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Choosing Which Student Loans to Refinance

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Choices when refinancing student loans

Refinancing is a flexible solution to potentially save money on your student loans, but how do you know where to start, and which loans you should refinance? Choosing which student loans to refinance starts with knowing your goals and knowing your loans.

Review your type of loan

There are two types of student loans – federal and private. Federal loans are granted by the government through the Department of Education, and have a set interest rate for everyone. There is no way to lower the interest rate on a federal loan, outside of refinancing with a private lender. A private loan is taken out through a bank or other financial institution and the rate is based on your financial situation at the time the loan is taken out. When you refinance, you can choose which loans you want to refinance – for example, a few federal and a few private, all your private loans and none of your federal loans, etc. It’s up to you which current loans you want to keep. You should make sure to review your loans because once you refinance to a private loan, you cannot switch back to a federal loan. Federal loans have certain benefits like deferment, loan forgiveness, and income-based repayment plans, which you might be giving up by refinancing with a private lender.

You can read more about the types of federal loan benefits and payment plans here.

The key benefits that can potentially be gained by refinancing are a lower interest and a more favorable term, which brings us to the next step.

Know your loans rates & terms

Do you want to pay off debt faster and can afford a higher monthly payment, or do you need to lower your monthly payment? Review the interest rates and terms on all your loans and see how a refinanced loan will compare. If you currently have a loan with an interest rate below what we have available, you may be better off keeping your loan where it is for interest savings. While variable rates often begin lower than fixed rates, think about your tolerance for risk and if it would make more sense for you to lock in a rate by refinancing to a fixed rate loan. To quickly summarize, a fixed rate loan will have the same interest rate throughout the life of the loan and your monthly payment won't change. A variable rate loan will vary with market rates, and your monthly payment will often start off lower, but the rate—and your corresponding monthly payment—can increase or decrease unexpectedly. Your loan term is important to think about in relation to your financial goals, because it is the measure of how long you will be paying off your loans. Most borrowers begin on a standard 10-year term, but you can potentially lower your interest rate and get out of debt faster by switching to a shorter term, like an 8 or 5 year term. To free up more room in your monthly budget, and potentially get a lower rate, also, you can lengthen your term—keep in mind this can cost you more in interest over the life of your loan.

At PenFed, there are no prepayment penalties, so you can refinance to whatever term fits your budget best, and pay extra when you can, to get out of debt even faster. Check your new monthly payment and interest rate for all the terms we offer on our rate calculator.

Refinancing is a flexible and personalized option for student loans that can help you save money based on your goals. Each situation is different, and you may wind up wanting to refinance all your loans, or just one of them. Before getting started, go through each of your loans and check your budget to see if you can afford to increase your monthly payment to save even more in lifetime interest costs. As always, give us a call if you need any help!