Any college student knows how much of a burden student loans can be. The average college graduate carries $37,000 in student loan debt, which can be a major hurdle to meeting future financial goals. However, like any loan, student loans can be refinanced to meet your needs — and help you make progress on your long-term financial goals.
By refinancing, you could:
- Lower your interest rate, meaning you could pay less in interest over the life of the loan.
- Lower your monthly payments to free up cash right now.
- Consolidate multiple student loans into a single, easy to make payment.
While any or all of those options may sound appealing, you shouldn’t rush into refinancing. Before you make a decision on refinancing your loan, you need to carefully consider your financial goals — and whether refinancing is the best way to reach them. Here are the questions you need to ask yourself when you’re shopping around to refinance your student loan.
What’s your interest rate?
Your interest rate is the most important piece of information about your loan, affecting both how much you pay month to month and how much you owe over the life of the loan. If you’re shopping around for refinancing, your goal is to lower that rate, letting you pay off your loan more quickly while making the same monthly payments. Because the interest rate is lower, more of your payment goes to the balance. This means you pay less on the loan over time and get out of debt more quickly.
What should your loan term be?
The loan term is the amount of time over which you’ll repay your loan — and after interest rate, this is what has the biggest impact on your costs. When you refinance your student loans, you’ll have the option to change your loan term. A shorter term will mean higher monthly payments, but you’ll pay the loan off faster and pay less in interest. A longer term will lower your monthly payments but you’ll pay more in interest over the life of the loan.
There’s no “right” loan term to have: it’s all about your financial priorities. If your goal is to get out of debt, choose a shorter loan term. If you need to free up cash right now, choose a longer loan term.
What’s your credit score?
The interest rate you can get all depends on your credit score, so you’ll want to check out your credit before you start shopping around for refinancing. Start by checking your credit report at AnnualCreditReport.com. Lenders use this record of your finances to decide what rates to offer you, and you’ll want to review it for accuracy. If there are any errors, you should correct them before applying for a loan and if your score could use some work you can take steps to improve it.
If your credit is poor and you can’t get a great rate, finding a cosigner can help. By having someone with better credit sign for your loan, you can take advantage of better rates.
Should you get a fixed or adjustable rate loan?
When you refinance, your lender may offer fixed rate and adjustable rate loan options. A fixed rate is just what it sounds like: your interest rate is set when you get the loan and never changes. This means your monthly payment is predictable and will never go up or down, which can be very helpful for budgeting. However, you may be tempted by adjustable rates, which change periodically. Adjustable rate loans often offer lower initial rates, but may go up over time. Though they’re less predictable, they can lower your initial monthly payments. Again, there’s no right answer here: this is all about your financial needs. Do you prefer the stability of a fixed rate loan or the lower interest rates of an adjustable loan?
Should you consolidate multiple student loans?
If you have multiple student loans, it can be complicated to keep up with payments — and if you’re refinancing, your lender may offer the option to refinance multiple loans into a single loan. If you have trouble keeping track of payments, consolidating can be a good idea.
Should you refinance a federal student loan?
Federal student loans have some features you’ll lose if you refinance, including income-based repayment plans, loan forgiveness for those pursuing careers in public service, and options to defer payments. If you don’t need your federal student loan benefits, refinancing at a better rate is an easy choice — but once you refinance, you can’t go back. Be sure to familiarize yourself with the benefits of any federal loans you have before you make the decision to refinance them.
Ready to refinance?
PenFed offers student loan refinancing with competitive rates. It only takes 15 minutes to apply, so it’s quick to see just how much you can save by refinancing with PenFed.