I recently refinanced one of my student loans. I think it was a smart move because I’m no longer paying close to 7% interest on that loan. However, the decision really wasn’t that simple. There are several things to consider before refinancing a loan. Before I start listing reasons to refinance your student loans, let me give you 3 Reasons NOT to Refinance Your Student Loans:
1. Do NOT refinance if you intend to use Public Service Loan Forgiveness (PSLF). In short, PSLF forgives the remainder of your loans if you work in public service (work at a nonprofit organization) for 10 years. In order to take advantage of this, you need to submit paperwork every year and make 120 qualifying payments under an income-based repayment plan.
I plan to pay off my loans in less than 10 years. I also hope to be making a significantly higher income after residency, and the income-based repayment plan means that my payments would have to be at least 10% of my disposable income. 10% of my disposable income after residency will be a substantial amount which will leave very little to be forgiven. Be sure to consider whether you will be using loan forgiveness as you will lose this option if you refinance.
2. Do NOT refinance if you plan to defer your loans or go into forbearance. Basically, if you don’t plan on paying your loans for some reason, don’t refinance; interest still accrues during this time. On the other hand, I wouldn’t recommend avoiding refinancing for the sole purpose of leaving the option for future deferment or forbearance of the loan.
3. Do NOT refinance if you need a cosigner. A general principle in the world of personal finance is that you should never cosign for anyone or have anyone cosign a loan for you. Yes, that even means your own family members and especially a best friend. Never let money stand in the way of a relationship.
Now that I’ve given you the cons, here are 3 Reasons to Refinance your Student Loans Now!
1. Refinance your loans now because these low rates will likely go up very soon! Interest rates are at historic lows, but the Fed is planning to raise interest rates very soon.
Interest rates can be as low as 3% depending on several factors I’ll talk about later. However, if rates go up, refinancing may provide very little benefit.
2. Refinance your loans with credible.com before March 31st to get a $500 bonus! I recommend credible.com (Use this referral link for the bonus) for reasons I’ll talk about below. Who doesn’t like free money?!
3. Refinance your loans to save thousands on interest! If you have loans with high interest rates (higher than, let’s say 6%) and you can drop your interest rate even 1%, that can be a potential savings of thousands of dollars per year, especially if you have a high student debt load. Money in the bank! I’m gettin’ paper, look at me now!
Now, you’re probably wondering, “How do I even get started? This looks like it’s going to be a tough process!” It’s actually pretty simple, and the application can be done in under 15 minutes, just like 15 minutes with GEICO can save you 15% or more on car insurance.
(On a side note, did you know holding 1 share of Berkshire Hathaway (BRK.A or BRK.B) can give you a discount on your GEICO car insurance? Just call a rep and tell him/her that you’re a shareholder.)
Like I said, I used and recommend Credible for these reasons:
- Credible uses multiple lenders that compete against each other to give you the best rate possible.
- Do I need to repeat, “You (and I) get a $500 bonus if you apply before March 31st!” We’ll both be on our way to paying off these terrible student loans.
- Credible is one of the most reputable student loan refinancing sites. They have an A+ rating from the Better Business Bureau, and they have already helped over 130,000 people.
- You don’t have to refinance all of your loans. In fact, I only refinanced one of my loans with the egregiously high interest rate.
- There are absolutely no hidden fees or finance charges. I just went through the process and read all of the fine print for you. I looked over the truth-in-lending document and everything checked out.
- They did not require a cosigner for me. I ended up going with Citizens Bank via Credible. I called customer service to ask a few questions, and the representative was intelligent and responsive. I asked where they were based, and she responded that she is sitting in Cranston, RI, the city where I grew up!
- The application process is easy and takes less than 15 minutes. You receive quotes instantly.
Things to know:
- The interest rates you will be quoted largely depend on your credit score and debt-to-income ratio. If you have a low credit score and/or your income is low relative to your debt burden, then your interest rates will likely be high.
- The interest rates will be lower with shorter term loans (i.e. 5 years vs. 20 years) and variable rate loans (as opposed to fixed rate loans). A variable rate 5-year loan will have a lower interest rate than a fixed rate 20-year loan. Determining what kind of loan you need really depends on your current circumstances. I chose a fixed rate 10-year loan for myself as I will need consistency and a longer term with my residency salary. If I were an attending physician, I would probably choose a variable rate 5-year loan to knock that sucker out fast.
Remember to consider all the different factors before moving forward with refinancing. Are you ready to take the next step toward saving money now?
Featured image source: Kayoung Lee