should i refinance my student loans

Should I Refinance My Student Loans?

Should I refinance my student loans

“Should I refinance my student loans?” It’s a question I’m asked almost weekly by my followers and potential clients. It’s true, student loan debt is a growing financial burden for many Americans. In fact, the biggest asset of the US Government is student loan debt. (Yikes!)

For some people, this debt prevents them from saving adequately for retirement and other long term-goals. For others, excessive student loan debt can even prevent them from qualifying for a mortgage. For folks who have college debt, refinancing might be a good option to relieve the pressure and accelerate the pay off. But there are a few questions you need to answer before you decide whether or not to refinance your student loans.

How much exactly do you owe on your student loans?

It shocks me that most people can’t give me an exact dollar figure to this question when I ask it. “Um, around $45,000, I think?” Why don’t they know what they owe? One reason might be that they have their student loans in deferral, which means they don’t have to make payments on them right now. It’s a case of “out of sight, out of mind.” But just because your student loans are currently deferred doesn’t mean they’ve disappeared. You still owe the money and it will have to be repaid eventually.

The other reason people lose track of their loan balances is because they typically don’t have just one. It’s not uncommon to have one or more student loan for each year or semester of college. With multiple loans taken out over a period of several years, it can be hard to keep track of them all.

If you don’t know the total of how much you owe on your student loans, go and find out right now. (Go on, I’ll wait.) And while you’re at it…

What are the interest rates on each of your student loans?

While you are looking up your student loan balances to tally them up, make a note of the interest rate on each of them. Why is this so important? It will be impossible to make a determination if refinancing is right for you without it.  Your interest rate is the cost of borrowing money.

When most people consider refinancing their student loans, they see if the monthly payment is going to be less. Why is this a mistake? Because there’s two ways to reduce the amount of your money payment on student loan debt: 1.) Lowering your interest rate (this is the one you want!) or 2.) Lengthening your repayment term (this is NOT the one you want!)

What’s the weighted average interest rate on your student loan debt?

If you have just a single loan for your student debt, you don’t have to worry about this. The interest rate of your current loan is the one you’ll compare to the rate being offered with your refinancing options. If your current student loan is at 8% and you have the opportunity to refinance it at 6.5% with no upfront fees, that’s a no-brainer “yes” decision. BUT, if your college debt is spread out over seven different loans at varying interest rates, that makes the calculation trickier. Thankfully, Student Loan Hero has a handy, easy-to-use Weighted Average Interest Rate Calculator to do the heavy lifting for you! Just plug each of your loan balances with their corresponding interest rates and it will tell you your blended interest, which you can compare against refinancing options.

What are the refinancing costs?

Certain lenders charge a loan origination fee. Be sure to read the fine print and find out if the refinancing deal you’re pursuing has one or not. It’s typically rolled into the loan, so it may not be obvious at first glance. If there is a loan fee, you’ll have to consider this in the cost of refinancing.

Let’s say that you’ve already determined you’ll save $750 in interest per year by refinancing your student loan debt. If the lender is charging $1,000 origination fee, you won’t actually start saving money until month 15 new of the loan. That doesn’t necessarily mean it’s a bad move to refinance. You just need to be aware of all of the costs of the new loan.

What’s your motivation to refinance your student loan debt?

If your motivation is to pay off your student loans as quickly as possible and get rid of them, kudos! That should be your motivation to refinance them. Getting a lower interest rate and more favorable terms will accelerate your payoff, especially if you’re paying extra on them every month.

If your motivation is to kick the can down the road and pay as little as possible on your student loans, there’s a problem. The only way you’re going to get rid of student loans is to pay them off. (College debt cannot be included in bankruptcy.) And the sooner you do it, the better. You can’t refinance your way out of debt.

Only after answering the questions above can you truly answer the questions: Should I refinance my student loans?

Need help creating a plan to get rid of your debt for good, student loans included? Let’s talk and see if we’re a good fit to work together.

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