The cost of a college education has consistently increased over the past 30 years. As a consequence, more students and their families must depend on taking out student loans and other financial aid forms to acquire higher education. 

According to the Education Data Initiative, the current average federal student loan debt stands at $37,338. Meanwhile, each borrower carries an average private student loan debt of $54,921. No wonder student loan debt is considered the second-largest form of debt behind mortgages. 

Repaying student debt can cause real stress for borrowers. The duration required to settle a student loan varies depending on the loan type and predetermined repayment plan. However, a survey among student loan borrowers revealed that the average timeline to pay off student debts is typically over two decades. 

The upside is that borrowers can repay their debts faster by refinancing student loans. Depending on what the borrower wants to achieve, student loan refinancing can also help make one’s monthly loan payments much easier to manage. 

Like other kinds of loans, conducting thorough research is vital before making a significant financial decision. Learn how student loan refinance works and when you should consider it. 

Understanding How Student Loan Refinancing Works

Generally, refinancing your student loan involves settling an existing loan with a new one. This option enables borrowers to combine federal and private loans for a new interest rate and term. Under the best circumstances, the refinanced loan must be an opportunity for borrowers to secure a lower interest rate. 

Consequently, a lower interest rate makes your monthly loan payment smaller and more manageable. That is if you choose a longer repayment term. It’s a viable option, particularly when you struggle to make timely payments. 

However, note that you will likely pay more for a loan with longer repayment periods, even if you qualify for a lower interest rate. That’s because interest accumulates as you extend the time to repay the loan. 

Alternatively, opting for a shorter repayment term increases your monthly payments. But since it allows you to repay your loan in a shorter timeframe, it also means paying less interest. Hence, you can lower the overall cost of the loan and maximize your savings. As evident, the borrower’s refinancing goals matter when considering a refinanced loan. 

It’s essential to be aware that the government doesn’t offer options for refinancing. They’re only available through private lenders, such as banks, credit unions, or online lenders. This is a critical consideration when deciding which loans to refinance. 

Consequently, trading in your federal student loan with a refinanced loan could make you lose certain protections, such as potential loan forgiveness and specialized repayment plans. If you’re a federal student loan borrower, you should reconsider before giving up these borrower protections. 

When You Should Opt To Refinance Your Student Loans

Refinancing student loans may only be suitable for some borrowers based on their financial situation, despite its advantages. Since everyone’s circumstances differ, various scenarios can prompt someone to refinance their student loans. 

Below, we examine various factors to consider before you opt to refinance your student loans. Hopefully, this information can help you determine whether it’s financially wise to apply for student loan refinancing. 

Understand which scenarios below apply to your situation to make a more informed choice. 

When you have a sufficient credit score

Your credit score is paramount in determining whether you’re eligible for refinancing your student loans and at what rate. 

Since refinancing is only available through private lenders, each loan servicer has unique credit requirements. However, in most situations, qualified borrowers need a credit score of at least 650 and, sometimes, higher to refinance a student loan. 

When your credit score is higher, you have a better chance of securing a better rate. Since refinancing often only makes sense if you can lock in a competitive rate, having a good or excellent credit score is one way to assess whether you should refinance your loan. 

When you carry private student loans

Private student loans don’t have any government protections. Since you don’t have to lose such advantages when refinancing a private student loan, it’s easier to decide and switch lenders anytime. 

Likewise, private student loans are not eligible for federal programs, making refinancing a more attractive and sensible option. 

When you refinance your private student loans, you will likely have many opportunities to acquire a new loan at a reduced interest rate. As a result, you’ll have considerable savings throughout the loan’s duration. 

When you hold variable-rate student loans

Interest on student loans with variable rates fluctuates with market conditions. It might make sense when the rates go down. However, it carries the risk of paying more costs, particularly if rates increase, making the loan more expensive. 

If you’re holding variable-rate student loans, consider locking in a fixed rate through refinancing. Doing so will help you avoid worrying about increasing interest rates caused by market fluctuations. 

When you meet the criteria for a lower rate

Being eligible for a reduced rate is one of the essential considerations when refinancing your student loan. With a lower interest rate, you’ll ultimately pay less on your refinanced loan in the long run than you would with your previous private student loans. 

When you’re juggling multiple loans

It can be overwhelming to juggle multiple loans with different interest rates, payments, and due dates. Suppose you’re falling behind on payments because of handling multiple loans. Refinancing can be a viable alternative. It allows you to consolidate all your student loans into a single loan payment. As a result, you could simplify your payments and reduce unnecessary financial stress. 

Maintain Control of Your Student Debts and Finances

Student debts aren’t entirely bad. With the increasing costs of college, incurring debt is often inevitable. For many students, taking out loans is the best pathway to getting and finishing their bachelor’s degree. 

A student loan can be a wise financial move when appropriately managed. Before beginning college, it might be beneficial for students to calculate how much debt they can afford. But suppose you can’t manage the payment later on. Various options are available. 

Feel free to reach out to your loan service provider or explore options like refinancing. Likewise, some trustworthy professionals can assist in student debt management. You can better control your student debts and finances by acquiring the assistance you need as soon as possible.