Getting a degree is often seen as a bit of a catch 22. On the one hand, you need a college degree in order to be more competitive (although there are a number of great jobs that pay well and don't require a degree) in the workforce. On the other hand, getting your degree means racking up a lot of debt. That debt means that your take home income is severely reduced for quite a few years.
Fortunately, as with any loan out there, you can look into a student loan refinance plan and save quite a bit.
Before You Refinance
Just like everything good, there are a few catches. Before you jump on a refinance, you need to consider a few important issues that could pop up with a refinance.
- Private student loans often don't include forbearance clauses
- Private student loans often don't have fixed interest rates
- You may need a cosigner for a private loan
- You won't qualify for loan forgiveness programs with a private loan
Just like all things in finance, there are a number of options to weigh before you make a decision. The good news: you can deduct the interest on your private loans the same way you can on a federal loan.
How Much Can You Save When You Refinance?
When you have federal student loans, you are stuck with the current interest rate. While you may be able to consolidate your loans, you can't refinance them. Switching to a private loan program can save you quite a bit. It all depends on how much you owe and what the current interest rates are. Interest rates vary between two and nine percent. For our examples, we will use 3.5 percent.
Suppose you have recently graduated with $25,000 in student loans. At the current interest rate for federal loans (4.29 percent), your standard repayment plan would consist of 240 payments of $155.34. Total repaid on the loans: $37,281.
Now let's assume that you refinance those loans with a 3.5 percent interest rate. Your repayment plan now consists of 240 payments of $144.99. Total repaid on the loans: $34,797.
Your refinance saved you $2,484. Calculate how much you can save with a student loan refinance calculator.
What About Multiple Loans?
The problem with student loans, however, is that most people don't have just one loan. They have several of them, and each one has a different interest rate.
Suppose you have three loans. You owe $20,000 at three percent interest, $8,000 at 5.5 percent interest, and $7,500 at 4.29 percent interest. Is it still worthwhile to refinance since the bulk of your loans are less than the going refinance rate?
- $20,000 at three percent interest will result in 240 payments of $110.92 for a total repayment of $26,620.
- $8,000 at 5.5 percent interest will result in 240 payments of $55.03 for a total repayment of $13,207.
- $7,500 at 4.29 percent interest will result in 240 payments of $46.60 for a total repayment of $11,184.
Sticking with your original interest rates results in a total repayment of $51,011.
If you refinanced to 3.5 percent, you would have $35,500 at 3.5 percent interest; 240 payments of $205.89, and a total repayment of $49,413.
Even when the bulk of your loans are under the market rate to refinance, you still save nearly $1,600. Calculate your savings with multiple loans using a student loan refinance calculator.
Should You Refinance Your Student Loans?
Every situation is different. If you are going to be pursuing a career in the public service sector, then you might want to keep your federal loans to capitalize on the forgiveness program. If you have all of your loans under the market rate for refinancing, then there is no reason to refinance to a higher interest.
After crunching the numbers, if you can save hundreds, or thousands, of dollars with a student loan refinance, you might as well do it. Most banks will offer these loans without origination fees, so unlike refinancing a house, there is no payoff period.