Refinancing loans is the process in which a borrower pays off their student loan debt by taking out a new loan through a private lender, usually at a lower interest rate. It’s typically most helpful to borrowers who currently have a very high interest rate. Refinancing can help you lower your interest rate and may also offer greater flexibility in terms of loan repayment.
Here are some things you should consider when it comes to refinancing your student loans.
1. There Has Never Been a Better Time to Refinance
With U.S. student loan debt climbing beyond the $1.2 trillion mark, there’s still good news for graduates who have landed jobs and have a steady stream of income. A group of lenders are clamoring to refinance both government and private student loans at lower interest rates.
Unlike government Direct Consolidation Loans, which simplify payments on multiple loans by consolidating them into one single loan without reducing your interest rate, refinancing can save you thousands of dollars over the lifetime of your loans with a lower interest rate.
2. Government Income-Driven Repayment Plans Are Not Always Ideal
Instead of reducing your interest rate, government income-driven repayment (IDR) plans lower your monthly payments by aligning them with your disposable income and household size. By stretching payments out over a longer period of time — up to 25 years — you’ll only have to devote ten to 20 percent of your disposable monthly income to paying down your student loans, depending on the exact plan.
If you want to lower your monthly payment, this may sound appealing, but there are some potentially negative outcomes of IDR’s:
- You can end up paying more in interest over the life of your loan.
- If you change your mind or are no longer qualified because you earn too much, you’ll have to pay back some or all of the unpaid interest that’s piled up, called “interest capitalization”.
- If you qualify for loan forgiveness after 20 or 25 years, the amount forgiven is considered taxable income by the IRS. Note: If you work for the government or a non-profit, you can qualify for Public Service Loan Forgiveness after ten years, and the amount forgiven is not taxed.
3. Marketplace Lenders Make the Refinancing Process Easy
If you decide to explore refinancing, it’s important to look around and consider all available options. Remember that group of lenders we talked about before? They offer loans at different rates and terms and some even cater to particular types of borrowers.
One way to comparison shop without having to visit each lender’s website is to use Credible.com, a marketplace that lets you request refinancing offers from multiple lenders. Think of it as Expedia or Kayak, but for student loan refinancing.
Those who use the Credible platform with the goal of reducing their interest rate, loan term, and total amount repaid can typically expect to save up to about $14,000 over the lifetime of their loans. The site helps you avoid that extra step and allows you to view a dashboard with the real rates you’ll qualify for in minutes.
Remember, not everyone will qualify to refinance their student loan debt. It can help your application to have a history of earnings, good credit, and a debt-to-income ratio that’s not sky high. And while refinancing isn’t for everybody, everybody should at least consider it to cut back on the overall interest rates.
Ariha Setalvad is a member of the DailyWorth Connect program. Read more about the program here.