If you’re paying off student loans, you might know the headaches involved with seeing your balances stay at almost the same level, despite paying hundreds of dollars each month. This is a common phenomenon experienced by borrowers across the board, regardless of the loan type.
Most loans are front-loaded, which means you will be paying off interest before making a dent in the principal balance.
Therefore, even if you’re paying hundreds of dollars per month to your student loans, the amount you owe might only be going down by a fraction of that.
For unsubsidized student loans, interest will start accruing before you’ve even graduated. This means your loan balance can balloon up to a much higher level than what you initially borrowed by the time you’re out of school.
So, what is refinancing, and how can it help with all this?
Let’s take a look at what happens when you refinance student loans.
What Happens When You Refinance Student Loans?
The main determinant of how much you’ll have to repay on your loan beyond the principal balance is your interest rate.
Interest rates generally tell you how much interest will accrue over a set period.
In pretty much every situation, lower rates are better than higher ones, as a loan with a lower rate will accumulate less interest.
When you refinance a student loan, you’re essentially taking out a new loan to replace the old one.
You would want to refinance if you’re able to find a loan that comes with more attractive terms and conditions than your current one.
For instance, if you have a student loan with a 6% fixed interest rate and can refinance to one that’s entirely the same but with a 4% rate, you’re going to benefit from lower interest payment obligations.
This, however, isn’t the only thing to think about when looking at a student loan refinance.
Especially with private student loans, it’s important to understand the difference between fixed and variable rates.
With a fixed rate, your interest rate is locked and won’t change—unless you refinance your loan.
Variable rates, on the other hand, can go up or down based on broader market and lending conditions.
Sometimes you can get a great deal if you opt for a variable rate when the time is opportunistic, but fixed rates are generally easier to predict as your payment won’t change.
The term of a loan is another thing that can be changed during refinancing. If you want to be more or less aggressive with your loan repayment, you can opt for shorter or longer terms.
Paying off a loan faster means you’ll be cost less in interest, though spreading things out can help if you want to have a lower monthly payment.
Consolidation is when you take multiple existing loans and roll them into a single, new refinanced loan.
This can help simplify your life, as you’re only paying back one loan instead of many. However, you should take care to ensure you’ll save money doing this before deciding to refinance.
Should You Consider Refinancing Your Student Loans?
There are a few times when it does and doesn’t make sense to refinance your student loans.
The most obvious reason to refinance is you’ll qualify for a new loan that comes with significantly better terms than your current situation.
Those looking to refinance should check out Juno. They negotiate with lenders to provide their group members access to the most competitive private loan offers.
If you’re looking to refinance, it’s a good idea to see if they can help you save money.
While everyone wants to be able to improve the terms of their student loans, refinancing doesn’t always make sense. Here are a couple of situations that should give you pause before attempting to refinance student loans:
- You have poor credit – Your credit score is going to play a huge role in determining what deal you’ll qualify for when looking for private student loan refinancing. If you have a low credit score and don’t have a co-signer, it’s unlikely you’ll be able to secure a great deal.
- You qualify for federal programs – Whether it’s loan payment freezes or income-based loan forgiveness, several federal student loan programs are highly enticing for borrowers. Refinancing your loans can disqualify you from these benefits. Make sure you fully understand the ramifications of refinancing before you go ahead with it.
Overall, refinancing student loans can be a great way for borrowers to save some money over time. Now that you know what happens when you refinance student loans, decide if this is the right decision for you.