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Top 5 Reasons to Refinance Your Student Loans
Updated On September 5, 2023
Editorial Note: This content is based solely on the author's opinions and is not provided, approved, endorsed or reviewed by any financial institution or partner.
If you want to learn the top 5 reasons to refinance your student loans, then keep reading. Student loan refinancing is one of the best ways to save money and pay off student loans faster.
When you refinance student loans, you exchange your current federal student loans, private student loans or both for a new student loan with a lower interest rate. The new student loan is used to pay off your old student loans, and then you repay your new student loan each month. Student loan refinancing is one of the most effective ways to save money, lower your student loan payment and get out of debt more quickly.
In this guide, we discuss the top 5 reasons to refinance your student loans:
- Get a lower interest rate
- Lower your monthly payment
- Simplify your student loan repayment
- Change your loan terms
- Change your student loan servicer
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Disclosures: SoFi | Earnest | NaviRefi | ELFI | Splash Financial | Citizens | Laurel Road | LendKey
1. Get a lower interest rate
The most common reason to refinance student loans is to get a lower interest rate. A lower interest rate means you can save money each month and pay off your student loans faster.
The reason you can get a lower interest rate is due to several factors. For example, every borrower receives the same fixed interest rate for federal student loans. This is because the federal government does not underwrite student loans, which means every borrower receives the same interest rate regardless of their credit score.
Since you’ve graduated, you have likely established a financial track record, became employed, generated income and improved your credit score. Lenders are willing to lower your interest rate because you are a mor established and less risky borrower.
This student loan refinancing calculator shows you how much you can save when you refinance student loans.
For example, let’s say you have $60,000 of student loans with a 8% interest rate and a 10-year repayment plan. Now, let’s assume you can refinance your student loans at a 3% interest rate an a 10-year repayment plan. Student loan refinancing would save you $117 each month and $14,074 total.
2. Lower your monthly payment
A second popular reason to refinance student loans is to get a lower monthly payment. If your current student loan payment is too high, student loan refinancing can help lower your payment so you can pay for living expenses and any other financial obligations. There are several ways to get a lower monthly payment.
First, a lower interest rate will lower your monthly payment, unless you change your repayment period. With a lower interest rate, you will save money each month and every month until you pay off your student loan.
Second, you can extend your repayment period, which will lower your monthly payment. A longer student loan repayment period means you pay less each month. However, it’s important to note that a longer student loan repayment period means more total interest because interest accrues even though you have a lower monthly payment.
3. Simplify your student loan repayment
Another benefit of student loan refinancing is the ability to simplify your student loan repayment.
When you refinance student loans, you combine your current federal student loans, private student loans or both into a single, new student loan. After you refinance, you will only make one monthly payment. That means you don’t have to manage multiple payment dates, student loan servicers or loan terms.
You also won’t have to make separate student loan payments for your federal student loans and private student loans. Therefore, student loan refinancing can significantly make it easier for you to pay off student loan debt. Remember to enroll in automatic payments so you’ll never miss or have a late payment.
4. Change your student loan terms
Student loan refinancing is an ideal opportunity to change your student loan terms. For example, if you have federal student loans, you have a fixed interest rate. This means that you pay the same fixed monthly payment, even if interest rates decrease. When you refinance student loans, you can choose a fixed interest rate or a variable interest rate, which gives you more flexibility for student loan repayment.
You can also change the length of your student loan repayment. For example, if you have federal student loans, the standard repayment term is 10 years. When you refinance student loans, you can choose a student loan repayment term from 5 to 20 years.
A shorter student loan repayment term (less than 10 years) means you would have a higher monthly payment, but you would save more money pay off your student loans faster. A longer student loan repayment period (more than 10 years) means you would have a lower monthly payment, but would pay more total interest since your student loan repayment term would be extended.
5. Change your student loan servicer
If you’re like many student loan borrowers, you may dislike your student loan servicer. Your student loan servicer is the company that collects and manages your student loan payments on behalf of your lender. When it comes to student loans, many borrowers want better customer service to answer questions, provide helpful information, and apply student loan payments correctly.
The good news is that when you refinance student loans, you receive a new student loan servicer. If you have multiple student loans, you may have several student loan servicers. Student loan refinancing will consolidate all your student loans into a single student loan with one servicer. With only one student loans, you can manage student loan repayment more easily.
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