When student loan refinancing offers come in the mail (or on the phone), you may start wondering whether refinancing is right for you. Refinancing is a personal decision, so you’re the only one who can decide whether it benefits you and your lifestyle. Read on to learn more so you can make the choice that works for you.
Understand Your Student Loan Payment
Before you can decide whether or not to refinance, you need to know how much you owe altogether, how much your monthly payments amount to, and what the interest rates are on your loans. This information is accessible from your lender, so go online or check your paper statements. Write down the amount and interest rate of each loan to evaluate the pros and cons of refinancing.
While you’re investigating, consider asking your lender if they can reduce your payments. For instance, many lenders lower your interest rate if you automate payments.
Knowing When to Refinance Your Student Loans
If you are having trouble affording your monthly payment, refinancing can be a good idea. Since private lenders often offer lower interest rates than student loan servicers, refinancing may lower your monthly payment substantially.
Private lenders may also extend the repayment term, giving you more time to pay back your loans. This can be a good idea if you’re thinking of a career change and anticipate earning less until you get established. Refinancing will lower your payments so they’re not a hardship for you on your reduced salary. When you’ve been promoted and are earning more, you can put some extra money toward your student loans, granted the terms of your refinance don’t include a prepayment penalty.
If your monthly student loan payment isn’t a financial hardship, you might still benefit from refinancing. Once you refinance just add extra to every payment, or use autopay to set up those payments for an amount that’s larger than the minimum payment amount (ideally one-quarter to one-half more than the total amount due). In most cases, the extra money you send will be applied straight to the principal. As you lower the amount of your principal, your loan accrues less in interest. This enables you to conquer that student loan faster and for less in most cases.
Use a student loan calculator to see how much lower your payments could be, then compare the interest rate and payment terms to your current option to decide whether refinancing makes sense.
When to Stick With Your Lender
In some cases, it’s smarter to stick with your lender. Federal student loan servicing companies have several options for loan payment relief, from putting loans into forbearance (a period during which you don’t have to make payments) to going on an income-based repayment plan (payments are capped at a percentage of your income). To learn more, visit the Consumer Finance Protection Bureau.
Also bear in mind that once you switch to a private lender, you won’t be able to get on an income-based repayment plan or put your loans in forbearance. If you have a health problem, face reduced hours at your job, or are out of work, these protections might be more valuable than an attractive lower interest rate offered by private lenders.
Legally, federal student loan lenders are not allowed to penalize you for paying your loans early. Private lenders may assess a prepayment penalty, so this is definitely something you’ll need to check out before you refinance.
Whether you decide to refinance or stick with your lender, take your time reviewing all the facts at hand. Then make the decision that’s right for you and automate those payments to be sure to avoid late payment penalties.
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