Why You Might Consider Student Loan Refinancing
Guest post by Nate Matherson, Co-Founder of LendEDU
Nate Matherson, Co-Founder, LendEDU
Friend and finance guru, Nate Matherson, is the Co-founder of LendEDU. LendEDU is a website that helps consumers compare personal finance products, and has been featured in major media outlets such as the Wall Street Journal and CNN. Nate and I met at an event earlier this year, and when told me he had refinanced his own student loans, twice (!), I knew I wanted him to share what that knowledge with you. Check out his post below for what you should know when it comes to refinancing your student loans. Take it away, Nate!
Thanks Kimberly! I am in an exclusive group of people who have refinanced more than once! After graduation, I had student loans with rates nearing 10 percent. Today, those same student loans have rates below 4 percent. Student loan refinancing is still a newish type process and product. In this article, I’d love to tell your readers more about my experience and the process of refinancing student loan debt.
Student loan refinancing involves obtaining a new loan and using borrowed funds to pay back existing student loans. The goal of refinancing is to change the terms under which you repay your existing loans, often by reducing the interest rate on current debt. You can refinance both private and federal student loans, although borrower protections are lost when federal loans are refinanced -- so you’ll want to think twice before refinancing federal loans (more on this later).
Refinancing can benefit you at any time if you're able to qualify for a new student loan at a more favorable interest rate. However, 2019 may be an especially good time to refinance your student loans thanks to falling rates. Here’s why.
1. Falling interest rates in 2019 could help you save on your student loans
In October, the Federal Reserve cut interest rates for the third time in 2019. This cut reversed almost all of the rate increases that had taken place during 2018.
When the Federal Reserve lowers rates, this reduces the discount rate, which is the rate banks are charged when they borrow funds from a Federal Reserve Bank. It also reduces the Federal Funds Rate, which is the rate banks charge other banks to borrow.
When rates go down, it's an especially good time to refinance existing debt. If you have loans at a higher rate and could qualify for a new loan at a better rate, you could save money on the cost of credit. As of this writing, student loan refinance rates range from 1.81 percent to 9.29 percent. By refinancing, more of your money should go to the principal, making overall repayment cheaper.
2. How does student loan refinancing work?
If you want to refinance your student debt, you'll need to apply for a new loan with a private lender. The federal government doesn't refinance loans.
While you can apply for a Direct Consolidation Loan with the Department of Education to get a new loan that repays multiple existing federal loans, your consolidated loan will have an interest rate equal to a weighted average of the loans you consolidated– you won't change your rates.
Private lenders, on the other hand, will evaluate your credit, income, and other financial factors in determining if you qualify for a loan and your interest rate. It makes sense to refinance only if you're offered a lower rate than you're currently paying. If you cannot qualify for a refinance loan at a lower rate, you may wish to consider asking someone to cosign for you. The cosigner's finances will be considered in determining loan eligibility. They’ll also share legal responsibility for repayment.
When you're approved for a refinance loan, your existing student debt is paid off by the new loan. You'll now owe and make payments to your refinance lender. Your new monthly payment will depend on both the new interest rate and the repayment timeline. Loans with longer repayment timelines carry a higher total cost due to paying interest for a longer period of time, but your monthly payments will be lower.
Refinancing your debt is one money move.
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If you refinance a loan at a lower interest rate and have either the same or a shorter repayment term, you should be able to save a substantial amount of total loan costs. This will save you the most over time.
For example, if you owed $30,000 at 6.8 percent with a $372 monthly payment and 108 months remaining, you could save $1,833 in total and $52 per month by refinancing to a new loan at 5.10 percent with a 120-month repayment term. But if you refinanced instead to a 96-month repayment term, you'd raise your monthly payment by $9 but save a total of $3,595 in interest over the life of the loan. Use this refinancing calculator to run your own scenario.
3. What are the downsides of student loan refinancing?
While student loan refinancing has substantial upsides including the ability to reduce total loan costs and monthly costs, there are also downsides to refinancing.
One downside is you could make your loan cost more if you refinance to a longer payoff timeline, even if you get a lower rate. If you refinanced the $30,000 loan mentioned above and you opted for a 240-month repayment term (instead of a 120 or 96-month term), your monthly payment would be $173 lower, but you'd pay $7,723 in increased interest costs over the life of the loan. This is why it's important to focus on the overall cost of the loan when refinancing.
Another downside is that you give up very important borrower protections if refinancing federal student loans. Private lenders don't offer Public Service Loan Forgiveness or income-contingent payment plans and they offer far fewer opportunities to put loans into deferment or forbearance. You also give up subsidized interest on Direct Subsidized Loans.
Because of the big downsides of refinancing a federal loan, carefully consider whether this is the right course of action for you. You don't need to worry about the loss of these borrower protections when refinancing other private student loans, though, as private student loans don't offer these features anyway.
So, is refinancing right for you?
While 2019 is likely a good time to refinance student loans due to falling interest rates, you'll need to consider your own financial situation when determining if you should refinance. Before refinancing, you should think about the type of loans you have and what type of new loan you'd qualify for based on your financial situation so you can make the best choice to meet your needs.
Thank you, Nate, for sharing this with us! For more info from Nate or LendEdu, visit www.LendEDU.com.
