Should You Refinance Your Student Loans?

Student loans have become a seemingly integral part of life in the United States. Student loans are the second-largest pool of consumer debt, following only home mortgages. If you’re currently dealing with student loans, you probably want to find a way to pay them off sooner, or possibly lower your monthly payment. This can be accomplished through student loan refinancing. But should you refinance your student loans?

What Is Student Loan Refinancing?

Before determining if refinancing your student loans is the right decision, it’s important to have a firm understanding of the refinancing process in general. If you weren’t previously aware, refinancing isn’t unique to student loans. It’s actually an extremely standard sort of financial procedure used for many forms of debt.

So, what is refinancing? It’s really just taking out another loan, which is used to pay off your current loan in full. There’s nothing gimmicky about this process. Refinancing is one of the best ways to get a loan that works better for your current situation.

But even if you don’t necessarily need to change anything about your student loan in order to afford the payment, refinancing can help free up more money. The main attraction of refinancing student loans is the ability to change interest rates and repayment terms. The ability to cut your interest rates, which will reduce the amount you’ll have to pay back based on the outstanding principal balance, can save you thousands of dollars over time.

Without a doubt, there are some strong benefits to refinancing student loans. But not all people have the same financial realities. Even though many will find it advantageous to refinance, others should consider some potential drawbacks before going through the process.

Should You Refinance Your Student Loans?

Deciding whether a student loan refinance makes sense for you ultimately comes down to a few key factors. Student loans have some specific nuances that make them a little different from other kinds, so you need to understand how these factors come into play in order to make an educated choice.

The most basic questions are easy to assess. Do you want to lower your interest rates or change the repayment term period on your loan? Then a student loan refinance can do just that for you. In the right circumstances, this can be an incredible financial tool for borrowers.

But notice that this is qualified by the need for the correct circumstances. In order to refinance student loans, you’ll have to go through a private lender. While this is fine if you already have private loans, or some federal loans like a Direct PLUS Loan, this can be a fairly straightforward decision. So long as you can get a better loan—and also qualify based on any credit and income requirements—it likely makes sense to go ahead with refinancing student loans.

Some federal loans, however, such as Undergraduate Subsidized Loans, are probably best to keep rather than refinance. One of the drawbacks of refinancing student loans is the fact that federal loans will likely lose many or all of their unique benefits, such as income-driven repayment plans. These can actually be more advantageous to many borrowers over time than getting a lower interest rate, which is usually difficult when you have subsidized loans, anyway.

The other group of people who will have to take special considerations before refinancing student loans is those with poor credit. Since refinancing can only be done through a private lender, you’re going to have to prove your creditworthiness. Most lenders are going to want to see a credit score of at least 650 in order to refinance student loans. Otherwise, you’ll need to find a co-signer in order to refinance.

Only you can determine if refinancing your student loans is the right decision. Armed with this information, you should be able to decide if it’s an optimal move to refinance.