College · June 22, 2020

5 Questions to Ask Before You Refinance Your Student Loans

When interest rates are low, you may be wondering whether you should refinance your student loans. While it may be a smart financial move based on your unique situation and what you hope to achieve by refinancing, it's important to understand what you may gain or lose by refinancing. Before you take action, consider these five key questions.


1 Are your loans federal or private? 

Your student loans may be federal, private or a combination of the two. Different loan types may have features—and some potential benefits—that could impact whether you'll benefit from refinancing. You can find your federal student loans on the US Department of Education's website, and both federal and private student loans will appear on your credit report.

Federal student loans are made by the government and have terms set by law. They typically offer benefits like fixed interest rates and income-based repayment options, which can adjust or suspend payments based on your income and employment status. Some federal programs may even forgive loans entirely after a period of time if you go into a public service profession.

Refinancing to a new private loan could mean losing these perks. Confirm which federal student loan benefits you qualify for—this can help you decide if the potential advantages of refinancing outweigh what you'd be giving up.

2 Will your rates be fixed or variable?

Variable interest rates could change at any time, while fixed interest rates won't change for the life of the loan if you make monthly payments as agreed. Depending on the lender you refinance with, a variable interest rate could change monthly, quarterly or annually. 

While variable rates may seem lower at first glance, fixed rates are generally the safer bet, for two key reasons. First, your interest rate impacts your monthly repayment amount. If your loan has a variable interest rate, your required payment could change unexpectedly. 

Second, the interest rates associated with your loans determine how much the debt ultimately costs you and how long it takes you to pay it off. With a fixed interest rate, you can create a plan for how you'll tackle your debt.

Variable interest rates make that kind of planning difficult. However, they may benefit you if you know you'll be able to pay the loan off aggressively, before the rate rises.

3 How will a lower interest rate affect your payments?

Interest rates impact not only your monthly payment amount but also how long you'll have the debt and what it costs you over the life of the loan. It's important to look at how refinancing will affect all these factors.

Use a calculator to compare the costs of different loans, their terms and interest rates to see exactly how much money you might save by refinancing your student loans. Then, you can make the decision that best fits your goals. For example, you may be willing to take on a slightly higher cost over the life of the loan in exchange for lower monthly payments if you have short- or medium-term expenses that are your top priority.

4 Can you consolidate your partner's loans with yours?

Student loan debt doesn't become shared with your partner once you marry, but you may be able to consolidate both of your student loans through a private lender. Consolidating your loans may result in a lower rate and simplified repayment terms, because you'll make one payment for both of your loans instead of several payments to different lenders. 

Be sure to compare the new loan terms against your existing ones to see if you'll save money by taking this step. Keep in mind that consolidating your student loan debt makes you both responsible for the sum total, whether the loans were originally yours or not.

5 How often can you refinance? 

Refinancing your student loans is essentially moving your debt from one lender to a new one. Provided you qualify to refinance based on your credit history, employment status, income, cash flow and the amount of your student loan debt, there's no limit to how many times you can refinance.

However, refinancing may involve fees and could impact your credit score, and extending your repayment term could make repayment take longer. Generally speaking, you'll want to refinance as few times as possible.

Go in with a plan

Having a solid strategy will help make your decision to refinance successful and avoid having to repeat the process. That's why it's important to ensure refinancing your student loans makes sense for your financial situation. Talk to a trusted financial advisor to help you understand what option is right for you.

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