Student loan refinancing is often the best way to lower your payment, reduce the total cost of the loan, and pay off your debt faster. If you’ve refinanced before, you have a way to make your loan even better: refinance again.
If your goals have changed since the first refinance, or if you want to reach those goals faster, student loan refinancing can help. Depending on when you refinanced, your interest rate could be 6% or higher. A new refinance could lower that rate and save you money now and in the long run.
For example, if you owe $27,000 at 6% interest, refinancing at 3% would reduce your monthly payments by about $39 and your overall interest costs by $4,686, assuming a 10-month repayment plan. years.
And with student loan refinance rates set to rise, this may be your last chance to get a good deal. Here’s what to consider when planning your next student loan refinance.
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What are your financial goals?
Whether you decide to refinance again and the type of term you choose should depend on your financial goals.
If you need more cash each month, it might be better to extend your term with a lower interest rate. It may also be the best route if you need to improve your debt-to-income ratio to qualify for another line of credit, such as a mortgage.
If you’re looking to pay off your student loans faster or reduce the overall amount you’ll pay, going with the shorter term will be your best bet. It can also be the way to go if getting the lowest interest rate is your primary goal. Lenders generally reserve their best rate offers for those who choose the shortest terms available.
Whichever route you choose, you should only refinance if you can get a lower rate than you currently have. However, don’t be discouraged if you don’t get the lowest advertised rate. Lenders reserve their lowest available rate for those with the best financial profiles. They may also have additional criteria to qualify, such as graduation. According to data from the 2021 NerdWallet survey, only about 18% of borrowers are offered the lowest advertised rate for refinancing student loans.
The beauty of refinancing repeatedly is that you can continue to get a better rate as your financial situation improves.
What’s the catch?
Just as there really is no trap in refinancing, there is no trap in refinancing again. You can refinance as many times as you qualify. There are no additional fees or penalties for doing so.
The only potential downside to refinancing is that lenders pull your credit before final approval. This credit check can lower your credit score by up to five points. This drop is temporary, however, and assuming everything else is OK with your credit profile, your score should recover within a few months.
It’s also important to pre-qualify with multiple lenders to ensure you get the best deal and the one that best suits your financial goals. Pre-qualify with lenders who will make you an offer without affecting your credit.
However, as you get closer to your repayment date, you may only have options to extend the term of your loan. Many lenders offer repayment terms as low as five years, but few offer shorter terms.
The good thing about extending your tenure when you’re close to payment is that your payment will likely be much smaller. The bad news is that your total costs will likely increase.
For example, let’s say you have $16,000 and three years left on your refinanced student loan at 4% interest. If you refinance again and get a 2% interest rate, but extend it for 10 years, your payment will drop from $472 per month to about $147 per month, a difference of $325. However, extending the term of the loan will cost you nearly $1,000 more in total due to accrued interest.
But if you have $64,000 and eight years at 4% interest left, you could refinance for 10 years at 2% interest and still save money: $191 per month and $4,224 in total. If you refinance for a shorter term, say five years, you will save a lot more overall, but your monthly payments will increase. You’ll pay about $342 more each month and save $7,584 in total.