Refinancing Your Student Loan

Refinancing your student loan is similar to consolidation, except that you’re applying the same principles to one loan rather than many different kinds of loans (credit cards, mortgages etc). Refinancing your student loan essentially means that you’re replacing your student loan with a new loan that has a lower interest rate, reducing the money that you will pay overall. If privately refinancing a federally-backed loan, however, you will no longer be afforded the protections that come with a federally-funded student loan.

If your student loans are government issued, then it may be worth consolidating them and combining them into one single loan. The government will then take this lump sum amount that you owe them, and factor in your current salary. Unless you’re earning tons of money, you should be able to qualify for income-driven payments. This is a system whereby the government monitors your salary and takes a percentage (less than 10%) from your salary every month to pay off your federal loans. This can make your loan repayments much more manageable, as the amounts go up and down with any fluctuations in your future salary. People earning very little (or no) money may not even have to make any monthly payments at all. This, however, would inevitably change if they landed a better salary in the future.

Private student loans are much trickier, as you are not given the safety nets and protections that the government provides. Most private student loans have higher interest rates, and even if choosing to refinance with a different private lender, the interest rate is still likely to be higher than a federal loan’s. If you’re looking to refinance privately, you should shop around and negotiate with various private lenders in search of a good deal. Private loan interest rates are largely based on your credit score, so the better it is, the better the deal you are likely to get.

Private lenders may also offer you refinancing loans with variable interest rates. Approach these with extreme caution. Although their initial rate may be temptingly low, the variability means that the lender can increase the interest at any time with little warning. If you’re on a tight budget, this could end up worse for you in the long run. Unsurprisingly, variable interest rates will go up much more than they will ever go down. Always try to get a fixed rate when possible, as you know exactly how much interest you will be paying for the loan’s lifetime.

It’s also important to note that a federal hike in interest rates will not affect your federal student loan, as long as you took it out before the hike. The interest on your federal student loan is fixed, and will remain fixed at the same rate throughout the loan’s lifetime.

Refinancing may or may not be right for you, however, do not just ignore your loan payments entirely. Defaulting will seriously hurt your credit score, which may stop you from getting certain jobs and credit cards in the future, leading to a negative snowball effect.

Whatever you choose to do, bear in mind that refinancing your student loan may decrease your monthly payments, but you will probably also prolong the lifespan of your loan too.