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The average college graduate walks away with $37,172 in student loan debt. Because of interest rates, loan balances can grow over time causing you to pay back thousands more than you took out in the first place.
If you’re burdened by student loans, refinancing them can help you take charge of your debt and save money. Find out how refinancing can help you get on track for your future.
Refinancing your student loans
Refinancing is often a smart option for borrowers who want to get rid of their student loans faster. When you refinance, you work with a private lender to take out a new loan that covers the amount of your original ones. The new loan will usually have different terms, including a new interest rate, reduced monthly payment, and different length of repayment.
Refinancing can be a useful debt repayment strategy, but there are some important factors to consider before you dive in. If you have federal student loans and refinance them with a private lender, you lose federal benefits like access to income-driven repayment plans or the option to put your loans into forbearance or deferment. Refinancing only makes sense if your financial situation is relatively secure.
3 ways refinancing can help you save
But refinancing has many benefits. It can save you money, give you more breathing room in your budget, and limit your debt burden. Here are three ways refinancing your student loans can help you now.
1. Reduce your debt-to-income ratio
If you’re shopping for a new car, home, or need a line of credit, lenders look at your debt-to-income (DTI) ratio. Your DTI is a calculation of how much of our monthly income goes towards debt, such as student loans or credit cards. The higher your ratio, the less likely you are to get approved for a loan.
Refinancing your student loans to get a lower monthly payment can help lower your DTI ratio, making you more attractive to lenders.
2. Free up money in your monthly budget
When you refinance, it’s possible to get a lower interest rate or extend your repayment term, if desired. That can result in a significantly lower monthly payment. If you’re struggling to pay all of your bills, refinancing to get a lower payment can give you more room in your budget to pay for other essentials.
Keep in mind that if you refinance to reduce your monthly payment, this might extend your repayment term. Even if you get a lower interest rate, if you add years to your loans, you can end up paying hundreds of even thousands more in interest. Carefully weigh your needs right now with your long-term goals.
3. Save thousands over time
If you are laser-focused on paying off your loans, refinancing your debt could save you thousands over the length of your repayment. For example, say you had $35,000 in Direct PLUS loans, which currently has an interest rate of 6.31%. If you were on a standard 10-year repayment plan, you would have a minimum payment of $394 and would pay $12,285 in interest over the length of your term.
If you were able to refinance that loan at 3.5% with a 10-year term, your monthly payment would be $346. Best of all, you’d pay just $6,532 in interest, saving yourself nearly $6,000.
Use the calculator below to see how much you could save on your student loans by reducing your interest rate.
Student Loan Refinancing Calculator
4 ways to use the money you saved
Refinancing can help you save money both on your monthly payment and in interest. That’s a lot of money you could use for your future goals. Here’s how you can use those payments to reach your future goals faster.
1. Pay off other high-interest debt
If you dream of being completely debt-free but have credit card debt or an auto loan on top of your student debt, refinancing can free up cash you can use to pay them down. If you apply the money you save on your student loans to another high-interest debt, you can save even more money and get out of debt faster.
2. Save a down payment for a home
For those who want to buy a home but think it’s impossible with student loans, refinancing can help your dream of homeownership become a reality. You can lower your DTI ratio while using your savings to save for a down payment.
According to CommonBond, borrowers who refinance their loans with them save $24,046 on average. That could be a substantial down payment on your first home.
3. Build your retirement nest egg
If you’ve put off saving for retirement because you were struggling with student loans, refinancing can give you the room in your budget you need to start contributing. And starting now can really pay off in the long run.
For example, let’s say you’re 25 and refinanced your loans. Your payment is reduced by $50 a month and you invest that extra cash in a 401(k) with a 7% annual gain. After 10 years, you’d have no more student loan debt and would have $8,654 in retirement.
With no more debt, you could apply those payments to your retirement savings, building up a large nest egg. See how much you could save for retirement with our investment calculator.
4. Invest in the stock market
If you want to build long-term wealth, investing is an important part of your financial plans. Investing your student loan savings into an investment account, with services like Betterment, can make your money work harder for you.
Pursuing your goals
High-interest student loans can be a huge burden and prevent you from achieving your goals. By refinancing your student loans, you can take control of your debt and accelerate your repayment. That can help you achieve the financial dreams you’ve set for yourself.
If you’re ready to refinance, sign up for the Student Loan Hero app and compare lender offers.
Interested in refinancing student loans?Here are the top 6 lenders of 2018!
|Lender||Variable APR||Eligible Degrees|
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1 Important Disclosures for Laurel Road.
Laurel Road Disclosures
2 Important Disclosures for SoFi.
3 Important Disclosures for CommonBond.
4 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|2.57% – 5.87%||Undergrad & Graduate||Visit Earnest|
|2.80% – 6.38%1||Undergrad & Graduate||Visit Laurel Road|
|2.48% – 7.52%2||Undergrad & Graduate||Visit SoFi|
|2.47% – 7.99%||Undergrad & Graduate||Visit Lendkey|
|2.57% – 6.65%3||Undergrad & Graduate||Visit CommonBond|
|2.72% – 8.17%4||Undergrad & Graduate||Visit Citizens|