Put simply, if you want a lower interest rate or you want to pay off your debt early, then refinancing is a great idea. However, there are some things to think about before heading down that path.
When to refinance:
If you have an interest rate that is high, you should try and refinance. Rates used to vary, but they are now fixed. Refinancing may give you a lower rate for your loan. It’s also a great way to pay off debt. Another reason to refinance would be if you had multiple loans. Combining the loans for one interest rate will make it easier for you each month and give you the ability to measure exactly what you owe. This will allow you to have the cash flow to afford important items in your life, perhaps investing or creating a nest egg.
When it isn’t a good idea:
Refinancing your student loan is not a great idea when you have a low or unstable income. Also, refinancing turns the loan from a federal loan to a private loan. Once you refinance, it can change your ability to have an income-driven repayment plan if that was set up originally. You also don’t want to do it if you have bad credit.
The amount of student loans taken out over the past decade has increased dramatically. The cost of going to school has increased as well. It’s hard to sit with that payment each month after graduating and spending years paying off your loan going to school. If you can monitor interest rates and keep an eye on your spending, you can jump ahead on refinancing and lower your debt.
What to do with the money you save from refinancing:
Think about the money you saved from refinancing as money that will help you make money. Take it into an investment that can help you make more on it over time. Of course, you may need money for the day-to-day items, but if you can, then invest that extra money you will earn each month from refinancing.
If you can’t refinance:
Work hard to build your credit, live a life of low payments, and not living beyond your means. Try to find a career with a higher stable income. Over time you can take it. Look at refinancing and getting your monthly payment down.
The good news is a student loan is typically the smallest of loans in your lifetime, and it helps you build your credit and gives you a sense of owning your life and managing yourself.