It’s smart to compare multiple refinance lenders before you commit to a student loan refinancing offer, but it can be tough to evaluate all of your options. So how do you decide? It’s all about knowing what your refinancing goal is and choosing the interest rate and term length that will help you reach it. Here’s how to think through that decision.
1. Be clear about why you want to refinance.
Choosing the best student loan refinance offer requires that you understand why you want to refinance in the first place. Which loan terms and borrower protections you find attractive will depend on your goals, says Vince Passione, chief executive officer of LendKey, a student loan marketplace.
The most common reason borrowers refinance is to get a lower interest rate. As you compare rates, make sure you’re looking at a real offer based on information you provide and not just a “teaser” rate, Passione says.
Other reasons borrowers refinance are to lower their monthly payment, simplify multiple private student loans into one, or release a co-signer. Once you pinpoint your goal, the rest becomes something like a Choose Your Own Adventure novel, with each reason leading to a different student loan refinancing path.
If you want to save the most in interest:
To save the most money in interest over time, choose a refinancing offer with the shortest term length. Most lenders offer terms between five and 25 years. A shorter term will increase your monthly payment, but it’s worth it if you can afford it — you’ll minimize the cost of borrowing and get rid of your student loan debt faster.
To tackle your debt even more aggressively, pay more than the monthly minimum. Make sure the lender you choose doesn’t have a prepayment penalty.
But remember, if you refinance federal student loans, they’ll become private loans and you’ll lose the ability to take advantage of federal benefits including income-driven repayment, loan forgiveness, deferment and forbearance.
If you want to lower your monthly payment:
First, answer this question: Do you want a lower monthly payment because you can’t afford your current payment, or because you want to save money and free up cash to spend on other things?
If you can’t afford your current payment and you have federal student loans, consider switching to an income-driven repayment plan. Income-driven plans, including the new Revised Pay As You Earn plan, cap your monthly payment at a percentage of your income and extend your term from the standard 10 years to up to 25 years. They also offer forgiveness on your remaining balance after 20 or 25 years, depending on when you first borrowed.
If you can comfortably manage your monthly federal loan payment on the standard plan, think twice about switching to an income-driven plan; doing so will increase the amount of total interest you’ll owe over time. Instead, consider refinancing to get a lower interest rate. That will typically lower your monthly payment as long as you keep the same loan term.
2. Compare the lenders’ borrower protections.
When you refinance federal student loans, you give up federal protections including income-driven repayment plans, forgiveness programs and the option to defer your loan payments if you’re struggling financially. Some private lenders offer similar protections, but it’s not a given.
When you’re comparing refinancing offers, look for lenders that offer options such as deferment, forbearance or flexible repayment. Even if you don’t think you’ll need those benefits, it’s always good to have them available in case of an unexpected financial hardship.
3. Choose a fixed or variable interest rate.
Most private lenders offer both fixed and variable rates for student loan refinancing. Deciding which to choose is a personal decision based on your financial situation and risk tolerance — there’s no “right answer,” says Phil DeGisi, chief marketing officer at CommonBond, a student loan refinancing company.
Fixed rates, as the name suggests, stay the same throughout the life of the loan. They’re currently higher than variable rates, but they’re a good choice for borrowers who don’t want any surprises.
“You know exactly what you’ll be paying every month,” DeGisi says. “There’s no guesswork.”
Variable rates change as the economy changes. They may start out lower than fixed interest rates, but they’re considered more risky, DeGisi says, because they’ll likely rise when market rates rise. The Federal Reserve announced in December 2015 that it will begin raising interest rates slowly, which will likely trickle down to variable interest rates on private student loans.
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