If you’re still paying off student loan debt, refinancing student loans can be a smart way to shave thousands off your total payoff amount. It can allow you to consolidate your debt, pay your loans off faster and take advantage of lower interest rates.
But refinancing isn’t the best choice for every situation. Here are five things to keep in mind before you refinance your student loans:
Know Your Reasons for Refinancing Student Loans
Refinancing student loans is not a one-size-fits-all solution. Knowing why you plan to refinance will help you determine if it’s really the best option for you. Are you looking for a lower interest rate? Hoping to combine your loans and focus on one consolidated debt? Wanting to pay a lower amount each month? These are all valid reasons for refinancing, but you should also know what you’re getting already.
If you’re planning to refinance a federal loan, know that they tend to have the most flexible repayment plans. For example, federal loans offer deferment options and loan forgiveness in certain situations. If you’re up for loan forgiveness due to your career or personal situation, it might not be worthwhile to refinance under a private loan.
So why refinance? As a recap, here are some of the main reasons people opt to refinance:
- Take advantage of lower interest rates
- Work with a different bank
- Consolidate multiple loans into one debt
- Release a cosigner from your loan
- Obtain a different repayment plan
- Lower your monthly payments
Know Your Total Payoff Amount
You should know as much about your current loan situation as possible before refinancing. How much do you owe in full? This will help you determine what you need to look for in a payoff plan. Maybe you can afford a shorter term than you thought you could, or you will need more time and a smaller monthly payment.
If you’re going through the effort of refinancing, make sure the terms work for you.
Know Your Credit Score
As with any kind of loan process, your credit score plays a big role. This is going to affect the interest rate you’re eligible for, as well as how lenders will view you. If your score is on the lower end, you might not be able to get the rate you’re hoping for.
If your score has improved, however, you might be able to take advantage of the best rates available when you’re refinancing student loans.
Know Your Repayment Options
If you refinance, you will lose federal loan repayment options. So if there is a repayment option that is important to you, keep that in mind when you’re shopping around for a lender.
Consider asking if there is repayment flexibility in the event of financial hardships or job loss. Some loan repayment plans also still allow for a grace period after graduation like federal loans do.
Know Your Lender’s Customer Service Reputation
It’s easy to overlook this part of the lender shopping process, but customer service is critical. This is the part you might not think about until you need it, but when you do, it’s important you work with someone who will prioritize your needs.
You will likely have a long relationship with whichever bank does your refinancing, so take your time when you make your decision.
About Your Richest Life
At Your Richest Life, Katie Brewer, CFP®, believes you too should have access to financial resources and fee-only financial planning. For more information on the services offered, contact Katie today.