Did you know that the average Class of 2016 graduate has $37,172 in student loan debt, up 6% from 2015?1 That’s a lot of debt to manage, on top of juggling a promising career and other life responsibilities.
Plus, most student loans charge the same interest rate, regardless of how credit-worthy you are. So chances are, you’re probably paying too much in interest on your loans.
This is where refinancing comes in. Student loan refinancing is the process of obtaining a new loan at a lower interest rate and with different repayment terms.
Factors to Think About When Considering Refinancing Your Federal Loans
When considering whether or not to refinance your student loans, first decide if you’d like to keep your Federal loans or refinance them to private loans. Federal loans come with a variety or protections and benefits including the ability to defer payments or request forbearance when you are experiencing financial hardship. They also allow many borrowers to adjust payments based on income and some borrowers can have their Federal loans forgiven in certain circumstances. You can find out about these programs on the Federal Loan website. Why would someone give up these Federal loan benefits? The simple answer is that refinancing to a private loan could save you a lot of money. If that tradeoff sounds compelling to you, keep reading.
Factors to Think About When Considering Refinancing Your Private Loans
The most important factors to consider in private loan refinancing are interest rate, repayment term (length of the loan), and type of loan (fixed rate or variable rate), which will impact how much you can save by refinancing and how much you have to pay each month. All things being equal, you want your interest rate to be as low as possible. However, the lowest rates are typically only available for the shorter repayment terms, and shorter repayment terms lead to higher monthly payments, since you are paying your loan back over a shorter period of time. As such, you will sometimes need to balance lower rates with shorter terms and higher monthly payments.
After you decide on a term, the other major factor is whether a loan is fixed or variable. While a fixed rate stays constant over the life of a loan, the variable rate option offers lower initial rates. However, these rates can fluctuate as interest rates change, which are hard to predict. Variable rate loans are good for people who believe they will make enough money in the future to cover potentially higher payments if rates go up, but may not be good for people whose future income is unpredictable.
Deciding on a Repayment Option
While student loan borrowers have a plethora of repayment options – from refinancing to standard repayment plans to Public Service Loan Forgiveness and more – wading through these options may seem tedious and overwhelming, especially if you are still navigating school or your career.
Fortunately, there are resources available to help you understand all of your repayment options and choose a path allows you to best reduce the cost of your debt. For example, our free student loan assessment tool allows you to easily compare each option and identify opportunities to save money. You’ll simply enter your loan and financial information, and you’ll receive estimates of monthly payments, forgiveness potential, and out of pocket costs for all of your options. Check it out here.
If you do decide on refinancing, at Laurel Road, a division of Darien Rowayton Bank, we offer a completely free and easy online application process to get your preliminary interest rates in minutes. Plus, there is no obligation to accept, and no origination fees or prepayment penalties. Apply here now to get preliminary rates in minutes.
Regardless of whether or not refinancing is your best road forward, it’s important to educate yourself on all repayment options to make an informed decision. There is potential to save thousands of dollars, so it’s important to do homework and research all lenders when making a decision.