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Why Refinancing Student Loans Can Benefit Established Professionals

It’s no secret that many Americans are struggling to repay their student debt. According to the U.S. Department of Education, in March 2023, about 44 million U.S. borrowers collectively owed more than $1.6 trillion in federal student loans. If you’re among those millions, you may be wondering if you ought to refinance your student debt. Doing this can often result in better loan terms, which can help you repay your debts and better leverage income from your professional career. Keep reading to learn how student debt refinancing works, and how to begin the process. 

What is student loan refinancing?

Student loan refinancing is offered by financial institutions such as credit unions and other specialized lenders as a way to help borrowers pay off their debts more quickly, or to consolidate loans to simplify repayment. Essentially, the process allows the borrower to take out a new loan to pay off their existing debt, replacing the original loan terms with an updated agreement. This often enables borrowers to get a lower monthly payment, a different term length, lower interest rates, or a more convenient payment structure.

Though student loan refinancing is sometimes referred to as student debt consolidation, they are not the same thing. Consolidation refers to combining your federal student loans into one new federal loan, with a new term. Unlike refinancing, though, it does not necessarily provide a lower interest rate, as the new rate will be the weighted average of the interest on the loans being consolidated. Though consolidation may make you eligible for some income-driven repayment plans and loan forgiveness programs, it is not typically regarded as a money-saving option. 

Primary Benefits of Student Loan Refinancing 

For those who have been out of school and in the daily grind of the workforce for a while, it can be easy to fall into a finance routine and not realize there are opportunities to reduce some of your loan burdens. We have already touched on some of the main benefits of refinancing your student loans, but here is more in-depth information:

  • Lower interest rates. Getting a lower interest rate on a loan is not a guarantee. However, if your credit score has improved since you took out your original loan, or if market conditions have improved, you could be able to lower your rate. Lenders have a lot more trust in working, established professionals than they do in bright-eyed teenagers. If you are such a professional, your terms should be much more favorable. 
  • A different interest rate type. Fixed rate loans remain the same over time and may therefore offer more security and peace of mind. Variable rate loans typically come with lower initial rate, but may fluctuate over time. If you’d like the security of a fixed-rate loan, or the lower cost of a variable-rate loan, refinancing will enable you to switch. 
  • Longer loan terms. Extending the time you have to pay back the loan can often lower your monthly payments as well. However, you may end up paying more interest over the life of the loan. When choosing your new repayment plan, try to strike a balance between a monthly payment you can afford, and a term that won’t rack up a burdensome amount of interest charges.
  • Shorter loan terms. Some borrowers actually want shorter loan terms so they can “fast track” their repayment and save money on interest, especially once they are gainfully employed. If you’re determined to get rid of your debt once and for all, this may be a good option for you—as long as you are able to make your monthly payments without suffering financial hardship. 

Other Benefits of Student Loan Refinancing

Obviously, the biggest benefit to student loan refinancing is the ability to save money over the entire loan term. But there are other factors to consider, too.

Simplifying Repayment

Refinancing can also make your life much more convenient by streamlining your payments into one single loan from one lender. With only one bill to keep track of, it may be easier for you to stay organized, make your payments on time, and stick to your debt reduction plan.

Increasing Cash Flow for Career Advancement

Paying off your debt more quickly can free up cash flow for other opportunities, including more schooling. Career advancement, in particular, is an opportunity that may be able to pay for itself. By obtaining an advanced degree, professional certification, or other career development initiative, you might be able to increase your earning power and save more for your eventual retirement. 

Factors to Consider Before Refinancing

Although refinancing can be an attractive option, it’s important to know that it’s not for everyone. Factors to consider before refinancing include: 

  • Your credit score. Your credit score is one of the biggest determining factors in whether you should consider refinancing. Most borrowers who are approved for refinancing have FICO scores in the 700s. With that said, if your credit score is too low, you may be able to qualify with a co-borrower
  • Your debt-to-income ratio. Refinancing is best for those who have a stable income. Generally speaking, your debt-to-income ratio should be between 20% and 50%.  
  • Whether you qualify for federal student loan forgiveness. If you refinance your federal student loans, you will no longer be eligible for repayment programs like SAVE. If you only want to refinance private loans, you do not need to take this into consideration. 
  • Whether you will save money. A student loan refinancing calculator will give you an idea of how much you’ll save by refinancing your student loans. A financial advisor may also help guide you in the right direction. 
  • Current interest rates. Recent rate hikes by the Federal Reserve have resulted in many lenders raising their interest rates. If you have loans with a fixed interest rate you are happy with, it may be better to stick with that lender. 
  • Other qualifying factors. If you never completed your degree program, you will probably not be able to refinance your loans. In addition, if you have recently declared bankruptcy, it might not be possible. Many lenders require that a certain amount of time—anywhere from four to 10 years—must have passed since your bankruptcy.

In order to maximize the benefits of refinancing, be sure to compare rates from multiple lenders, negotiate terms, and consider the impact refinancing may have on your long-term financial goals. Before you sign any paperwork, make sure you fully understand the terms and conditions which you will be agreeing to. If you are confused or uncertain, don’t be afraid to reach out to financial advisors or lending experts who can help. 

Refinance your student loans with a credit union

We hope that this article has helped you understand the benefits of refinancing student loans, including cost savings, increased financial flexibility, and greater peace of mind. If you decide to pursue this option, remember that refinancing should be just a part of a comprehensive financial strategy. Our resources can help you find loan funding options, manage your debt, and work toward your goal of achieving financial freedom.

*Federal student loans may qualify for payment and interest rate benefits that private student loans do not. Carefully consider your options before refinancing federal student loans, as they will no longer qualify for current and future federal benefits once refinanced with a private lender. For more information, visit studentaid.gov or contact your federal student loan servicer.