The decision to refinance or not refinance your student loans is an important one. A smart refinance can easily save thousands of dollars. A mistake refinancing can cause years of grief.
In some cases the decision whether or not to refinance is simple and straightforward. Other times it can be more complicated.
Should I Refinance My Private Loans?
The decision to refinance private loans falls into the simple and straightforward category. If you can get lower interest rates, refinancing is typically the smart move.
Refinancing private loans also makes sense if you want to get a cosigner off of your loans. Even if your interest rate doesn’t change, refinancing into a loan without a cosigner can be a huge benefit to the individual(s) who helped make school a reality.
The refinance decision shouldn’t be made until lenders have made actual interest rate offerings. Many lenders advertise rates below 3%, but these rates only apply to short-term loans for borrowers with excellent credit. As the length of the loan gets longer, the interest rates offered go up. Checking rates doesn’t commit a borrower to refinancing, and there is nothing wrong with deciding that your current loans should stay unchanged.
Should I Refinance My Federal Loans?
Things get far more complicated with federal loans. This is because it is hard to do an apples to apples comparison. Even if federal loans do have higher interest rates, they also come with excellent borrower protections such as Student Loan Forgiveness and Income-Driven Repayment plans. These programs help ensure that federal borrowers never have to worry about defaulting on their loans… even if they lose their job.
Refinancing federal loans typically only makes sense for those borrowers who are certain they will be paying off their federal loans in full. For these borrowers there is no doubt IF they will be paying off their loans, the only question is WHEN.
Another way to consider this decision is to look at the federal perks as an insurance policy. This insurance policy helps protect your credit score and your finances if you get into trouble. The higher federal loan interest rate is the cost of this insurance policy. If the insurance policy is worth the cost, then the loans should stay federal. If the cost is too high, then it is probably time to consider refinancing.
What If I Don’t Want to Refinance All of My Loans?
One common misconception is that borrowers have to refinance all of their loans or none of their loans. The reality is that borrowers get to pick and choose which loans get refinanced.
This means that borrowers can refinance their high interest rate loans, but leave the low-interest rate loans with their current lender.
The only limitation is the minimum amount to refinance requirement that most lenders have. Most companies require a minimum of $5,000 to $10,000 in order to refinance. If you only want to refinance $3,000 worth of student loans, you may be out of luck.
Should I Refinance Now or Wait for Better Rates?
There is always a temptation to try to time the market. Like interest rates on mortgages and credit cards, lender offerings change, typically on a month to month basis.
Despite changing market conditions, there is no reason to try to time the market to get the best rates. The primary reason for this is that there are not transaction costs associated with student loan refinancing. Unlike refinancing a mortgage where there are loan origination fees, appraisals, and documentation fees — no such costs exists with student loan refinancing. For this reason borrowers can refinance multiple times without repercussion. The only cost is the time spent on the process and the possibility of a credit check appearing on your credit report.
With well over a dozen companies offering refinancing services, it is easy for borrowers to bounce around in order to keep improving their interest rates.
Student loan refinancing is a savvy financial move for some and a mistake for others. Because it is a decision that can have major financial implications it should be considered carefully.