Overall, about 45 million Americans owe over $1.6 trillion in student loan debt. The average student debt is almost $30,000. That is quite a scary number.
Of course, the number can fluctuate from person to person. My student loan debt exceeds $100,000. Others only need to borrow a few thousand.
Regardless of the amount, student loan debt is a heavy burden to bear and everyone wants to get out from under it. We hear of potential get out of debt options and want to take advantage of them, but they can be a tad bit confusing- sometimes more than a tad bit.
Refinancing your student loan with a private student loan is one of those options, but it does not have to be confusing. We are going to go over the ins and outs, ups and downs of refinancing with a private student loan so you can determine if it is the right move for you.
Ways Refinancing With a Private Student Loan Saves Money
I would love to tell you that refinancing with a private student loan can solve all of your problems, but that would be a lie. It can, however, offer some benefits that may far outweigh the consequences and risks for you. Let’s take a look at the good side of refinancing with a private student loan.
One of the best ways that you can save money on a student loan is by refinancing with a private student loan is through the interest rate. Sometimes, a private student loan can offer a much lower interest rate, and even a 1 percent variation in your interest rate can make a big difference in the overall amount you pay.
A $1,000 loan with a 6 percent interest rate means you will pay $60 in interest. At a 5 percent rate, you will pay $50 in interest. Granted, that is not a big difference by itself, but most of us owe much more than $1,000 on student loans. Additionally, that interest is simple interest. If the interest is compounded, that difference grows exponentially.
Do remember, though, that not all private loans will offer a lower interest rate. Some will offer lower interest, but the extra costs wipe out the benefit- more detail about this in a moment. If you are going to refinance, do some shopping around before choosing a lender to make sure you are getting the best rate.
Longer Repayment Terms
When you refinance with a private student loan, you can choose a longer repayment term. In ways, this can save you money- especially on a monthly basis as you are not paying out as much. Additionally, if the interest rate varies and goes much lower down the road, you will save in interest.
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Lower Monthly Payments
For the most part, refinancing your student loans mean that getting a new loan that has more favorable terms. This usually means extending your payment term, but not always. This really depends on you. If you have 15 years left on payments, you might choose to refinance for another 15 years or you may choose 20 or 25 years. It will depend on your decision, though sometimes the lender will decide according to your financial situation.
If you choose a longer repayment term, you will have lower monthly payments. This does not necessarily mean that you will owe less overall, but it can help you save money every month, which you can then put toward paying off other debt, invest, or any number of things that can help you financially.
While extending your repayment term can help you with lower payments, it is not always worth it. Take a look at the terms of your loan offer and determine how much interest you will pay over the life of the loan. If you will be paying thousands more in interest, refinancing with a private student loan is probably going to cost you a lot more than it saves you.
Difference Between Refinancing and Consolidating
With such high student debt, it should come as no surprise that student loan borrowers are looking for debt relief. Two common ways of doing this are student loan debt consolidation and student loan refinancing, but these often get confused with one another. Let’s see if we can clear the confusion before moving on.
Consolidation means that you put multiple debts into one debt and then make one payment each month. Perhaps you owe $50,000 in student loans that come from five separate loans, meaning you are making five payments each month. This can be expensive and confusing. Instead, you could consolidate all of those loans into one $50,000 debt.
Refinancing means trading one loan for another. Basically, in the $50,000 case, you would borrow the $50,000 from another lender, repay your loans, and then pay monthly to the new lender. You might have to borrow more than one loan to do this, depending on how much you can get approved for each loan. For instance, you might have to borrow five $10,000 loans instead of one $50,000 loan. As refinancing can only be done through private lenders, your approval is based on your credit.
When Refinancing With a Private Student Loan Could Hurt More Than Help
Like I said, refinancing with a private student loan cannot magically solve all of your problems. In fact, there are times that it can actually create some. Refinancing with a private student loan can be really beneficial at times, but there times that it can hurt your wallet much more than it can help. It will ultimately be up to you to compare the pros and cons to decide if it is a good idea. Consider the following when you are thinking it through:
New Loans Mean New Fees
Remember those extra costs I mentioned a moment ago? Let’s dig into those for a moment. When you take out a loan, there are often fees that come with it. The names and types of fees depend on the type of loan you are getting. For instance, fees for a mortgage are called something different than fees for student loans or even cars.
Regardless of their names, they are all fees, which means you pay out more money. Not all loans charge fees, but it is important that you know if yours does. Some fees are expensive- expensive enough that they offset any savings you could get by refinancing with a private student loan. Some are low enough that it is still worth it.
Still, you need to be aware of any associated fees and be sure that it is worth refinancing. If you will not be saving money, extending your repayment term, or at least lowering your monthly payments, there really is not a reason to refinance.
Swapping to a Private Student Loan Means Missing Out on Special Programs
One of the best things about federal student loans is the programs that are available. For instance, if you happen to experience financial hardship, you can apply for an income-driven repayment plan. Depending on your situation, your payments can be lowered all the way down to $0 per month while you are experiencing your trouble.
There are also student loan forgiveness programs that only apply to federal grants. If you do refinance with a private student loan and have any financial trouble, you will not be able to take advantage of the government programs. This does not have to be a deal-breaker, but it should make you stop and think. If you are already struggling a lot financially, do not have a very secure job, or expect any negative changes to your finances, you should probably stick with federal loans.
Other Refinancing Facts to Consider
There are a couple of additional things you should know before making your decision.
You Can Refinance More Than Once
Here’s some good news: There is no rule that says you can only refinance once. Let’s say that you do end up having some trouble making your refinanced loan payments down the line due to job loss or some other factor. While you cannot take advantage of government programs, you can try to refinance with another private student loan to get lower payments. If you have been making your payments on time for a while, your current lender may even refinance your loans for you.
Additionally, some lenders offer periods of deferment due to job loss. This is not true with all of them, though. Be sure to find out when you initially refinance so you will know what options are available to you.
You Can Use Refinancing to Simplify
Having to pay multiple loans can get irritating and exhausting. When I look at my student loan service provider’s website, my anxiety kicks in and I get a headache. This is not because of the amount I owe- though that alone is enough to induce panic. My problem is actually trying to figure it all out.
With the more than $100,000 I took out in student loans, there is what seems to be a never-ending list of smaller loans to make up the full balance. Each has its own interest rate and other details. Any time I try to formulate a plan to pay them off, I freeze up. And considering I am normally a very effective planner, this says something. There are just too many loans to dig in and figure it out.
That is one thing I love about both refinancing and consolidating- the potential to simplify. It is usually a little easier to consolidate your loans through the government or your loan service provider, but if you can get approved to refinance a large amount, you can still decrease the number of loans you have out. Can you imagine only making one or two payments a month instead of making 10 or more? I don’t know about you but I could definitely help my nerves.
Private Lenders VS the Federal Government
Here is an important thing to note: Private lenders can refinance federal loans but the federal government does not consolidate private loans. This means that if your loans include private ones, the government will not be able to help you with those. You can still take advantage of their ability to consolidate your federal loans, but you will have to take care of your private loans separately. Or you could use a private lender to handle all of your loans.
Before Refinancing With a Private Student Loan
If refinancing sounds like the choice you want to make, there are a few things you need to do before applying.
Think It Through- Again
First and foremost, think about it again. I listed pros and cons here but they may seem a little vague to you. Sit down with this guide, a pen, and a piece of paper. Reread the pros and cons and turn them into more personal facts. You need to know that you are able to make payments on time, or you can end up with a default on your student loan.
For instance, you might say something like, “Refinancing for a longer-term means that I can have lower monthly payments. With the money I save each month, I can pay my mortgage off quicker” or “Work one less day a week so I can spend extra time with my family” or whatever your thoughts are.
Doing this will help you determine how refinancing may or may not actually help you, help you determine what your motives are for making the move, and help you have a plan for what to do with any leftover money. Through this exercise, you will be able to make a much more informed decision about what to do.
Check Your Credit
Remember, your credit is what will get you approved or rejected for a loan and determine your interest rate. For the best results, you, of course, want a really good credit score. Before you make any moves, check your credit.
There is no magic number for approval as each lender has their own criteria. However, the higher above 600 your score is, the better options you usually have. If you are in the low 500s or even lower, you might be much better off consolidating your loans through your loan service provider or a government program. Cleaning up your credit takes time, and the lower it is, the longer it usually takes. Unless you can make some drastic changes in the next month or two, refinancing with a low-interest rate might take too long. And if you are already struggling to pay, you need faster results.
If, though, you have a bit of a higher credit score but it is still not quite high enough to lower your interest rate, you could make some quick changes to your credit. Obviously, what you can do and how fast you can do it depends on what is on your credit, but here are a couple of ideas:
- Try disputing anything that is not correct, including any personal information like old addresses or employers
- Try to pay off or pay a very large chunk of what you owe to a debt on your credit
- If something is about to hit your credit, like a collections account, contact the creditor now and try to work out a payment plan. This could prevent the debt from ever hitting your credit report at all. **Notice I said “could”, not will. Some creditors will report it anyway while you pay on it. Some will work with you to keep it off. Just talk to them and see if they will not report it as long as you make your payments**
Gather Your Information
Any time you are going to apply for credit, you need to have your documentation ready. This includes your personal information, of course, like your ID, social security card, and proof of income. Also, take any proof of collateral you have.
When you secure the loan with something of value- like a piece of property or a car- you have a better chance of a lower interest rate and a higher loan amount. Do not, however, secure your loan with anything you cannot afford to lose. It is better to simply consolidate through the government than to refinance by using your home as collateral and then using your home.
If you are in a lot of student loan debt and are looking for a way out, refinancing with a private student loan might be a good move for you. Just don’t dive into the deep end head first without looking down at the water below. Consider your options carefully and seek professional advice if you feel overwhelmed by the decision.
Brandy Woodfolk is an educator, home business owner, project manager, and lifelong learner. After a less than stellar financial upbringing, Brandy dedicated her schooling and independent studies to financial literacy. She quickly became the go-to among family, friends, and acquaintances for everything finance. Her inner circle loves to joke that she is an expert at “budgeting to the penny”. Brandy dedicates a large portion of her time to teaching parents how to succeed financially without sacrificing time with their little ones. She also teaches classes to homeschooled teenagers about finances and other life skills they need to succeed as adults.
Brandy writes about smart money management and wealth building in simple and relatable ways so all who wish to can understand the world of finance.