Primary Benefits of Student Loan Refinancing
For those who have been out of school and in the workforce for a while, it can be easy to fall into a routine and not realize there are opportunities to reduce some of your loan burdens. We have already touched on some of the main benefits of refinancing your student loans, but here is more in-depth information:
- Lower interest rates. Getting a lower interest rate on a loan is not a guarantee. However, if your credit score has improved since you took out your original loan, or if market conditions have improved, you could be able to lower your rate. If you are such a professional, your terms could be much more favorable.
- A different interest rate type. Fixed rate loans remain the same over time and may therefore offer more security and peace of mind. Variable rate loans typically come with a lower initial rate, but may fluctuate over time. If you’d like the security of a fixed-rate loan, or the lower cost of a variable-rate loan, refinancing will enable you to switch.
- Longer loan terms. Extending the time you have to pay back the loan can often lower your monthly payments as well. However, you may end up paying more interest over the life of the loan. When choosing your new repayment plan, try to strike a balance between a monthly payment you can afford, and a term that won’t rack up a burdensome amount of interest charges.
- Shorter loan terms. Some borrowers actually want shorter loan terms so they can “fast track” their repayment and save money on interest, especially once they are gainfully employed. If you’re determined to get rid of your debt once and for all, this may be a good option for you—as long as you are able to make your monthly payments without suffering financial hardship.
Factors to Consider Before Refinancing
Although refinancing can be an attractive option, it’s important to know that it’s not for everyone. Factors to consider before refinancing include:
- Your credit score. Your credit score is one of the biggest determining factors in whether you should consider refinancing. Most borrowers who are approved for refinancing have FICO scores in the 700s. With that said, if your credit score is too low, you may be able to qualify with a co-borrower.
- Your debt-to-income ratio. Refinancing is best for those who have a stable income. Generally speaking, your debt-to-income ratio should be between 20% and 50%.
- Whether you qualify for federal student loan forgiveness. If you refinance your federal student loans, you will no longer be eligible for repayment programs such as SAVE. If you only want to refinance private loans, you do not need to take this into consideration.
- Whether you will save money. A student loan refinancing calculator will give you an idea of how much you’ll save by refinancing your student loans. A financial advisor may also help guide you in the right direction.
- Other qualifying factors. If you have recently declared bankruptcy, refinancing might not be possible. Many lenders require that a certain amount of time—anywhere from four to 10 years—must have passed since your bankruptcy.
We hope that this article has helped you understand the benefits of refinancing student loans, including cost savings, increased financial flexibility, and greater peace of mind. If you decide to pursue this option, remember that refinancing should be just a part of a comprehensive financial strategy. Our resources can help you find loan funding options, manage your debt, and work toward your goal of achieving financial freedom.
This blog was contributed by CU Student Choice. Learn more about refinancing your student loans through Service Credit Union and Student Choice.
*Federal student loans may qualify for payment and interest rate benefits that private student loans do not. Carefully consider your options before refinancing federal student loans, as they will no longer qualify for current and future federal benefits once refinanced with a private lender. For more information, visit studentaid.gov or contact your federal student loan servicer.