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It’s easy to feel like you’ve been paying off your student loans for months and yet, the total balance hasn’t budged—what gives?

High-interest rates are the culprit. If your loans have a high rate, interest charges can accrue rapidly, preventing you from making any headway at lowering the principal balance. Refinancing could help you save thousands, but there are significant downsides to keep in mind.

How Does Student Loan Refinancing Work?

Student loan refinancing is a term that refers to a specific process for managing your student loan debt. When you refinance your debt, you apply for a loan from a private lender who can cover some or all of your existing student loans as a new loan. Using the new loan to pay off your current debt, you’ll get completely different terms than you had before with a potentially lower interest rate.

Refinancing has some major benefits:

  • Lower interest rates. One of the main reasons to consider a student loan refinance should be based on whether the current rates are lower than your existing student loans. As of November 2021, some lenders offer fixed rates as low as 1.64%.
  • Reduced payments. If you qualify for a lower interest rate or decide to extend your repayment term, you can reduce your monthly payments and get more breathing room in your budget.
  • Simple, single payments. You likely took out multiple loans to pay for school, and keeping track of all of them can be complicated. When you refinance your debt, you can combine your loans into one, with a single monthly payment.

5 Things to Consider Before Refinancing

There are many advantages to refinancing your loans, but student loan refinancing isn’t a good idea for everyone. When deciding whether or not to move forward, ask yourself these five questions.

1. What Type of Loans Do You Have?

There are two main loan types: federal student loans and private loans. If you have federal student loans, there are substantial drawbacks to refinancing your debt.

When you refinance federal loans, you transfer them to a private lender. Once the process is complete, your debt will no longer be eligible for federal loan programs like income-driven repayment, Public Service Loan Forgiveness, or federal deferment. If you want the option of utilizing these programs later, you shouldn’t refinance your debt.

2. What Is Your Credit Score?

To qualify for student loan refinancing, you typically need good to excellent credit. If your credit is less-than-stellar, you may not be approved for a loan, or you may get a relatively high interest rate, negating the value of refinancing.

3. What Are Your Goals?

Student loan refinancing makes the most sense if you have high-interest debt. By refinancing, you can get a lower interest rate, allowing you to save money and pay off your debt faster.

If your goal is to lower your payments, you may be better off with other options for managing your debt, such as enrolling in an alternative payment plan.

4. What Loan Term Do You Want?

Before refinancing your loans, think about what loan term works for you and your budget. While a longer term can be appealing because it lowers your monthly payments—and some lenders offer terms as long as 20 years—you’ll end up paying more in interest due to the longer repayment period.

Lenders also typically charge higher interest rates on refinancing loans with longer terms. The lowest rates are generally for borrowers who opt for a term of five to eight years.

5. Do You Have a Co-signer?

If you don’t have perfect credit or don’t meet the income requirements, you can struggle to find a lender willing to work with you. But if you have a parent or relative willing to co-sign your loan application and share responsibility for the loan, you can qualify and likely get a lower rate than you’d get on your own.

How to Refinance Your Student Loans

Here is how to start the process of refinancing your student loans.

  • Get your documentation together. When you apply, you’ll need to provide your driver’s license, Social Security number, employment information and the account numbers of your existing loans. You may also have to submit proof of your income, like providing a pay stub or tax return.
  • Compare rates. Rates can vary from lender to lender, and each company has its own requirements for borrowers. It’s a good idea to get rate quotes from multiple refinancing lenders so you can find the best deal. To get started, check out the best refinancing lenders of 2021.
  • Submit your application. Most refinancing applications can be completed online, and you’ll usually get a response within a few minutes. Once approved, it can take a few weeks before the lender pays off your existing loans, so keep making your minimum monthly payments until you receive confirmation that the loans have been paid in full.

Other Ways to Manage Your Debt

If you decide refinancing is not right for you, but you still need some help with your loans, you have a few other options:

  1. Income-driven Repayment (IDR) Plans: If you have federal loans and can’t afford your monthly payments, apply for an IDR plan. Under an IDR plan, your payments are based on your discretionary income and a longer repayment term, so you could get a much smaller payment.
  2. Forbearance: While federal forbearance tends to be longer than the forbearance that private lenders offer, it can still be a useful solution. If you can’t afford your payments or are currently experiencing a significant hardship, contact your lender and explain your situation. You may be able to postpone your payments while you recover.
  3. Debt payoff strategies: For those borrowers that want to pay off their debt aggressively—but aren’t willing to refinance—consider using a repayment strategy like the debt avalanche or debt snowball methods. You can pay off your debt more quickly and save money.

Still undecided? Use a student loan refinance calculator to see how refinancing your debt could affect your monthly payments and total repayment cost.

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