Student loan debt has surpassed $1.4 trillion in the United States; to put that in perspective, if you were to stack the country’s student loan debt in $1,000 bills, you would have a stack nearly 70 miles high. That is a ridiculous sum of money. Moreover, for individuals carrying thousands in debt, the burden can feel overwhelming.
Once students graduate and make it through the grace period, reality comes crashing down in the form of monthly loan payments. While the amount may have looked manageable when you signed your promissory notes years ago, it can be a lot harder to afford it when you have competing priorities like rent, car payments and utilities to handle. Even if you keep up with the payments, high interest rates can prevent you from making any progress and the principle never seems to budge.
What is Refinancing?
For many, refinancing student loans can be a huge help. It gives lenders more freedom, giving them more cash to use for other necessities and begin building a secure future. When you refinance, you essentially get a new loan from a lender that you use to pay off the original one. The new loan has different terms that are more advantageous and competitive, giving you more breathing room in your budget.
Here are five reasons you should consider refinancing your loan:
- Lower interest rates: Depending on the type of loan you have and when you took out your our debt, your interest rates could be as high as 6.8 percent on undergraduate federal loans and 8.5 percent on graduate PLUS loans. If your loans are through private lenders, interest rates can be even higher. These high rates are prohibitive, keeping you from making progress repaying your debt because of how much you pay in interest. By refinancing, you could get a rate as low as 2 to 3 percent, increasing how much of your payments go to principle and accelerating how quickly your loans can be paid off.
- Lower monthly payments: When you refinance, you have the option of extending your repayment term from the standard ten years to 20 or 25 years. This can cut your monthly payments down significantly, freeing up more money for you to use in other ways. For instance, the money you save each month can go towards your retirement fund. By starting young, compound interest goes to work, and that money can grow quickly.
- Eliminate cosigner: Many students have poor credit or no credit when they enter school. Because of this, they usually need a cosigner to get approved for a student loan. That means that, if you default on the loan, your cosigner is responsible for fulfilling the loan terms. This arrangement can put a lot of pressure on you and even cause resentment from your cosigner. By refinancing, you can eliminate your cosigner's responsibility and get more freedom.
- Secure a fixed interest rate: If your loans have a variable interest rate, your payments can change at any time, and you could end up paying a lot more in interest. By refinancing, you can get one fixed interest rate. With that approach, you know what your payments will be each month and how much goes towards the principle.
- One easy payment: If you have multiple federal loans and private loans, it can be challenging to manage all of your accounts and due dates. When you refinance, you wrap them all into one main loan, so you have just one balance and one payment to make each month, simplifying your life.
If you are struggling to manage your student loan debt, refinancing can be a great option for you. From decreasing your interest rate to having just one convenient payment, refinancing can make handling your loans much simpler.