Why Is Refinancing Your Student Loan a Good Idea?


Student debt is good debt if it makes it easier to make a better living after school. One of the hazards of student debt is that it's generally offered to people with little credit history and a short understanding of managing debt. If your student debt is cutting too far into your living expenses, a refi can help.


You Can Lower Your Payments

Refinancing your student loans can also include a consolidation step. For example, two loans that require you to pay $250 per month each can be combined for a total monthly bill of $350 or $400, freeing up at least $100 a month. If you run out of money days before payday, a consolidating refinance can be helpful even if it doesn't save you any interest.

In addition, refinancing your student debt can lower your interest rate. For example, before you apply for a student loan refinance, make sure you know your credit score and the requirements of your potential lender. A student loan refinances a hard pull on your credit score; don't apply where you know you won't be accepted.


You Can Pay Off Your Debt Sooner

If your monthly income meets your needs, a student loan refinance can shorten the amount of time you have to pay off the debt. In the scenario above, you can consolidate your student loans and keep paying the $500 total, putting $100 or $150 per month against the principal.

Another option is to lower the student loan payment and put that extra cash against another debt. An excellent way to track this is to create a spreadsheet that allows you to sort your debt by

       Entity owed

       Monthly payment

       Interest rate

       Total debt

If you've got enough coming in to meet your needs, sort your list by interest rate (avalanche method) and wipe out that debt as quickly as you can if you can't get the lender to lower your rate. Leave the account open to avoid hurting your credit rating. Next, sort your list by total debt and dump the extra money against the smallest debt, rolling the payments onto the next highest total (snowball method). You can also sort by the highest monthly payment and tackle that debt to free up even more cash for savings or additional payments.


You Can Improve Your Credit Rating

If your credit cards are closed to maxed out, your utilization rate can hurt your credit rating. According to Lantern Credit by SoFi, “Small changes in your financial choices can make it easier to qualify for lower student loan refinance rates.”

Set simple targets to improve your credit score. The first step is to pay bills when they come in, rather than waiting for payday and risking a late fee. If you've had anything go to collections, do your best to set up a payment plan and wipe out those debts. Address credit cards close to maxed out to lower your credit utilization rate. Finally, add something to your savings each month.


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