Raise your hand if you’re reading this and wish you could change at least one thing about your monthly student loan payment! Whether it’s a better interest rate, lower monthly payments, or better loan terms, if you haven’t refinanced your loans you’re probably not getting as good of a deal as you could be. Many students took out plenty of federal loans which means they may be holding on to an old fixed interest rate as well as multiple monthly payments to worry about.
With the new year just around the corner, it’s time to cough up resolutions that can make a real difference in your finances. Below, we’ll walk you through three great reasons to make 2017 the year you get serious about refinancing your student debt.
Reason #1: Lock in a lower interest rate.
The most popular reason for refinancing is to save money by obtaining a lower interest rate from a new lender. These days there are many institutions – and many different types of institutions, for that matter – competing with each other for your business. That means savvy borrowers who haven’t already refinanced can almost certainly get lower interest rates than they got when they applied for the loan in school. This is because you likely have a better credit score and greater income than you had at that point in your life. Most borrowers had little-to-nothing on their credit report when they were in school, and because they were in school they probably did not have a full-time job or other stable source of income. As a graduate, you’re considered a lower-risk borrower now, and you can use that to your advantage to shop for a lower rate.
The first place you check should be the financial institution you bank with, since they already know you and you have one or more accounts there. But don’t take the first rate they offer you. Look into offers at competing banks and credit unions, and check online lending institutions. There are even several websites that will help you look for and compare rates from many potential lenders at once. While student loans are already somewhat low, they can get even lower which most people do not take into consideration.
Reason #2: Lower your monthly payments.
Most federal and private student loans are automatically on a ten-year standard repayment plan. Perhaps now that you’ve graduated, you aren’t making the amount of money you’d anticipated, or maybe your expenses are higher than you’d thought they would be. In this case, your reason for refinancing might have less to do with saving money through a lower interest rate and more to do with managing the size of your payments. Many lenders will refinance student loans with extended loan terms, often up to twenty years. If your credit score is pretty good, you might be able to lower your interest rate even while extending the life of your loan. Also, some states such as Minnesota offer state offered refinancing options. Over the next year, a number of other state offered programs may be on the way. In California, Democratic Congressman John Garamendi is working on a four pronged plan which includes refinancing. Just remember that carrying a loan balance for a longer term of years will almost always mean paying more interest over the long term. This is usually true even if your interest rate is reduced at the same time that your loan is extended.
Reason #3: Getting your cosigner off your loan.
If you had to have a cosigner sign for student loans you took out, refinancing is an option that can take them off the loan and make you the only one responsible from this point onward. The majority of borrowers who use cosigners have their parents cosign for them. Sometimes, significant others such as boyfriends or girlfriends cosign, as do friends and extended family. Any adult with good credit can cosign for a borrower, regardless of their relationship. Sometimes, using a cosigner can become awkward if the relationship deteriorates later on, such as after a breakup. And sometimes the very act of cosigning for someone can introduce stress into a relationship or friendship, because the cosigner’s credit report will reflect that loan and its balance just as the borrower’s does. If you have steady employment and income, and you’re ready to get your cosigner off your loan, you might ask if your current lender is willing to drop them based on your satisfactory payment history. If they aren’t, then refinancing with a new lender under your name alone will release your cosigner from the old loan. This is powerful motivation for many borrowers, since oftentimes their original lender will have policies in place that prevent release of the cosigner until a certain number of months or years have passed, or the borrower reaches some sort of milestone regarding income and credit score. If your primary reason for refinancing is to release your cosigner, be prepared for the possibility that you might have to accept a higher interest rate than you originally had, because you will be losing the benefit of your cosigner’s original excellent credit. This makes it even more important to shop around with different lenders before committing to one.