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I have been in the process of refinancing my private student loans recently and had a ton of people reach out to me with questions about the whole process. One of the biggest ones was, “How do I know if it’s the right move for me?”
That really can only be figured out by you. After all, personal finance is personal.
However, there are some steps you can take to make this decision a little easier for you.
Do you have Federal or Private loans?
This is super important and in my opinion will immediately make your decision for you. If you only have federal loans, I would immediately say, don’t refinance. The reason I say this is because federal loans come with a lot of protections for you in the event something happens. They offer many programs for deferment, forgiveness, and are generally more willing to work with you in the event of job loss, disability, etc.
On the other hand, private loans typically offer no perks like it, most companies you can’t even die to escape them. That sounds dramatic, but I’m being serious. In the tragic event that you die with private student loans, someone is still going to be responsible to pay those things off. If you have any private loans, refinancing might be a good option for you.
Are you just starting out on your journey to pay off your student loans?
If you are, then I would suggest holding off on refinancing. The reason being that once you refinance you will most likely consolidate many small loans into one large loan. I strongly believe in using the debt avalanche method to save money, but there is major research in the debt snowball method to keep motivation high. If you refinance right away, you won’t experience any pay offs right away because you will be tackling a huge loan amount potentially.
If you have been slaying your debt for awhile and are feeling motivated to get this debt out of your life, refinancing might be for you.
Can you afford your monthly payment?
If you can afford your monthly payment, I would say refinancing may be for you. If you are someone that is struggling to afford your payment, then I would say you should not refinance. This might sound crazy, I know. But, refinancing shouldn’t be used to save you money on your monthly payment, if it will extend the life of your loan. You will only be throwing away more money in interest to these companies. Instead, you need to track your expenses, budget, and maybe even increase your income. I’m happy to help you with all of this 🙂
Do you have loans with an interest rate over 7%?
If you do, then I would say refinancing might be for you. By refinancing, you can potentially get a better interest rate. This will save you money in the long run, as long as you pay close attention to the loan details, we’ll get to that later.
Once you have answered these questions, and feel like it is worth it to look into refinancing, then you need to keep a few things in mind. Refinancing isn’t always beneficial and can actually cost you more money in the long run, if you aren’t careful.
Just because your rate is lower, doesn’t mean you are automatically saving money. A lot of companies will provide you with a lower rate and a lower monthly payment, but extend the life of your loan. This most likely will not help you save any money in the long run.
When you are looking into refinancing your student loans, it’s important to look at all the moving parts, interest rate, monthly payment, and life of the loan.
For example, I refinanced my loans with Earnest and it has been nothing but wonderful compared to my old loan provider. When I refinanced, I went with a lower rate (4.97%), lowered the life of my loan (15 years to 5 years), and increased my monthly payment ($770 to $865). This is saving me money in interest because I now have a lower rate, and less time I’ll have the loan.
Refinancing can be tricky, but it can be a great tool to use to save you money in interest. If you have any questions about refinancing don’t hesitate to contact me! I am happy to help you navigate the process. Have you refinanced your student loans? How did it help your financial freedom journey?