Refinancing student loans can be a great way to manage your student loan debt. However, not everyone should refinance, and the timing may not always be right. There are many facts about refinancing student loans that you should know before you jump in with a lender.
Interest Rates are Crucial
The biggest thing to consider when refinancing student loans is your interest rates. This is ultimately the main reason for consolidation—to lower interest rates, payment amounts, and change payment terms. However, there are important facts about rates that you need to understand before your refinance.
Don’t Refinance Federal Subsidized Loans
First, federally subsidized student loans should not be refinanced. The government is currently paying the interest on these loans. However, if you refinance them through a private lender, you will lose the subsidy and become responsible for paying that interest. Therefore, it actually costs you more money to refinance these loans.
Second, carefully consider the interest rates being offered by the refinancing institutions you are speaking with. Average the interest rates of all the loans you currently have. If that average is lower than the interest rate being offered, refinancing may not be the best option at this time. However, if the interest rate is lower, you will save a lot of money by refinancing student loans.
Payment Terms are Key
Another thing to consider is payment terms. If you are still a student, your current loans are likely on what is known as an academic deferment, meaning that you do not have to pay on them until you graduate or are no longer attending school. You need to be sure that the refinance will allow for the same type of deferment.
Also consider the length of the term. Lenders want to convince you that refinancing student loans is the best thing for you to do, and they will promise you low payments. However, those payments are low because you are paying for twenty or thirty years. Weigh the options and make sure you are managing your student debt the best way for you.