Reasons to Consider Refinancing Student Loans

Monday, November 07, 2016

Source: http://www.thecollegejuice.com





The job market and overall financial prospects for recent grads is brighter than a few years back, but the average student will still leave school with student loan debt. For recent grads, it’s important to have a strategy in place for managing this debt.

Reason #1 to Consider Refinancing Student Loans: Overall Cost Savings

One of the main benefits of refinancing student loans is the ability to reduce the total cost of your debt by securing a lower interest rate. A few factors influence your ability to get a lower interest rate now by refinancing than you were able to get when you first took out your loans.

Market Conditions

Lenders typically use market benchmarks and indexes when setting interest rates. If the variable(s) a lender uses to set interest rates are more favorable now than they were before, then interest rates should also be more favorable. In other words, think of it as the price of gas – if the cost of a barrel of oil goes down, the price per gallon at the pump also goes down.

Risk Profile

Most private student lenders require a risk evaluation to assess the borrower’s anticipated ability to repay the loan. This usually includes a credit and income check. The lower the risk (or higher ability to repay), the lower the interest rate offered. When most people first apply for their student loans, they’re 18-24 years old with little to no credit history or income. In fact, you likely needed a cosigner in order to get the loan.

Once you graduate, secure an income, and begin building a credit history, your “risk profile” improves. However, without refinancing, your interest rates will continue to be based on your initial risk profile, and you will not benefit from your newly improved one.

A favorable outcome in one (or both) of these factors could result in a lower interest rate, leading to thousands of dollars in savings on your student loans.

In addition, when you refinance student loans, you select new repayment terms. Selecting a shorter repayment term, combined with a lower interest rate, will result in even more savings on your student loans.

Tip: Use the College Ave refinancing calculator to see how much you could save by refinancing your student loans.

Reason #2 to Consider Refinancing Student Loans: New Monthly Payment

Sometimes, things happen that you don’t expect and you need to adjust. Refinancing student loans can give you the flexibility you need to get a new, monthly payment that fits your budget better.

When refinancing student loans, you will select a new repayment term (the amount of years you take to repay the loan). Without considering other factors, simply selecting a repayment term that’s longer than what you currently have will result in a lower monthly payment. But keep in mind that also means you’ll probably pay more in overall interest charges.

In some cases, your lender may also give you the option to pay only the interest charges on your loan for a period of time. Generally, this type of option will increase the total cost of your loan over time, but it gives you the flexibility you need when your budget is at its tightest in the first few years post-graduation.











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