Should I Refinance My Student Loan So I Can Pay A lower Interest Rate?
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College Students

Should I Refinance My Student Loan So I Can Pay A lower Interest Rate?

EPF May 25, 2019

Readers often ask us: how do I lower my student loan interest rate?

Well, the answer isn’t as simple as it seems.

See, if you decide refinance your public student loan, you replace it with a private student loan. And while you’ll likely benefit from a lower interest rate, changing your loan provider from a public entity to a private entity will cause you to forfeit many of the benefits that public student loans offer. Benefits such as: the ability to delay repayment until after you graduate, the option to enroll in an income-driven repayment plan – and most importantly, student loan forgiveness.

For a detailed breakdown of how public student loans differ from private student loans, check out our articles on Federal Student Loan Interest Rates and Income-Driven Repayment Plans.

Now, if you’re on the fence and can’t decide – don’t worry. We have plenty of information to help you figure out which path is right for you.

 

How Do I Know If Student Loan Refinancing Is Right For Me?

While there are plenty of variables you need to consider before you make your final decision, we recommend you weigh the value of interest savings versus the cost of losing public student loan benefits.

If decreasing your cost of borrowing is the most important factor, we can’t blame you. For example, a borrower with $30,000 in student loan debt that plans to repay the proceeds over 10-years, will save $5,205.55 in total interest costs by reducing their interest rate from 6% to 3%.

Big difference?

As a quick guide, we always recommend refinancing student loans for borrowers in these categories:

  • You already have a private student loan and won’t lose out on any public benefits
  • Your federal student loan does not offer loan forgiveness
  • Your goal is to pay off your student loan balance in less than 10-years

On the flip side, if you don’t fall into any of these categories, refinancing is still a viable option – it’s just a little more complicated. As mentioned above, your decision depends heavily on the interest savings. But like our example above showed, a small reduction in interest can make a huge difference.

 

If I Decide To Refinance, How Do I Get The Lowest Interest Rate?

When dealing with private lenders, the key is to negotiate from a position of strength. Let them know you have plenty of options. See, the lending market is an extremely competitive space and with so many debt consolidators out there, many will compete for your business by offering more favorable terms and lower interest rates. Moreover, if you have a good credit score, you will be an even more attractive prospect in their eyes.

 

Helpful Tips To Get The Lowest Interest Rate

 

Engage With Multiple Lenders

Before finalizing any decision, make sure you shop around for the best offer. We recommend you talk to at least five lenders so you can weigh the pros and cons of their offers. Through their online portals, the process is extremely quick and easy. You can get real-time quotes from reliable lenders and receive generic estimates regarding the terms they can offer.

For more personalized results, talk to a human at the institution directly. Moreover, if you or your parents have an established relationship with a bank or institution, leverage your customer loyalty to obtain a lower interest rate. Due to the increased competition we mentioned above, many lenders go above and beyond to retain customers whose families have shown a reliable and predictable borrowing history.

 

Leverage Competing Offers

While pitting one institution against another may not be the nicest practice in the world, it’s essential to obtain the lowest interest rate. See, when you show up with an offer already in hand, the other institution will know you’re serious and look to up its game. It’s not uncommon to receive a 0.50% to 1.00% decrease in your interest rate by leveraging one offer against another. And even a small reduction in interest pays off significantly over time.

 

Ask About Bonus Offers

While an institution may tell you it can’t beat a competitor’s interest rate – and is only willing to match – it can offer added bonuses that end up making it the most attractive offer. Just like how credit cards offer introductory APR periods or offer high cash back percentages for the first few months, student loan refinancers can offer upfront cash as a way to win your business. Moreover, these amounts can range from a few hundred dollars to a few thousand.

If you do the math, you may find the upfront bonus – even with a higher interest rate – actually reduces your total cost of borrowing. Remember though, it’s rare for this to occur and will only work if the interest rate differential is a few basis points.

 

Conclusion

When you’re fresh out of university and looking to take on life’s challenges, student loan refinancing can be the furthest thing from your mind. However, we’re here to tell you: you have options. And if carefully planned, you can save a ton in interest.

See, the reason lenders offer student loan refinancing is because they see it as a way to win new customers and build a lifelong banking relationship. As you move on from university and start to build your career, lenders know you’ll turn to them to help fulfill the financial milestones of your life. Milestones like: taking out a mortgage on your first home or setting up your first investment portfolio to save for retirement. Whatever it may be, lenders now the importance of customer loyalty and are willing to work with you to earn it.

So, before you make that next student loan payment, take a hard look at whether student loan refinancing is right for you.

Elite Personal Finance

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