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With interest rates rising, borrowers may consider refinancing their student loans to lock in lower interest rates while they can. And if you have private student loans, there are fewer downsides to refinancing than if you have federal student loans.
Still, deciding whether to refinance your private student loans is a complex decision that takes time and thought. Review some of the most common reasons to refinance your student loans and when to avoid it.
When refinancing a private student loan makes sense
Since private student loans do not offer the same benefits and protections as federal student loans, there is less risk when it comes to refinancing. You could refinance to enjoy the following benefits:
1. You can get a lower interest rate
Qualifying for a lower interest rate is a common reason to refinance your student loans. If you are approved for a lower interest rate, you could save hundreds or even thousands of dollars in total interest.
For example, suppose you currently owe $60,000 in student loans with an interest rate of 7% and a repayment term of 10 years. If you refinance on a 10-year term but get a 5% interest rate, you could save over $7,000 in total interest. Your monthly payment will also be $60 less each month.
You could use that extra money to pay off other loans with higher interest rates, invest for retirement, or save for a down payment on a house. A refinance calculator can help you estimate how much you could save.
To qualify for the best interest rates on a refinance loan, you’ll need good to excellent credit and a stable income. If you don’t meet these requirements, you can add a qualified co-signer to your application.
2. You want to change your repayment term
Generally, the only way to adjust your repayment term is to refinance with a new loan. Extending your repayment term typically lowers your monthly payment, making it easier to achieve other financial goals like opening a business, building a family, or buying a home.
However, extending the term of your loan also means that you will likely pay more interest over the life of your loan. Your interest rate may also increase when you extend your repayment term, as longer-term loans usually come with higher rates.
Decreasing your repayment term will mean a higher monthly payment, but you’ll also likely get a lower interest rate. By paying off your loan sooner and getting a lower rate, you could pay significantly less total interest than if you chose the same or longer repayment term.
3. You want to consolidate several loans into one
Most students take out multiple student loans during their studies, which means they may have multiple student loan repayments to track each month. You can simplify the repayment process by refinancing multiple debts into one new loan. This will reduce the number of monthly payments you have.
4. You must remove a co-signer
Since most private loans require good credit and a stable income, students are often unable to qualify on their own. To solve this problem, many add a qualified co-signer to their loan application. A co-signer is someone who meets the lender’s credit and income criteria and who will take over student loan payments if you can’t afford it.
Co-signing a student loan involves certain risks. Your student loan will appear on the co-signer’s credit report, which may affect their ability to qualify for a personal loan. Additionally, any missed payments will appear on both your credit report and that of your co-signer. If you can’t make the payments, your co-signer will need to step in and take responsibility.
Some lenders offer a co-signer release, which allows you to remove the co-signer from the loan after meeting certain conditions. But not all lenders offer this option; if your lender does not allow you to remove a co-signer, you can refinance a new loan in your name only.
5. You are unhappy with your lender
If you’ve received poor customer service from your lender, refinancing your loan with another company could make your life easier. Before you refinance, read customer reviews on sites like Trustpilot and the Better Business Bureau and see what others think of potential lenders.
Figure out if there’s anything else you don’t like about your lender. For example, if they have a short forbearance period, look for a lender with a longer one. If they don’t let you choose your due date, find a lender that does.
When You Shouldn’t Refinance Private Student Loans
Even though refinancing private student loans carries relatively little risk, there are times when this strategy is probably not a good idea.
1. You are about to pay off your debt
If you only have less than a year left on your loan, it may be best to keep the loan as is and not refinance. You probably won’t save much total interest in such a short time, so it might not be worth it. Additionally, refinancing may result in a small (but temporary) drop in your credit score.
2. You apply for a mortgage or other large loan
If you’re in the process of applying for a mortgage, it’s probably wise to avoid refinancing your student loans until the home buying process is complete. Refinancing student loans can affect your credit score, which can impact the interest rate you receive from the mortgage lender.
If you want to refinance your student loans, do so at least six months before applying for a mortgage. This should give your credit score enough time to bounce back.
If private student loan refinancing can help, start by researching refinancing lenders and comparing their interest rates, loan terms, fees, and other factors. Many lenders allow you to prequalify, which tells you the estimated rates and terms you may qualify for.
Once you have narrowed down your list of lenders, you can submit an application and wait for approval. Before long, you could be on your way to saving money or simplifying your student loans.