Don't Ignore These 4 Things Before Refinancing Your Student Loans

The average American with student loans has approximately $30,000 in debt, and makes a monthly payment of nearly $250. With interest rates sometimes reaching as high as 8%, many people struggle to bring down the balance. One popular solution is to refinance your loans, getting a lower interest rate or lower monthly payment with a different repayment term. For some people, this can be an excellent way to make progress on eliminating their debt. For others, it can be a short-term option that ends up causing more problems later on.

What Is Refinancing?

If you have federal or private student loan debt at a high interest rate, you can refinance your debt by taking out a new loan from a private lender to cover your entire current balance. You use that money to pay off your current debt, then make payments at a lower rate or different repayment term on the new loan.

If you have high-interest debt, refinancing can be a way to save you thousands over the course of your loans. When you are researching your options, it is important to look at offers from multiple lenders to ensure you are getting the most competitive interest rate and terms. LendEDU is a site that allows you to compare multiple offers in one place to get the most attractive loan that meets your needs.

4 Factors to Consider Before Refinancing

While refinancing student loans is a good decision for many people, there are factors you need to consider before you sign any agreement.

1. Interest Rates

When refinancing your debt, you will have the option of choosing a variable or fixed interest rate. Variable rates as low as 2% are available. However, they can change every year and can go as high as 8% to 10%. While fixed rates are often slightly higher than the initial variable interest rate, (usually they are about 3%), that interest rate is guaranteed not to increase over the course of your debt. If you have a small amount you can pay off quickly, a variable rate can make sense. However, if you need five to 10 years to pay off your loans, a fixed rate is more secure.

2. Deferment Options

If you have federal student loans, you have the ability to defer your debt if you run into economic hardship, such as if you lose your job. When you refinance with a private lender, you may end up losing that benefit since some companies do not offer deferment options. Make sure you understand their policies regarding economic hardships to ensure you're prepared for the worst-case scenario.

3. Loan Terms

When you refinance, your monthly payment can be cut in half. While that looks great on paper and it frees up money in your budget, you actually will end up paying much more over the length of your loan. To get the payment so low, your repayment term is extended from the standard 10 years to 20 or more. Over the duration of your loan, you can end up paying thousands more in interest. If you opt for an extended repayment term, assess your budget every year. As you move up the corporate ladder and get a better salary, you can increase your monthly payments and pay the debt off more quickly, saving yourself money.

4. Prepayment Penalties

Some private lenders have prepayment penalties, meaning you will owe a fee if you pay off your new loan early. In some cases, the fee may be small, but for some companies, the cost might be prohibitive. Make sure you check if there are any prepayment penalties ahead of time.

For some, refinancing student loans can be a great way to save money and pay down the debt faster. It can be a good strategy to get a lower interest rate or to get a more affordable monthly cost. By considering these four factors, you can ensure you are informed and empowered to make the best decision for you.

Have you refinanced student loans? Has it worked out for you?

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Don't Ignore These 4 Things Before Refinancing Your Student Loans

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