Refinancing Student Loans: What You Need to Know

Sheryl Nance-Nash Updated on December 21, 2017

Maybe you need to reduce your monthly student loan payment so you can save money. Perhaps you’re on a mission to get out of debt sooner, or it could be that your interest rate is 6.5% or higher and you believe you can beat that rate. 

For sure, there are any number of reasons why refinancing your student loans is a smart strategy. 

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Simply put, reconfiguring your federal and private student loans can lead to significant savings on both your monthly payment and your total payoff amount.

Here are the basics you should know before you refinance. 

How soon can you refinance?

There’s no magic period of time for how long you should wait to refinance.

The truth is, you could go for a do-over right after graduation, but it likely wouldn’t be worth your while. Typically, you’re rewarded with lower interest rates and payment terms after you’ve earned them by building a strong credit history. So be patient. Give yourself time to show a track record of timely payments.

Figure out how much you could save

When you refinance, your total loan balance doesn’t change: if you owe $40,000, you’ll still owe $40,000.

What changes is how much you’ll need to pay every month, as well as how much you’ll pay over the life of your loan.

Let’s say your current loan has an interest rate of 6.8%, but you have the credit to merit a 3.5% interest rate. If you pay off the loan over 10 years at the 6.8% rate, your monthly payment would be about $460. But at the 3.5% interest rate, your payment would be $395. That’s a $65 savings, right?

Here’s how you can save even more: maintain that $460 payment at the lower interest rate and you’ll shorten the life or your loan by about 18 months.

Imagine Life Without a Student Loan Payment... Start Saving Now!

Take a snapshot of your current loans

Gather all your loan information. Make a chart or spreadsheet, whatever works for you, so you can look at your loans side by side. Compare interest rates, balances and critical terms.

If you have multiple loans, double-check that you haven’t missed any. You don’t want to inadvertently default on a student loan because you accidentally omitted it during refinancing.

Look at your loans’ outstanding balances and interest rates to see where you stand.

Weigh the risks

There’s virtually no downside to refinancing private student loans if you can get a better interest rate or more manageable monthly payments.

The big question is often what to do with federal loans? Should you refinance them, too? Well, if you can get a cheaper interest from a private lender, and you aren’t eligible for an income-based repayment plan or loan forgiveness, then a refi is probably a good idea.

Remember, though: with private lenders, you don’t get a guaranteed payment break in the event of financial hardship. You may want to build an emergency fund of at least three months’ worth of expenses before refinancing your federal student loans privately.

Want to get started? Use our Student Loan Refinancing Calculator to find out how much you could save. 

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Published in: Refinance

About the Author
Sheryl Nance-Nash

Sheryl Nance-Nash is a freelance writer based in New York City. She specializes in personal finance, business, small business, and travel topics. Her articles have appeared in Money, Newsday, The New York Times, DailyFinance.com, ABCNews.com, Forbes.com, TheFiscalTimes.com, among others. When she's not writing about retirement, taxes, student loans, credit, debt, and everything under the personal finance umbrella, she writes about businesses—big and small—their victories and the challenges they face. Sheryl is married with a grown daughter. Her favorite pasttime is traveling. She loves chronicling her adventures and exploring new places and cultures. Read more by Sheryl Nance-Nash

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