There is an app on my phone that tells me exactly how long I have until my student loans are paid off. It is a basic countdown app that I set up after using this online calculator to find out just how long I will be paying off those loans. Here’s a calculator for federal loans.
But as student loan borrowers are we stuck with the same loan, lender, or servicer until we finally get those loans paid in full? No.
As student loan borrowers we now have the option to refinance our student loans to try to save money, or to lower our monthly bill, or to get away from raising interest rates from a variable rate loan, or to switch lenders – no matter the reason, we student loan borrowers now have options.
Here is what you should know about student loan refinancing.
Lowering Your Interest Rate Even 1% Can Save You Money
Changing from a 6% interest rate to a 5% interest rate may seem like it won’t make a difference – but each 1% can have a profound effect on your payments over time.
For example, if you have $20,000 of student loan debt and make a $222 per month payment – Changing from a 6% to a 5% interest rate would allow you to pay off your debt 7 months sooner and save $1,554 (if you keep your monthly payment the same).
In the same scenario, while lowering your payment – from $222 to $212 – you would still save $1,210 over the standard 10-year repayment period with a 5% vs 6% rate.
Lowering Your Payments, and Extending Repayment, Can Help Now but Hurt Later
Sometimes life can get tough and lower monthly payments can help make a food budget stretch through the month or help with other life expenses. Refinancing – even if your interest rate stays the same - can help you get a lower monthly payment, but also increase the number of payments you have to make, and increases the overall amount you have to pay, when you extend your repayment period.
For example, if you have $20,000 in student loan debt, at 6% interest, and are making $700 monthly payments you’ll have it paid off in 31 months (2.6 years). If you refinance that amount at the same interest rate of 6%, extending your repayment period to get a monthly payment of $387, it will take 60 months (5 years) and cost you $1,520 more to pay off.
Variable Rates Can Change, Fixed Rates Stay the Same
Some lenders offer initial low rates that are variable. These rates may seem like a great deal, but be careful! Variable interest rates can increase, sometimes dramatically, over time. If you have had to deal with the rate on your student loans suddenly increasing and driving up how much you have to pay, you can take comfort in refinancing for a fixed rate that will stay the same for the life of your loan.
When Can it Be a Bad Idea to Refi?
When you’ll give up all benefits associated with the old loans.
This may include options such as forgiveness, deferments, and income-based repayment options, available on federal Direct and/or Stafford loans, the Alaska WWAMI Biomedical Program and benefits offered by other lenders. Make sure you look into the benefits your current loan offers and weigh those benefits with how much you may be able to save by refinancing. You may not want to give up the benefits.
When the interest rate is higher.
This may seem like a no brainer, but be careful to check the rates. If you have loans with interest rates below the rate you are refinancing for, refinancing may not lower your costs. Many refi loans, including ACPE’s refi loan, allows you to pick and choose which loans to refi and which to leave alone. So, if you have one or two loans at a higher rate, go ahead and refi those loans while leaving the lower rate loans alone.
Student loan refinance can be an excellent tool to save you money on your student loans, or free you from rising variable rate loans, or allow you to switch to a new lender. The freedom student loan refi offers is well worth the time you may spend in researching your options.
Choose your refi loans carefully and happy saving!
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