6 Reasons to Refinance Your Student Loans in 2021

 December 2, 2020
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If you’re feeling overwhelmed by your student loan payments, refinancing could be the solution you need to turn things around. Not only could student loan refinancing potentially result in a better interest rate, but it can also simplify repayment and adjust your monthly bills. If you’re ready to take control of your student debt, read on for some good reasons to refinance student loans, such as:

1. Lock in a lower interest rate
2. Reduce your monthly payments
3. Take advantage of a flexible repayment plan
4. Release a cosigner from your student loan
5. Switch to a lender offering better service
6. Consolidate student loans for easier management

1. Lock in a lower interest rate

One excellent reason to refinance student loans is to seek a better interest rate. When you refinance your student loans, you combine all your federal and private loans into one new loan with a private lender. This private lender could be a bank, credit union or an online institution like SoFi or CommonBond.

Before giving you an offer, the lender reviews your income and credit score. If you have a steady job and strong credit, you could qualify for lower interest rates, since these factors show that you’re not a risky candidate for a loan.

Most lenders look for a credit score of 650 or higher. If your score falls below that mark, applying with a cosigner could net you a better interest rate. Adding a cosigner to your application can be another way to reduce risk in the eyes of the lender.

The lender will offer you a variety of loan terms with both fixed and variable interest rates. Currently, variable rates tend to be lower than fixed rates at the beginning, but they could go up (or down) over time. Whatever you choose, lowering your interest rate could save you money over the life of your loan.

Let’s say you have $50,000 in student loan debt with an average interest rate of 6.80%. Through refinancing, you lock in a new fixed interest rate of just 4.99%. After 10 years of repayment, you would save over $5,438 on interest.

You can game out different interest rates for your own situation with our student loan refinancing calculator.

2. Reduce your monthly payments

Besides snagging a lower interest rate, another reason to refinance student loans is the opportunity to change your repayment terms.

Most federal and private loans come with a 10-year repayment term. Although student loan refinancing options vary by bank, most range from five to 20 years.

If your current loan has a 10-year repayment term and you refinance to a 20-year term, your monthly payments will of course drop significantly. This can help add room in your monthly budget if you need it.

Let’s reconsider that example of $50,000 in debt at a 4.99% interest rate. On a 10-year term, you’d pay $530 per month. But if you lengthen your repayment term to 20 years, you’d pay just $330 every month. That $200 in monthly savings could be just what you need to make rent or buy groceries.

The federal government also offers some income-driven repayment plans, such as Pay As You Earn (PAYE) and Income-Based Repayment (IBR), but they only apply to federal student loans, and you might not even qualify if you don’t meet the income requirement.

Student loan refinancing helps grads who don’t qualify for income-based repayment but also don’t make enough money yet to manage their student loan payments comfortably.

Keep in mind, though, that a longer payment term can mean more interest paid over time — so pay attention to the total cost of the loan and consider paying it off early when your finances improve. Often, there’s no penalty for prepaying your loans before the term is up, but always check with your lender to be sure.

3. Take advantage of a flexible repayment plan

Banks and other private lenders aren’t usually known for their flexibility, but some do offer helpful repayment options if you go back to school or run into financial hardship.

SoFi, for instance, lets you defer your monthly payments if you return to school on at least a half-time basis. CommonBond offers temporary forbearance in the case of economic hardship.

Some private lenders (SoFi and Laurel Road, among them) also honor an existing six-month grace period if your current loan has one. So if you refinance right after graduation, you may not have to start paying until your grace period is up.

That said, refinancing your student loans with a private lender means you lose access to federal repayment plans. Some of these plans include IBR, Income-Contingent Repayment (ICR) and Revised Pay As You Earn (REPAYE). If you want to retain access to federal programs and plans, this could be a reason not to refinance student loans.

Plus, you won’t have access to federal loan forgiveness programs, such as Public Service Loan Forgiveness (PSLF). So before refinancing, make sure you won’t need these federal programs.

4. Release a cosigner from your student loan

Sometimes if your parents are cosigners on your current student loans, it can add stress to your relationship with them. What’s more, your loan impacts your cosigner’s credit and their ability to borrow additional funds.

When you refinance with a private lender, you could be eligible to release your cosigner. Some lenders remove your cosigner from the loan after you make on-time payments for a certain number of months. Two banks that currently offer cosigner release are CommonBond and Citizens Bank.

Once released, your cosigner can improve their credit score. As a result, they’ll gain access to new lines of financial capital if they need to buy a big-ticket item like a home or car.

If you’re looking to release a parent or other cosigner from your student loans, find out which lenders will work with you. If you have good credit and a steady income, it will be a lot easier to release your cosigner.

Similarly, refinancing could allow your mom and dad to transition a federal parent PLUS loan into your name.

5. Switch to a lender offering better service

Some borrowers find themselves unhappy with their student loan lender or servicer — student loan refinancing gives you the opportunity to switch to a new one with better customer service, if that’s an issue.

There are tons of online reviews to help you decide who to go with. As lenders compete for your business, put them under the microscope using resources like the Consumer Financial Protection Bureau, Federal Trade Commission, Better Business Bureau and TrustPilot.

Many new lenders in the refinancing space offer extensive online and phone-based customer service. Plus, they help you throughout the application process.

6. Consolidate student loans for easier management

Finally, one of the top reasons to refinance student loans is to simplify repayment. If you borrowed money to pay for college, it’s likely you have more than one student loan you need to repay. On top of that, student loan servicers buy and sell loans. That means you could end up sending your payments to new places every few years. This becomes confusing and hard to manage after a while.

Student loan refinancing allows you to combine multiple student loans into one, making your debt easier to organize, track and repay.

Rather than tracking multiple payments and interest rates each month, you only have to worry about making one payment — with one potentially lower interest rate.

A Direct consolidation loan through the federal government would also combine your debt, although it would leave you with about the same interest rates. Refinancing solves both problems.

If you’re tired of dealing with multiple student loans with various terms, and you’re also aware of the possible downsides of refinancing, then it’s time to start researching your student loan refinancing options. You could save money, time and a whole lot of hassle.

Rebecca Safier contributed to this article.