When is Refinancing Student Loans a Good Idea?
When is the best time to refinance your student loans?
Student loan debt is a big burden for many Americans. According to data from the Federal Reserve Bank of New York, such outstanding debt reached more than $1.4 trillion at the end of 2018. Recent graduates and working professionals alike may struggle to balance their debt obligations, but there's a solution.
Refinancing student loan debt is possible, which can net borrowers crucial savings when it comes to repayment. But when is refinancing a good idea?
What is refinancing?
Before beginning, let's establish what refinancing entails, since not all are familiar with the concept. In essence, refinancing is when a lender pays off a borrower's original loan, and extends a new one to them with more favorable terms. Often, this means a reduced interest rate. Shaving even 1% off an initial rate can save thousands over the lifetime of the loan.
When is refinancing a good idea?
Refinancing can be advantageous for those with any amount of student loan debt. However, there are certain personal finance milestones that lenders will look for before they extend those favorable terms. In general, it makes most sense to refinance when you:
1. Have built your credit profile
Many who take out loans to pursue higher education don't benefit from a strong credit history. It's not uncommon for students to get rates around 8% for either government or private loans. This is partly based on lack of credit history — as many don't start building credit until after graduating. Be sure to check your current credit score to get an idea of what refinancing rate quotes you'd receive. For example, don't pounce on refinancing a year or two after graduating unless you're positive your credit score is the best it can be. Waiting a few more years could build credit further and knock down interest rates.
2. You existing rates are high and variable
Just like a mortgage, student loans can be made on a fixed- or adjustable-rate basis. Many opt for a traditional fixed rate, but a variable rate could generate cost savings. However, it's important to note rates are rising, and an entry-level salary might not be enough to keep your income above your debt costs. Refinancing can allow you to switch your rate setup so that rate volatility in the future won't affect your personal finances as much.
3. You have steady employment
Lender will often look for refinancing applicants to have a dependable employment situation before acting. While these things can change quickly, holding down a job is something lenders will look positively on — and it may net you the best possible refinancing rate.
When is refinancing a bad idea?
On the other side of the coin is the fact refinancing isn't always a good idea. For instance, you can refinance loans made by the federal government through a private lender, but doing so will eliminate any loan forgiveness and repayment protections the government extends. If you still benefit from those stipulations, be aware refinancing will remove those protections.
Want to learn more about your refinancing options? Talk to a local representative at Vectra Bank today.