It’s no surprise that student loan debt is a major problem. But did you know that it can cause you to delay retirement or even max out your credit cards, too?
In TD Bank’s 2019 Student Debt Impact Survey, researchers found that Americans spent more than 20% of their take-home pay on their student payments. With so much of their income going toward their debt, they delayed building an emergency fund or saving for retirement, putting their long-term financial health at risk.
If you’re sick of your student debt and are wondering how to lower your student loan payments or how to pay off your loans fast, student loan refinancing can be an effective strategy. Here’s how to refinance your student loans and manage your debt more easily. Or, if you owe between $100K and $200K, this article on how to pay off $100K+ in student loans is for you.
How student loan refinancing works
When you went to college, you likely took out several different loans to pay for school. Depending on your situation, you may have used a mix of both federal and private student loans to finance your education, so you could have multiple loans and loan servicers to remember.
With student loan refinancing, you apply for a loan with a private lender for the amount of your existing combined debt. If the lender approves you, the new loan will pay off the old ones, and you’ll have just one loan, one monthly payment, and one loan servicer moving forward.
The refinanced loan will have different terms than your old debt. You’ll have a different interest rate, repayment term, and minimum monthly payment.
When you refinance your federal loans, they become private student loans, so you’ll lose federal perks like access to alternative repayment plans and forgiveness options. However, you may find that refinancing’s benefits outweigh its drawbacks, depending on your circumstances.
Benefits of student loan refinancing
Student loan refinancing offers some major benefits besides being able to consolidate your loans and streamline your payments.
1. You can lower your monthly payment
The Federal Reserve reported that the average student loan payment is $393 per month. But if you have a large loan balance or high-interest debt, your payment can be much higher. Many borrowers have payments of $1,000 or more. On an entry-level salary, loan payments can eat up a large portion of your income, making it difficult to make ends meet.
If you can’t afford your current payments, you can refinance your debt and extend your repayment term. Lenders offer loan terms as long as 20 years, giving you a more affordable monthly payment.
For example, let’s say you had $30,000 in debt at 7% interest. With a 10-year repayment term, your monthly payment would be $348 per month.
If you refinanced your education debt and qualified for a 20-year loan at 6% interest, your monthly payment would drop to $215 per month, freeing up $133 each month in your budget.
You would pay more in interest charges over the length of the loan, but you’d have more cash flow every month.
Keep in mind that most refinancing lenders don’t charge a prepayment penalty. If your circumstances improve and you have more income later on, you can always make extra payments and pay off your debt early to reduce your total interest — while taking advantage of the lower payments right now.
2. You can pay off your loans more quickly
If you want to know how to pay off student loans fast, refinancing may be the perfect solution.
When you refinance your debt, you can qualify for a lower interest rate; right now, interest rates are incredibly low. To get the lowest rate possible, you can opt for a shorter loan term — five to eight years — and accelerate your loan repayment.
To put that in perspective, consider that you’d repay a total of $41,799 on a $30,000 loan with a 10-year loan term at the original 7% interest rate.
If you refinanced your loans and qualified for a five-year loan at 4% interest, you’d repay just $33,150. By refinancing your debt, you’d save $8,649, and you’d pay off your loans five years sooner.
3. You can do a bit of both
With student loan refinancing, it doesn’t have to be just one goal or the other. You can do some of each: reduce your monthly payment and pay off your loans faster. And, refinancing can be worthwhile even if you qualify for a more modest rate reduction.
You can do a hybrid approach where you compromise on the loan term. Instead of opting for a much longer loan term — like 15 or 20 years — you might choose a loan term between eight and 12 years. With a shorter term, you’ll pay off your loans earlier and pay less in interest, but your monthly payments will still be more affordable.
For example, you could qualify for a 10-year loan at 5% interest. That would reduce your monthly payment by $30 per month, and you’d save $3,615 over the length of your loan.
| Original Loan | Refinanced Loan With 5-Year Loan Term | Refinanced Loan With 10-Year Loan Term | Refinanced Loan With 20-year Loan Term | |
| Loan Balance | $30,000 | $30,000 | $30,000 | $30,000 |
| Interest Rate | 7% | 4% | 5% | 6% |
| Monthly Payment | $348 | $553 | $318 | $215 |
| Total Interest Paid | $11,799 | $3,150 | $8,184 | $21,583 |
| Total Repaid | $41,799 | $33,150 | $38,184 | $51,583 |
Should I refinance my student loans?
When deciding whether or not to refinance your student loans, it’s important to think about your current financial situation and your future goals. If you’re struggling to make ends meet, refinancing to extend your repayment term can give you some more breathing room in your budget. Or, you can use student loan refinancing as a tool to accelerate your repayment and become debt-free sooner.
If you think that refinancing makes sense for you, make sure you do your homework and compare offers from multiple lenders before submitting a loan application. Loan terms and benefits can vary widely from lender to lender, so it’s a good idea to do your research ahead of time.
Purefy helps make the process simpler with our Compare Rates tool. Answer a few basic questions about yourself, and it will give you interest rates you qualify for from multiple top lenders — all at once in one place, with no impact on your credit score.
