When you graduate college with debt, you probably have more than one student loan to manage.
Maybe you have four federal loans. Or three public loans and two private loans. Or a couple with reasonable interest rates, but one annoying loan with a 9% rate. You might struggle to remember which day of the month you’re supposed to pay which loan with which servicer.
It’s a lot of information to keep track of.
Refinancing your student loan debt is one way to eliminate these inconveniences from your life.
When you refinance, you take out a brand new loan from a private lender, usually with a new interest rate, to pay off your other loans. Now you only have one monthly payment and rate to deal with. And if you have a good credit score, your payments and interest rate could be lower.
Refinancing comes with trade-offs, though. A common pitfall is a longer loan term, which means more interest accumulates over the years while you repay the debt. Refinancing federal loans also means you’ll lose access to federal programs like income-based repayment or Public Service Loan Forgiveness.
Is refinancing worth it?
We talked to three borrowers who shared why they refinanced their student loans — and why they recommend refinancing to others.
1. Refinancing to make financial progress
David Bakke is a personal finance expert for the website Money Crashers, and he knows a thing or two about how student loans work. Before he refinanced his student loans, he wrote a list of ways he wanted to progress financially: pay off credit card debt, build an emergency fund and save for retirement.
But his student loan payments stood in the way of other money goals. By refinancing, he could dedicate more money to achieving financial stability.
If Bakke had learned anything from his time at Money Crashers, it was to do his research. He studied credit unions, banks and other financial institutions. In the end, he refinanced through Wells Fargo.
“I went with the [institution] that had the best terms, but not necessarily the lowest monthly payment,” Bakke explains.
Many borrowers who refinance try to secure the lowest monthly payments possible, which means maximizing the duration of your loan and paying more in the long run. But not Bakke.
“My monthly payment did go down [because of lower interest], but I made sure that I did not go with a company that could lower my payment by stretching out the term of the loan.”
Bakke’s goal was financial progress, so whittling away at a loan for a longer period and paying more in interest in the long run wouldn’t match his priorities.
For borrowers with similar goals, Bakke recommends student loan refinancing, “provided the following conditions exist: You can reduce your interest rate, and you can reduce your monthly payment.” He warns to steer clear of stretching out your loan repayment.
2. Refinancing to invest in property
Bakke refinanced to become financially stable, but Thibault Kuten, a British citizen who grew up and attended school in the U.S., had a different objective. He refinanced to actively grow wealth.
“I refinanced my student loan about three months ago in order to finally buy my first investment property,” Kuten says.
He refinanced through his bank in Great Britain. His monthly payments dropped from around £300 ($393.69) to £276 ($362.19). On even months, he puts that extra money — nearly $400 per year — toward his investment property. In odd months, it goes into a stock trading account. He’s not just saving money — he’s using it to make more money with investments.
Kuten will end up paying $3,000 more on his refinanced loan over the years. But he plans to earn more than $3,000 through his investments in that time, so he considers the trade-off well worth it.
“I would only recommend refinancing your student debt if you have a plan of what you want to do with it,” Kuten says. “I’m a firm believer that you should only take on more debt in order to buy something that makes you more money!”
3. Refinancing to become financially independent
Bakke warns against extending the term of your loan, and Thibault advises taking on debt only if it will help you make more money. While these are sound insights, everyone has different priorities.
Maia Price didn’t want to focus on long-term goals. She was focused on becoming financially independent ASAP.
Prior to refinancing, Price paid $500 per month toward private student loan debt. This high payment stretched her thin financially. She had been planning to live at home or with up to four roommates to make ends meet, but these options infringed on her independence and overall happiness.
After refinancing the loans, Price’s monthly payment dropped from $500 to around $180. “It meant I had the ability to rent a home,” she says. Now she lives with her partner rather than with her parents or multiple roommates.
Refinancing also meant Price could release cosigners from her loan. When loved ones are held accountable for your financial decisions, relationships can become tense. After refinancing, she was the only one responsible for her debt.
Price found a refinance loan through LendKey, an online marketplace for people with private student loans. Her loan term increased from eight to 15 years, but she’s OK with that.
“It will cost me more, but my partner and I are working to pay it [the loan] off early via some family money and side hustles,” she explains.
If your financial freedom and quality of life are top priorities, you might decide it’s worth refinancing, even if it costs more money in the long run.
Do you want to refinance student loans?
What would you do with extra money in your pocket each month? Pay off high-interest credit card debt? Invest? Move out of Mom and Dad’s house? If lowering monthly payments can help you attain life-changing goals, refinancing student loans may be the right choice.