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Last update: May 29, 2024

6 minutes read

Do People Really Save Money by Refinancing Student Loans?

Ever wonder if refinancing will actually save you money? Well, we have the shocking statistics, you won't want to skip this read.

By Brian Flaherty, B.A. Economics

Edited by Rachel Lauren, B.A. in Business and Political Economy

By Brian Flaherty, B.A. Economics

Edited by Rachel Lauren, B.A. in Business and Political Economy


Can refinancing your student loans really lead to big savings? Lots of people wonder about this when trying to reach financial freedom. The short answer: yes, refinancing private student loans can really help your finances. In this post, we'll break down the basics of student loan refinancing and how it can change your plan for paying back the loans.

Key takeaways

  • A lot of borrowers refinance to pay off their debt faster or reduce their monthly payments
  • Most borrowers, two-thirds to be exact, report a healthier financial situation after refinancing their student loans
  • Negative experiences like surprisingly high interest rates or extended loan terms highlight the need for due diligence

    Do people really save money by refinancing student loans?

    Refinancing student loans can lead to big savings. By getting a lower interest rate, consolidating multiple loans into one, and/or choosing a shorter repayment term, borrowers can minimize total repayment costs and meet other financial goals.

    Why do borrowers choose to refinance student loans?

    Borrowers use student loan refinancing for many reasons. A nationwide survey of 1,240 participants by U.S. News found some of the most common motivations, including:

    1. Paying off debt faster (46.9% of respondents)
    2. Reducing monthly payments (39.8%)
    3. Lowering the interest rate (35.1%)

    Student loan refinancing is meant to cut down on debt efficiently. When you refinance to a shorter-term loan, it means big savings on interest charges, even though it comes with higher monthly payments.

    What are the benefits of refinancing your private student loans?

    An impressive 67.3% of borrowers shared that their financial situation got better after refinancing. Here are the details revealed by the survey:

    • 34% were able to pay down additional debts
    • 27% improved their savings
    • 19% channeled more money towards retirement
    • 16% lifted their investment contributions

    These numbers clearly show that, for many people, refinancing student loans has opened the way to better financial futures. However, keep in mind that there's no one-size-fits-all solution, and refinancing may not always be the perfect fit.

    Does refinancing student loans have any drawbacks?

    Yes. About 36.9% of student loan borrowers who chose to refinance ended up having regrets. Here are the pain points:

    • 29.9% experienced an increase in the expected new interest rate
    • 27.3% admitted that repayment was taking longer than expected
    • 21.7% felt their new monthly payment size hurting their pockets

    A noticeable 15.6% of borrowers who were having a tough time weren't happy with their new lender.

    TuitionHero Tip

    it's not just about the numbers. Checking customer reviews and the company's reputation should be part of your decision when picking a lender to refinance with.

    Has refinancing affected student loan debt?

    Yes, it has! After refinancing, most people owed less money, and almost 35% now have less than $5,000 in student loans. Let's take a closer look at the numbers:

    • Before refinancing, 20% had borrowed less than $5,000
    • After refinancing, the percentage shot up to 35%
    • The share of borrowers with debt above $20,000 trickled down from 14.8% to 11.7%

    These numbers show that refinancing loans can really help reduce debt, ultimately making life better.

    How do borrowers prepare for student loan refinancing?

    Getting ready is key for a smooth refinancing experience. Before deciding, people applying for a private student loan should collect info about different lenders, interest rates, and terms. As the survey found:

    • 63% of respondents compared interest rates among many lenders
    • Of those, 50% were pre-qualified through 3 lenders
    • While 30% pre-qualified through only 1 or 2 lenders

    Contrary to what you might expect, getting a lower interest rate doesn't always mean you have to switch to a different lender. It's surprising, but 58% of people in the survey actually refinanced with their original lender. So, when you're looking around, make sure to consider your current lender.

    Do’s and don'ts of refinancing student loans

    A lot of borrowers find lower interest rates and better financial health as good reasons to refinance student loans. To make sure you're happy with your decision, let's go through the things you should and shouldn't do when refinancing your student loans.

    Do

    • Shop around with multiple lenders

    • Pre-qualify with a soft credit check

    • Have a tangible goal in mind (reduce monthly payments, shrink debt faster, etc.)

    • Carefully consider the lender's reputation and customer relations

    • Update your budget to reflect the new potentially higher monthly payments

    Don't

    • Dive in without a detailed comparison of lenders

    • Start the process without knowing the potential interest rates

    • Go in blind, without a target goal to hit

    • Ignore the lender's reputation and past consumer feedback

    • Overlook the possible changes to your monthly budget post-refinancing

    Data on financial impacts of student loan refinancing

    Even though the financial outcomes of refinancing student loans can be different for everyone, it's helpful to check out some common trends. Let's look at how financial indicators come together for borrowers who decide to refinance their student loans.

    Financial Indicator

    Percentage of Borrowers

    Able to pay down additional debts

    34%

    Improved their savings

    27%

    Increased retirement savings

    19%

    Boosted other investments

    16%

    Advantages and disadvantages of refinancing student loans

    Many people say their financial situation got better after refinancing their student loans, but not everyone has a smooth experience. Let's look at the good and not-so-good parts of this process.

    • Lower interest rates: Getting a lower interest rate is a big draw for borrowers, especially when they do careful research and compare their options.
    • Consolidating multiple loans: Rolling multiple loans into one means fewer monthly payments and potentially a single, lower interest rate.
    • Faster debt payment: Refinancing can speed up the path to being debt-free by offering shorter-term loans.
    • Surprisingly higher interest rates: Some borrowers have switched out a lower interest loan for higher interest with lower monthly payments, finding themselves paying more overall
    • Extended loan term: Having to repay loans for a long time can slow you down on the road to reaching your financial goals.
    • Exorbitant monthly payments: The chance of having to pay more each month is a big concern and can mess up your personal budget.

    How TuitionHero can help you

    At TuitionHero, we get that private student loans can be tricky, and refinancing looks tempting for better terms. Whether you want a lower interest rate, a faster debt payoff, or just want to organize your finances, our team can help you through the student loan refinancing process.

    We also offer services to boost your financial knowledge. From helping with FAFSA to finding scholarships, we use our expertise to make your college costs more manageable. Plus, we help with credit card offers so you can make informed choices.

    Frequently asked questions (FAQ)

    Refinancing allows borrowers to take a new loan to pay off one or more existing student loans. You may be able to secure a lower interest rate or adjust your loan term, which can lead to lower monthly payments or less interest paid over the life of the loan, or both.

    Before you decide to refinance, consider your financial goals and current situation. Do you want to lower your monthly payment? Are you aiming to pay off your debt faster? Then compare interest rates from different lenders - sometimes even your current lender might offer the best rate! But keep in mind that refinancing may also extend your loan term or result in higher-than-expected rates if not handled carefully.

    While a co-signer can improve your chances of approval and help you secure a better interest rate on your refinance loan, it's not always necessary. Your eligibility and interest rate will be based on your credit score, income, and other financial variables

    Some people end up regretting refinancing their student loans. Unfortunately, once you refinance, you can't go back. That's why we at TuitionHero highlight how important it is to do thorough research and get advice from a financial professional before you make any decisions. Being sure about what you're doing is crucial.

    Final thoughts

    Getting your diploma shouldn't mean a life of financial struggles. Refinancing private student loans has made a big difference for many, helping them reach their financial goals faster. But it's a serious financial decision that needs careful thinking and planning. Just like clothes, one size doesn't fit all when it comes to financial moves. That's why, at TuitionHero, we're committed to giving you personalized and careful advice as you think about your financing choices.

    Source


    Author

    Brian Flaherty avatar

    Brian is a graduate of the University of Virginia where he earned a B.A. in Economics. After graduation, Brian spent four years working working at a wealth management firm advising high-net-worth investors and institutions. During his time there, he passed the rigorous Series 65 exam and rose to a high-level strategy position.

    Editor

    Rachel Lauren avatar

    Rachel Lauren is the co-founder and COO of Debbie, a tech startup that offers an app to help people pay off their credit card debt for good through rewards and behavioral psychology. She was previously a venture capital investor at BDMI, as well as an equity research analyst at Credit Suisse.

    At TuitionHero, we're not just passionate about our work - we take immense pride in it. Our dedicated team of writers diligently follows strict editorial standards, ensuring that every piece of content we publish is accurate, current, and highly valuable. We don't just strive for quality; we aim for excellence.


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