8 Questions to Ask Yourself Before Refinancing a Student Loan

When you’re managing multiple loans, it’s easy to feel there’s no end in sight. As you work to stay on top of the different payments and rates, you might well get to a point where you think, There’s got to be a better way. 

Consolidation might be the right answer for streamlining your loans and simplifying your life. But while all kinds of loans can be consolidated, student loans are sometimes trickier than other types of debt. 

If you're considering consolidating your student loans, you want to be certain of where you stand and sure of the type of loan you’re looking for. Try asking yourself these eight questions to find out if you're ready to consolidate.

1. Can I Reduce My Interest Rate?

You'll typically get the most benefit from consolidating student loan debt if you can land a lower interest rate. Your interest fees are based on the interest rate, so cutting your rate could cut your loan costs and monthly payment.

If your financial situation has improved since you applied for the original loan, you may be eligible for a lower interest rate when you consolidate. If your credit score has increased, check with your current loan provider and others to learn who’s offering the lowest rate.

2. Should I Extend My Repayment Term?

When you consolidate, consider what type of repayment term you want for the new loan. It's best to keep at least the same repayment timeline, if not a shorter one if you can. 

Extending your loan repayment term could cut your monthly payment, but it might lead to more interest costs on the loan overall. Before choosing a longer term, first do the math to learn how much it will cost you over the long term to extend the loan.

3. What Type of Loan Am I Refinancing Into?

When you consolidate debt, you want to land the best interest rate possible. Consolidation loans come in two types, and which you choose could make a difference.

• Fixed-rate loans. A fixed-rate loan remains the same throughout your repayment term. For example, if your fixed-rate loan has a 5% interest rate, the rate will be 5% the day you pay it off. A fixed-rate loan provides predictable payments and allows you to budget more easily.

• Variable-rate loans. The interest on a variable-rate loan can change over time. Often, the appeal of a variable-rate loan is that it starts at a lower rate than a fixed-rate loan. However, that rate can fluctuate throughout the loan—and often for the worse. Since your payment amount could change, budgeting may be more difficult.

Before committing to a new loan, make sure you’re comfortable with the type of loan. If not, it’s okay to keep loan shopping.

4. How Will Refinancing Impact My Monthly Payment?

Let’s say you’re earning more money than ever, and your goal is to pay off your student loan as quickly as possible. You may decide that refinancing your loan with a shorter-term loan is right for you, even if the payments are higher than you’re accustomed to paying.

If you’re wading through rough financial waters, the amount you can afford to pay each month will help you determine whether a new loan is right for you. Don’t decide on a specific loan until you’ve reviewed your current financial situation and determined you can easily afford the new payment.

5. What Fees Are Associated With Refinancing?

Some student loans may come with origination or application fees. Even if they don't, consider any other costs. For example, how steep are the fees for late or returned payments? Some lenders also have other fees, like prepayment penalties. 

Read the entire loan agreement carefully before signing so you don’t get hit with any unwelcome surprises. If the fees are too much for your budget, look at other refinance loans.

6. Am I Losing Anything Important by Refinancing My Old Loan?

Federal loans often come with benefits like deferment, forgiveness options, and income-driven repayment plans. Refinancing with a private lender will permanently eliminate these protections. If you’re considering refinancing a federal loan with a private one, make sure you’re not losing any protections. 

Before signing a new loan, list your current benefits and check if the private lender offers similar options. You may still be able to get deferment or forbearance for hardship, but you’ll likely lose the broader benefits such as Public Service Loan Forgiveness that come with federal student loans.

7. What Are My Plans for the Future?

Future plans could play a part in your ability to repay the new loan. For instance, if you’re pursuing further education, you may find it more difficult to manage payments. If you’re pursuing a career you’re passionate about in a field that doesn’t pay well, keep that in mind as you commit yourself to new payments.

8. Are There Any Alternatives to Refinancing My Student Loan?

You might be able to come up with an alternative to refinancing by working with your current student loan provider. Here are some options to consider.

Income-driven plans 

If you’re looking to refinance because you can’t swing your monthly loan payments, find out about income-driven repayment plans that adjust your monthly payments based on your income and family size.

Graduated or extended repayment options 

Some lenders offer flexible repayment plans that could reduce your monthly payment without refinancing while keeping you as a customer. Ask your lender if this is a possibility.

Employer repayment assistance 

If you’ve recently started working for a new company or you’re interviewing for new positions, find out if your new employer offers student loan repayment assistance as a benefit.

Deferment or forbearance 

If you’re facing temporary financial hardship due to illness, job loss, or some other reason, ask your student loan provider about deferment or forbearance until you’re back on your feet.

Student loan forgiveness 

If you work for an eligible employer in the public sector or a nonprofit, you may be eligible for student loan forgiveness after a set period of time. Check with your lender to learn if you work for a qualifying organization. 

Financial counseling 

By working with a licensed financial counselor, you could learn more about how to make your student loan work within your budget. Navigating financial challenges is usually easier when you learn as much as possible about the alternatives. With student loans, you have enough options at your disposal to carefully choose which one is right for you.