Can I refinance my student loan?
Refinancing a federal student loan
- You may be able to pay off student loans faster and save money by refinancing.
- If you refinance through a private lender, you lose certain benefits of federal student loans.
- Refinancing often lowers monthly payments.
A common misconception about federal student loans, such as Stafford and Perkins loans, is that you cannot refinance them through private lenders such as banks.
It is true that not all private lenders will refinance federal student loans, but some do and this type of refinancing can benefit some borrowers by lowering their interest rates and monthly payments, reducing the terms of the loans and even saving money in the long term.
Not right for everyone
Refinancing federal student loans through a bank or private lender is not always the best choice, however. Government-backed student loans offer a number of benefits to help borrowers who are having trouble repaying their loans. There are flexible payment plans that allow borrowers to pay less per month during times of financial hardship, loan deferments for those borrowers who go back to school or enter the military, and even loan-forgiveness opportunities that can completely remove some of the debt owed under certain circumstances. Borrowers who refinance federal student loans through private lenders lose those benefits.
In addition, to secure a private loan to pay off those federal student loans, borrowers need to demonstrate they are a good credit risk and can make the payments for the length of the loan term. This can mean having a good credit score, or at least a history of making loan payments and meeting other obligations on time. As with any other loan, borrowers also will need to prove they have a good job with enough income to handle their debts.
Refinancing student loans isn't a cure-all for fixing financial troubles. If you are looking to avoid defaulting on your federal student loans, because you can't find work or your debt load is too high for the salary you have, you are probably better off looking into flexible payment plans, deferments, forbearance or loan consolidation. The federal student aid website has information on all of these programs and benefits.
Making the right decision
There are some good reasons for refinancing your federal student loans through a private lender, however. You might want to refinance simply to secure a lower interest rate on your student loan. Lower rates can save you money over the long term, can allow you to pay off the loan faster, or can lower your monthly payments without increasing the term of the loan.
If you are looking to purchase a home, you may wish to refinance your student loans to lower your monthly payments, which can improve your debt-to-income ratio, allowing you to qualify for a home loan. Lowering your monthly student loan payment also can help you save money for a down payment. If refinance and end up with longer-term loan than you had before, however, you will pay more interest on that loan over time.
Thus, it is important to know what the new loan will cost you, both in up-front fees and over the duration of the loan. Before making a decision to refinance, know what your current interest rates are and compare refinance rates from lenders. These will vary depending on market forces, the duration of the loan and your credit and financial health.
You can often pay less interest by taking a variable interest rate, but if you are looking at a variable rate, find out how often the rate can change and how much it can change over time. Finally, determine what fees you will need to pay to get the loan, and factor those into your calculations to determine if refinancing your federal student loan makes sense or if you should explore loan consolidation through the federal student loan program.