Before You Refinance Student Loans, Read This

Before You Refinance Student Loans, Read This

September 10, 2019

Student loan debt presents a serious financial burden to countless members of Gen X and Gen Y. We may be some of the most educated generations in history, but we're still struggling to earn enough money to take care of rising living expenses while paying down a massive debt load.

When you have student loans, you may feel stuck. Your monthly payments eat up a lot of money that prevents you from doing other things you need to save for, like getting married, starting a business, buying a house or having a family.

If you're in this situation, you likely want to find a solution now -- and refinancing your student loans can look like an attractive option. Refinancing does make sense for some people, and it can save money or make debt more manageable.

But it's not a cure-all for every single person with student debt. You need to think through some of the following to understand what happens when you refinance student loans -- and how it could negatively impact you and your financial situation.

You Start the Clock Over Again (and That Can Cost You)

Here's a simple explanation of what happens when you refinance student loans:

1. You apply for a new loan with a new lender, asking to borrow the sum of all your existing student loan balances.
2. The lender approves your loan application and underwrites a loan that includes new terms and a new interest rate.

3. The money from the new loan is used to pay off all your existing student loan debt.

4. You repay the new loan.

Getting a completely new loan means an opportunity to secure a lower interest rate. That could save you money if the rate is significantly lower than the rates on your existing student loans -- a big reason why refinancing sounds so appealing.

But it also means that you get new loan terms, which means you're starting from square one.

If your existing student loans had 10-year terms and you were four years into paying them off, your new loan could come with a 10-year term -- meaning you'll be paying on that debt for 10 more years, rather than just six more with your existing loans.

Extending the time it takes to repay your debt could negate any savings you might generate by getting a lower interest rate. Before you refinance student loans, do the math. Is the interest rate you can get from a lender low enough to make paying off loans over more months worthwhile?

Don't forget to take the fees associated with originating and closing a new loan into account, too!

Copyright © 2019 The Kiplinger Washington Editors. All rights reserved. Distributed by Financial Media Exchange.

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