By Peter Mastrantuono
The average amount of student loans owed by individuals is over $35,000, according to Experian, a consumer credit reporting company. With interest rates at historical lows and economic uncertainty at a high, many Americans are wondering if now represents a good time to refinance their student debt. Here’s what you need to consider.
Factors to Consider When Refinancing
Student debt comes in one of two forms: loans from the federal government and those from private lenders.
While the federal government does not offer refinancing, you can choose to consolidate multiple federal loans into one loan, with a new interest rate that is a weighted average of your existing loans. It won’t necessarily get you a lower rate, but it will provide the convenience of a single monthly payment.
Of course, you can refinance federal government loans by taking out a private loan to pay off the federal loan. However, before doing this you should recognize that you will lose certain benefits attached to the federal loan. For instance, federal student debt has certain forgiveness provisions that will be lost if you convert the debt to a private loan. So, if you are contemplating entering a qualified public service career, refinancing through a private lender may be costly.
Additionally, federal loan repayment amounts can be based on your income. So, if the current economic situation has reduced your income, you may be able to lower your monthly repayments on your outstanding federal loans. Plus, any remaining balance at the end of the repayment period is forgiven.
Another factor to consider before refinancing is that the new loan may not be considered a student loan for purposes of qualifying for the student loan interest deduction on your taxes. If you’ve been benefiting from this deduction make sure you factor that into your cost-benefit calculus.
The first step in the refinancing decision is to understand the interest rate you are paying, whether the rate is fixed or variable and the loan’s repayment terms.
The number of options for refinancing your student loans has expanded greatly in recent years, so be sure you do some comparison shopping to find the best option for you. One online tool for searching refinancing options is available through Bankrate. When comparing these various loan choices, you can use an online comparison calculator tool to determine the best loan option for you.
As you consider the alternatives, make sure that you look at the Annual Percentage Rate on the loan. Don’t confuse a lower monthly payment with saving money; a lower monthly payment could simply reflect a longer repayment period, which could result in paying more over the long term.
Also, determine whether there are any service fees associated with a refinancing that may drive up the cost.
Finally, ask a potential lender if a cosigner (e.g., a parent or grandparent) will improve approval chances and/or lower the interest rate on the loan.
Talk to Your Financial Advisor
The decision whether to refinance and what loan may be the best option can be confusing. Don’t hesitate to speak with a financial advisor. He or she can be a valuable resource by guiding you through the numbers and helping you make an informed decision.
Peter Mastrantuono is a contributing writer to MyPerfectFinancialAdvisor, the premier matchmaker between investors and advisors. Peter worked for over 30 years in the wealth management industry, focusing on retirement planning, investing, asset allocation and financial planning.