Should You Refinance Federal Student Loans?
With student loan forbearance coming to an end, wondering whether you should refinance federal student loans? Let’s take a step back and define what refinancing means. Refinancing means replacing an existing loan with a new loan. This usually means with different interest rates, repayment period, and/or lender. Typically, the conditions are in favor of the loaner meaning the interest rate would be lower.
This post is about should you refinance federal student loans.
Let’s dive into the top 5 reasons as to refinance federal student loans:
1. Lower Interest Rates
Student loan interest rates can be quite high, so one of the main reasons people choose to refinance federal student loans is to snag lower interest rates. Getting a lower/better interest rate can actually save you money in the long-term. It essentially equates to less interest paid over time on the loan as the rate determines how much interest grows. For example, when rates were at a historical low in 2022, the housing market was quite hot and known as a seller’s market because rates were 2-3%. That would also have been a great time to secure lower rates for student loans as well.
2. Reduction in Monthly Payment Amounts
Since refinancing federal student loans means changing the terms, typically in favor of the loaner, the terms also include the duration of the loan. This means you’re able to spread out your monthly payments even longer.
For example, say your original loan was $10,000 with a 10-year repayment term, at an interest rate of 6%. The calculated monthly payment for this would be about $111.
But if you refinanced to a new loan of $10,000 with a 15-year repayment term, and an interest rate of 5%, your calculated monthly payment would be about $79.
As you can see, the monthly payments would decrease, which could free up additional monthly funds for other financial goals!
3. Improve Credit Score
As you can see from this post about what impacts your credit score, consistent payments are one of the major factors of determining your credit score. If your current payments require you to stretch yourself, refinancing can help decrease your monthly payments. Therefore, helping to make the monthly payments much more manageable. As you can see from the tip #2, just a reduction in 1% reduced the monthly payment by almost $30. That’s extra cash you can either put in savings, investments, or make the monthly payments more feasible.
By making the monthly payments more feasible, it increases your capabilities to pay off the loan every single month. Therefore, improving your credit score.
4. Co-Signer Release
For those who don’t have credit or good credit, it’s not uncommon to have a co-signer on your loans. Once you’re more established with better credit and decide to refinance federal student loans, since it’s a brand new loan, you have the ability to release the co-signer from the obligation. This way, it’ll remove the responsibility associated with the student loan, freeing up their financial liability. This is especially advantageous if they’re now trying to take out a loan for themselves (decreases debt utilization ratio, for one).
5. Simplified Repayment
Taking out student loans during college, it is not uncommon to have multiple loans with multiple lenders (several semesters, quarters, years, etc). Refinancing loans can help with consolidating into a single loan. This will significantly simplify the process of repayment. You’re essentially dealing with one lender, making only one monthly payment, as opposed to multiple payments to multiple lenders.
To reiterate, the top 5 reasons to refinance federal student loans are:
- Lower interest rates
- Reduce monthly payments
- Improve credit score
- Co-signer release
- Simplified repayment
There you have it! Interested in learning more about managing loans responsibly? Check this post out for what impacts your credit score.
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