What You Need to Consider Before Refinancing Your Student Loans

It’s not a secret that our country’s college grads are in the middle of a crisis. Student loans are out of control. In fact, recent studies are showing that the data is worse than many of us in the financial industry realized was possible. Right now, data shows that as many as 40% of college attendees could default on their student loans by 2023.

This is all to say that if you’re feeling stressed about your student loans, you aren’t alone. One thing many people are considering as a potential solution is student loan refinancing.

What is Refinancing?

Refinancing your student loans entails finding a new loan that covers each of your student loans (you might have several!). Ideally, the new loan has better repayment terms - a shorter repayment time frame, or a lower interest rate. While refinancing is an attractive option for many people who are struggling to keep up with payments on multiple loans with varying (often high) interest rates, there are several things you should consider before taking the leap.

Why Do You Want to Refinance?

As is the case with most things, knowing your “why” plays a big part in whether student loan refinancing is the right option for you. Refinancing can be a solution for many people, for several different reasons. Some things that might motivate you to consider refinancing as an option are:

Lowering your monthly payments
Shortening the length you’re scheduled to repay
Lowering your interest rate to save yourself money in the long run
Combining multiple loans into one to avoid repayment confusion

All of these are valid reasons to consider refinancing. As you start comparing student loan refinancing companies, it’s important to keep your “why” in mind. For example, if your ultimate goal is to lower your monthly payments, signing on with a refinancing company who is shortening your repayment term might not be what you want. Alternatively, if your goal is to lower your interest rate and knock out loans quickly, maybe you’re willing to pay more each month on a lower-interest refinanced loan to become debt free.

Will Refinancing Hurt Your Loan Forgiveness Options?

Depending on what your job description is, or who employs you, you might be eligible for student loan forgiveness. Not all career paths have this option, but for those in Public Service or Education, your federal student loans may fall under a federal loan forgiveness program. PSLF (or Public Service Loan Forgiveness) typically requires you to work full-time for your employer for a specific number of years.

After that, you become eligible for loan forgiveness depending on your salary and loan balance, even if you’ve been making reduced payments on your loan. This could mean that you have the option of paying less on your student loans while you wait for loan forgiveness to kick in - which could help you avoid years of repayment, massive amounts of interest owed, and more.
Each program available through federal (and state) government has its own conditions, but refinancing with a private loan company could make you ineligible for loan forgiveness - which could hurt your finances in the long run.

Are You Refinancing Federal or Private Loans?
Not all refinancing companies are created equal. Some of them are specifically geared toward refinancing or consolidating your private loans. Others are able to take on a mixture of federal and private loans. Before you decide which loans you want to refinance, make sure to look at each interest rate and how it stacks up to the refinancing rate you qualify for.

Often times, federal loans come with lower interest rates than private loans. If the interest rate on your federal student loans is lower than the interest rate being offered through a loan refinancing company, consider cherry-picking which loans you refinance and which ones you leave alone. This can help to ensure you lock in the best interest rates across the board - which will save you money in the long run!

Final Answer?
Is student loan refinancing right for you? The short answer: maybe.
The long answer: Everybody’s financial situation is unique. Refinancing or consolidating your student loans isn’t a decision you should take lightly. Weighing all of your options, carefully evaluating your short and long term financial goals, and shopping around by talking to several student loan refinancing companies can help you determine whether or not it’s your best path.

Want help? Talking to a professional can be a useful way to objectively evaluate your student loan situation and narrow in on the best options for you. Contact us today to learn how Michael Brady & Co can help you take back control of your finances and repay your student loans.