Here’s how to decide whether you should refinance your student loans

PFI Disclosure 1

  • Should you refinance your student loans? It depends on whether you can get a lower interest rate and save money.
  • You may be able to consolidate and refinance your student loans at the same time, which combines your loans into one.
  • Federal student loans have some unique benefits, so only refinance after checking the numbers and assessing your financial situation — if you refinance, it will become a private loan.
  • Read more personal finance coverage.

If you are one of the millions of Americans with student loans, you are probably interested in anything that can save you money. In many cases, refinancing your student loans will do just that.

Refinancing is a fancy term for paying off your old loans with a new loan. Essentially you take a loan with a private lender (SoFi, Earnest, and Commonbond are popular options for refinancing) and allow that lender to pay off your original loans. Then, you’re responsible for paying the new loan, usually at a lower interest rate.

But don’t rush and refinance before you understand the long-term costs and ramifications. Follow these steps to decide if refinancing your student loans makes sense.

Should I refinance my student loans?

1. Review your student loans

Start by gathering all of the details on your current loans in one place. Make a list of your loans with balances, interest rates, and minimum payments so you can get an idea of the total you owe, what you have to pay each month, and how far you are from paying off each loan if you have multiple.

2. Note which loans are federal and which are private

While going through your loan list, also note if they are federal student loans or private student loans. Federal loans have some benefits like the ability to sign up for an income-driven repayment plan, deferment, or forbearance that may not be the case with private loans. Federal loans may also be subsidized and could allow loan forgiveness if you participate in a qualifying plan. With private loans, you can expect to pay all interest and all balances down to zero.

3. Check out refinance options

Private lenders and loan companies like SoFi, Earnest, and Commonbond offer loans to pay for your education as well as refinance loans that can repackage existing student debt. Sites like Credible allow you to compare multiple quotes in one place. Getting a preliminary quote isn’t hard: You just enter some basic information online. The more information you enter, the more detailed your quote will be.

Your options to refinance may vary based on your credit history and current debt load. Shopping around will help you find the best deal to refinance your loans. The most important place to look when shopping around is the interest rate. You should never refinance at a higher interest rate than you pay today. Only refinance if you will save money.

If you have a willing cosigner with excellent credit, it could be a path to a lower interest rate that saves you even more over the life of the loan.

Get refinancing quotes from our partners in minutes:

4. Use a calculator to figure out how much each quote would save

Once you have your best refinance option laid out, compare to the list of loans from step three. If your refinance interest rate is lower than your current one, you will save money on every dollar you borrow over the remaining life of the loan, assuming you pay as scheduled either way.

This student loan refinance calculator from Credible does a good job of comparing monthly payments and total interest costs between an old loan and a refinanced loan. Don’t just pick a loan for a lower monthly payment. Your total interest cost is the most important number in comparing your savings.

5. Don’t accidentally give up federal student loan benefits

Federal student loans come with some benefits you won’t get with private student loans, so make sure you don’t convert your federal loans to a private loan without serious consideration. If you do, you could wind up unable to take advantage of the federal programs.

For example, federal loan payments could be lowered with an income-driven repayment plan. If you stick with one of those for a decade or two, your remaining balance could be forgiven. You won’t get that with private student loans. Federal loans could also qualify for a limited number of forgiveness plans that are exclusive to government-based loans.

6. Focus on long-term savings over short-term gain

One of the most common reasons to refinance student loans is to overcome challenges making your regular monthly payments. A lower payment may be tempting today, but if the term is longer or the interest rate is higher, you could pay more in the long-term. With a focus on long-term savings first, you can make the best decision around refinancing your student loans.

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