When you have private student loans, you may not be aware that you’re paying high interest rates. And these high rates can result in you paying tens of thousands of dollars in interest more than you should be.
So how can you save on interest? By refinancing your private student loans. Refinancing entails getting a new loan contract, usually with a different lender.
There are also plenty of reasons to refinance besides saving on interest. Here are the most common reasons – and what to know before you refinance.
4 reasons why you should refinance private student loans
To save on interest
Most borrowers choose to refinance their loans to pay less total interest. You can do this by refinancing to a lower interest rate, a shorter repayment term or both.
For example, let’s say you have $50,000 in private student loans with a 12% interest rate and a 10-year term. If you can refinance to a 6% interest rate and a 10-year term, you’ll pay $19,470 less in total interest. Your monthly payment will also be $162 less.
You can speed up the repayment process by continuing to make your original monthly payment of $717.35. If you do that, you’ll pay off the loan in seven years instead of 10. You’ll also save about $5,000 in total interest.
To change your repayment term
When you take out a private student loan, you may not be given a choice of your repayment terms. If you want to change the repayment term, you’ll usually have to refinance.
Most private student loan refinancing companies offer a variety of terms, often ranging from five to 20 years. You can choose to shorten or lengthen your term.
But you should know that increasing the repayment term may increase the total amount of interest paid, even if your monthly payment goes down. Here’s how that works. Let’s say you owe $50,000 with 12% interest and a 10-year term. If you refinance to a 20-year term and a 7% interest rate, you’ll actually pay $6,954 more in interest.
In general, if you shorten the term, you’ll usually pay less in total interest, even if the difference in interest rates isn’t that dramatic.
To remove a cosigner
Most undergraduate students need a cosigner to qualify for a private student loan because they have no credit history, low income or both. But when you graduate, the cosigner may ask to be removed from the loan.
While some private loans offer cosigner release, you may have to wait several months or even years to qualify. If you want to remove the cosigner now, then refinancing is your best option.
Look for a lender that approves you for a new loan without asking for a cosigner. If you can’t get approved without a cosigner, you can use a different cosigner than the one you had before.
To switch to a new lender
If you’ve had a bad customer service experience with a lender, you can refinance to switch to a new company. For example, if your old lender kept entering your payments incorrectly or having long hold times, you can find a lender that has a better reputation.
Plus, some lenders offer special perks. For example, SoFi offers more protection for borrowers who lose their jobs.
Is now a bad time to refinance private student loans?
While interest rates are not as low as they were during the height of the Covid-19 pandemic, you may still qualify for a lower interest rate.
Even if rates aren’t as low as you would like, refinancing now can still save you money in the long run. Just keep monitoring interest rates and be ready to pounce when they drop again.
How many times can I refinance my private student loans?
There is no limit to how many times you can refinance your private student loans. You can refinance your loans as often as you want.
The only limit is if you can find a lender that will approve your application. If you are having trouble getting approved, then that will affect how often you can refinance.
When should I avoid refinancing my private student loans?
The only time when you may want to refrain from refinancing your private student loans is right before you take out a major loan, like a mortgage. Refinancing can cause a slight drop in your credit score, which can affect what kind of interest rate you’ll qualify for with other loans.
If you’re planning to buy a home within six months or so, consider not refinancing. However, if refinancing will significantly lower your debt-to-income ratio, then it may be a good idea. Talk to a mortgage lender to see what they recommend.
Can private student loans be forgiven?
In general, private student loans are not eligible for loan forgiveness programs. The only exception is if you’re eligible for a special loan repayment program, like the Nurse Corps Loan Repayment Program.
If you’re working toward a loan repayment program, make sure that refinancing won’t make you ineligible.