3 benefits of refinancing your student loan

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3 benefits of refinancing your student loan


If you're currently paying off a student loan, rest assured that you're not alone. Over one in four Credit Karma members has an open student loan, and according to a 2014 study by the Institute for College Access and Success, the average amount borrowed by graduating seniors is $28,400 - and this figure doesn't even factor in how much you may have to pay back including interest.

If you're having trouble making your monthly payments or your student loan has a high interest rate, refinancing may help. Read on to learn more about what refinancing entails and how it may be able to help your financial situation.

What is student loan refinancing?

Student loan refinancing involves applying for a new loan - you pay off your original loan by getting a new loan with new terms. Ideally, this new loan would have an improved interest rate or better terms that can save you money over the repayment period.

If you have more than one student loan, refinancing can also consolidate your multiple payments into one payment with one interest rate.

Here are three potential benefits of refinancing your student loans.

1. You may qualify for a lower interest rate.

It's simple - a lower interest rate over the same term typically means you'll pay less overall when repaying your loan.

Say you're a graduate student for the 2015 / 2016 academic year with a $35,000 10-year federal direct unsubsidized Stafford student loan that has an interest rate of 5.84 percent. According to Credit Karma's Debt Repayment Calculator, you'd pay about $11,282 in interest on top of the principal (the original loan amount).

Here's where refinancing can make a difference. Many marketplace lenders, such as Credit Karma marketing partner Earnest, offer student loan refinancing with fixed interest rates as low as 4.7 percent for a 10-year refinancing loan.

Using the ten-year loan example above, you'd pay $8,938 in total interest with the 4.7 percent rate, a potential savings of $2,344 on the graduate loan.

You may also qualify for refinancing from a traditional financial institution such as a bank or credit union. These include Wells Fargo, Citizens Bank and Alliant Credit Union. These institutions also offer competitive interest rates and may offer discounts on interest rates if you're already a member.

Note that in order to qualify for a low interest rate with a lender, the company typically will take many factors into consideration, including your credit score, education level, annual income and employment history.

2. You can consolidate multiple student loans.

If you have multiple student loans, whether they're private or federal, it can be inconvenient to make several payments each month. And the consequences of one missed payment can be significant. Many issuers of private loans, including Sallie Mae and Wells Fargo, will charge a late fee. The late payment may also be listed on your credit report, which could negatively impact your credit score.

Refinancing can help consolidate your loans into a single loan so you don't have to make multiple payments a month, thus potentially reducing your risk of missing a payment. There are many other potential benefits to refinancing, including lowering your monthly payment or qualifying for a lower interest rate.

Be aware that if you do lower your monthly payment when consolidating, this may extend the life of your loan such that you might end up paying more interest over the life of the loan than you would have before consolidating.

3. You have interest rate options.

If you decide to refinance your student loans, you can typically choose between two interest rate options - a fixed interest rate or a variable interest rate.

But how do you choose? The following information can help as a rule of thumb:

Fixed interest rate: This is typically higher than the variable interest rate offered, but it will not change over the life of the loan, which can make your repayments predictable. This may suit you if you're borrowing when rates are relatively low and you want to lock in a loan at that rate.

Variable interest rate: This rate is typically lower than the fixed interest rate offered at the time of borrowing but is susceptible to changing over time, as the rate is typically tied to another rate known as an index, which generally will rise and fall depending on whether the Federal Reserve's interest rate rises and falls. If your loan's variable interest rate rises during the lifetime of your loan, your repayments will also rise.

Variable interest rates tend to work best for borrowers who can pay back the loan quickly, as there is less time for the rate to rise. If you do decide to opt for a variable rate, you can look for lenders who will cap the rate at a certain number.

Bottom line

There can be many benefits to refinancing your student loans, including the potential to lower your monthly payment and secure a lower interest rate.

However, be aware that qualifying for many of the benefits of refinancing will likely depend on your personal situation. For example, lenders may give more favorable interest rates and terms to borrowers with excellent credit scores and who are in good standing on their current student loans.

About the author: Korrena Bailie is Credit Karma's Managing Editor. She's been writing and editing personal finance content since 2012. When she's not scanning personal finance-related Google Alerts, she's climbing, traveling to countries where it rains all the time (ahem, Ireland) or talking to her cats as if they're people.

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Hello, a huge thing that I think is often overlooked in articles like this, is that if the student loans are through the government (most are), they come with other benefits such as Income Based Repayment, the ability to defer your loans if you lose your job, the public work loan forgiveness program (work 10 years in the public sector and loans are forgiven), and the 20-year forgiveness program (pay faithfully for 20 years and the remainder of the loans are forgiven). People lose these benefits when they refinance a federal loan with a private company. Companies may offer one or some of these benefits, but they are not all universally given across all companies.

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Do you have recommendations for the best companies / banks to refinance your student loans with? And will you still be able to claim the interest paid on your taxes? 

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