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Should I Refinance My Student Loans?

With millions drowning in debt, it’s no wonder so many Americans are refinancing their loans. Refinancing can be a great way to get a better interest rate and save you money in the long run. And if student loans are cramping your style, maybe you’re wondering, Should I refinance my student loans? Let’s find out!

When to Refinance Your Student Loans

For many people, student loans feel like a roadblock that delays their dreams.

We get it. Figuring out how to get out of student loan debt on your own isn’t easy. It’s like they’re designed to be as confusing as possible so you stay stuck and pay more in interest with every payment.

But refinancing could be a great option to accelerate your debt payoff.

Does any of this sound familiar?

  1. My student loan interest rate is too high.
  2. My variable interest rate is making it hard for me to budget.
  3. At this rate, it’s going to take me forever to pay off my student loans.

If any of this rings a bell, then refinancing could be a good option. But we only recommend a refi if all of the following are true for you:

  • It’s completely free to make the change.
  • You can keep a fixed rate, or you can replace a variable rate with fixed. (The last thing you want to do is give your lender the option to jack your monthly payment way up without notice!)
  • You don’t have to sign up for a longer repayment period. (And hey, if the new loan shortens the term of repayment, that’s even better!)
  • Your new interest rate would be lower than your current interest rate.

Refinancing Private Student Loans Right Now

Since private student loans were not affected by any relief from the CARES Act or the Student Loan Payment Relief Extension, now is the perfect time to refinance your private student loans.

How Much Will Refinancing a Student Loan Save You?

Imagine you have a student loan of $25,000 with a variable interest rate that’s currently sitting at 7%. You’d probably like to get rid of it, but so far you haven’t exactly been attacking the debt. So, you’re only making the minimum monthly payment of $225. At that rate, it’s gonna take you 15 years to pay off. That’s nearly four presidential elections away!

Get a new student loan rate from a Ramsey-trusted company in 10 minutes.

A refi on the right terms could get things moving much more rapidly in the right direction! Let’s see what would happen if you found a lender who could refinance (with no fees) to a fixed rate of 5% on a 10-year timetable. We’ll chart the difference here:

   Original Student Loan

 Refinanced Student Loan

 Starting Balance  $25,000

 $25,000

Interest Rate

 7% (variable)

 5% (fixed)

Monthly Payment

 $225

 $265

Term

 15 years

10 years

Total Cost

 $40,447 ($15,447 in interest)

$31,819 ($6,819 in interest)

 

Wow! By paying an extra $40 a month, you’re knocking the loan out five years earlier and saving nearly $9,000 in interest over that period. And there’s no law saying you can’t send more than the minimum after you refinance. In fact, that new interest rate and the closer payoff target will probably motivate you a ton. Going from old loan to refi is like going from dial-up to Wi-Fi!

When You Shouldn’t Refinance Your Student Loans

Student loans come in all rates and sizes—and the same is true of refi deals! So, before we talk about the smart way to refinance yours, let’s talk about the reasons you might need to take a hard pass on a refi.

If any of the following apply to your current situation, your best bet is to leave them as they are. Do not refinance if:

  • It’s going to cost you any money to get it done. Application or origination fees could wipe out any savings you might get in the end. You’d be better off putting all your funds toward becoming debt-free fast, instead of wasting money just restructuring the debt.
  • Doing so would saddle you with a higher interest rate than you already have. Keep in mind that a lower monthly payment doesn’t necessarily mean you’re winning financially. And if lowering that payment raises your interest rate, you’ll be setting yourself back in two ways: paying more and staying in debt longer.
  • The deal requires you to sign up for a longer repayment period. Don’t do anything that postpones your date with debt-freedom. Any refi that places that date further into the future is an absolute no-go.
  • You’ve recently declared bankruptcy. Most lenders aren’t as willing to offer a refinance after bankruptcy. If that’s you, you’re probably hurting in more ways than one. The good news is the debt snowball is a tried-and-true method for getting out of debt, regardless of the interest rates!
  • Your new single-payment setup might make you lose your motivation to pay off your debt fast. Do you like subscriptions that let you set it and forget it? One reason people refinance is to have fewer payments to keep up with. And that is convenient. But a refi isn’t worth it if it slows your momentum toward getting rid of the loans entirely. Again, you should be looking for ways not only to save time and money, but also to speed up your progress toward having no payments at all.
  • If you need a cosigner. Cosigning for a loan is almost always a bad idea—for both the person seeking a loan and the person cosigning. Why? Because it mixes money into relationships! That’s almost always a toxic mess. Imagine getting your Uncle Ralph to cosign for your refi, then hearing him bring it up at every family gathering until it’s paid! The only exception here is your spouse—after all, married couples should combine all their finances anyway, and anything you sign up for is something they’re involved in too.

If none of the above apply to you, chances are refinancing is not only safe, but could also be a good option right now.

Consolidation vs Refinancing

Here’s another term you might run into as you get after your student debt: consolidation. It’s related to (but different from) refinancing. While refinancing can get you a new rate on a mix of either private or federal student loans, consolidation just means combining your existing loans.

Federal Student Loan Consolidation

Consolidation for federal student loans is only available through the government and no private loans are allowed—just the loans you already have through the government. If you choose this option, they’ll take the federal loans you already have, roll them together, and use the weighted average of all the original interest rates to give you a new weighted average.

Keep in mind this approach won’t save you any money. The main advantage is that it allows you to make one payment. Some people love the convenience of a single payment, and it could be a good move for you.

But all of the same conditions for a smart refi apply to consolidation as well. And you might be better off keeping those loans separated and using the debt snowball method to motivate you to pay them off faster. (Remember, the goal here is always speed and freeing up the wealth-building power of your income.)

The main thing to know about student loan consolidation is that the only way to do it for free (which is also the only way it would make sense to pursue) is through the government. And you can only do it once (except for a couple of rare exceptions).

Private Student Loan Consolidation

What about consolidating your private student loans (or a mix of private and federal)? The government can’t help you with that. It can only be done with a private company. As with a federal consolidation, the lender will roll all of your loans into one new loan. But here’s what’s awesome—when you go this route, they won’t simply give you a weighted average interest rate, they’ll give you a new interest rate! If the new rate they offer you is lower than some or all of your existing rates, you could save some significant money. Sound familiar? It should because this is called refinancing.

Other Student Loan Relief Options

We want to help you get out of debt fast—so as you research refinancing, you also need to know about the other student loan relief options. But here’s the deal. Refinancing is the only option we recommend. Yes, there are a few other options marketed as “relief.” But if you look into them, you’ll see they’re more trouble than they’re worth.

  • Student Loan Forgiveness. Let’s begin with one of the worst options. The problem here is that almost no one actually gets their student loans forgiven—it’s extremely rare! One way is through a form of public service with very specific rules. Well, how often does it work out? Up through September 2020, a whopping 179,371 people had submitted 229,215 applications for student loan forgiveness through public service.1 Out of those 179,371 applications, just 5,069 were approved, and only 3,469 people were actually granted student loan forgiveness. That’s only 1.9%! Bottom line? Don’t get your hopes up. Better to refinance if you’re able, then stay focused on paying the loans off quickly.
  • Income-Based Repayment. If you go this route, you can choose from several timetables which allow you to cap your monthly payments anywhere from 10% to 20% of your discretionary income. That’s some budget relief! And some options include the possibility of having the balance forgiven after a couple of decades of payments. The problem is it slows your repayment way down—and that’s no way to win financially.
  • Service Member Benefits. There are a few ways military service members can either lower their student loan rates (which is a good idea!) or reduce or defer payments (which is usually a bad idea). Unless you’re having trouble taking care of the Four Walls—that’s food, utilities, shelter and transportation—delaying your debt payoff efforts makes no sense.
  • Deferring Student Loans. Like we said before, we don’t recommend you slow down on paying off debt. The longer you owe, the longer your woe.
  • Student Loan Forbearance. This only happens when you’ve applied for a deferment and been rejected. Of course, deferring is generally not the best way to approach debt! But forbearance is yet another option if you’re dead set on putting off your loan repayments. (Hint: Refinancing is smarter and will get you out of debt faster!)
  • Student Loan Payment Relief Extension. As part of the CARES Act to help people struggling during the COVID-19 pandemic, the federal government included a few measures toward student loan relief. And those were recently extended to continue until September 30, 2021.2 This affects loans in three ways: It suspends all payments, it stops any new interest from accruing, and it pauses all collections and wage garnishments for loans that are currently in default. But here’s something else to consider: You can still refinance your loans even if you aren’t paying on them! Sure, it’s nice not having interest collected for the time being, but those debts aren’t going away forever—and neither are the interest charges. You can either pay them off ASAP with the zero percent interest (a really smart move) or you can refinance them now (another great idea).

Can You Refinance Your Student Loans?

Let’s talk about what qualifies you to refinance. There are four things lenders look at. You’ll need:

  • A credit score of 660 or more (No, we haven’t started liking FICO. In fact, we still hate it. But if you have loans, you have a score—and this is the minimum to refinance.)
  • An annual income of at least $36,000
  • A degree
  • A low debt-to-income ratio

Chances are you check those boxes. But even if you don’t qualify, you’re already heading in the right direction! And you ought to keep working to pay your student loans off ASAP. If you want some encouragement and specific steps on doing that, check out our quick read, Destroy Your Student Loan Debt.

Is Refinancing Student Loans a Good Idea?

As with most financial decisions, the question of whether to refinance your student loans will depend on your personal circumstances. One thing’s for sure, being in debt sucks! And here’s something that helps: leaving it behind forever, as soon as possible.

For many people, refinancing helps them move through the Baby Steps faster. How? You could replace a variable rate and all of the worry it causes, with a fixed rate and some peace of mind.

A refi could also lower your interest rate, allowing you to save a lot of money as you pay your loan down. Or it could shorten the timetable for the life of the loan, moving your payoff date way up. That speeds up your debt snowball! Check out how much faster you can pay off your loans with the Student Loan Payoff Calculator.

And if a refinance gets you one—or maybe even all of those advantages—you might get so pumped up about paying the loan off that you attack it with even more intensity than ever before!

Ready to see how refinancing might save you time and money? You can get a new student loan interest rate in about ten minutes—with no fees to apply. Not only can you get a lower fixed rate, you can also use the savings to help you get out of debt even faster!

See if a student loan refi is right for you.

 

Should I refinance my student loans infographic

Ramsey Solutions

About the author

Ramsey Solutions

Ramsey Solutions has been committed to helping people regain control of their money, build wealth, grow their leadership skills, and enhance their lives through personal development since 1992. Millions of people have used our financial advice through 22 books (including 12 national bestsellers) published by Ramsey Press, as well as two syndicated radio shows and 10 podcasts, which have over 17 million weekly listeners.