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Should You Refinance Your Student Loans?

Are you a recent college graduate with student loans? According to the Pew Research Center, Americans owe more than $1.3 trillion dollars in student loan debt. For young adults struggling to repay their student debt – due to unemployment, entry level wages or high living costs – refinancing is an option. Refinancing allows you to “trade in” your current loans for a new, lower-interest-rate loan. Sounds great, right? But it’s important to ask yourself the following five questions before deciding to take this path.

  1. What Is the Benefit for You?
    What are you hoping to achieve by refinancing your student loans? There are many advantages, but it’s always important to have a clear goal before making a big financial decision. Some common benefits include:
  • Lower interest rates
  • Lower monthly payments
  • Longer repayment term
  • Getting out of debt sooner

Identifying what matters most will help you and a lender decide what new loan is best.

  1. What Is Your Current Interest Rate?
    Unfortunately, some federal and private student loans can have high interest rates that increase what you owe over time. For many borrowers, it is critical that refinancing results in a lower interest rate, but how much lower should it be?

On average, federal student loan interest rates range from four to seven percent and private range from nine to 12 percent. If your interest rate is already low and you’re more than halfway through repayment, it may not be worth it to extend your term with refinancing.

  1. Do You Have a Secure Job?

When college graduates refinance their federal student loans, they lose the following perks:

  • Income-driven repayment
  • Student loan forgiveness
  • Loan deferment or forbearance

If you were to become unemployed, would you be able to meet your monthly payments? Key factors for successful refinancing include:

  • A healthy income
  • Good credit score
  • Ability to repay, even in financial distress

Borrowers who are struggling to make ends meet with their current salary may want to consider a payment reduction.

  1. What Is Your Credit Score?

Credit score is a measurement of your ability to repay. If you make payments on time and have no discrepancies on your report, you likely have a good credit score. Taking out student loans and paying them back on time has hopefully strengthened your credibility. When considering student loan refinancing, the private lender will factor in your credit score. If you have an average score, you can use a co-signer with good credit to secure a better loan.

  1. Do Flexible Options Exist?

As mentioned, refinancing can eliminate your access to certain federal loan repayment options. However, the lenders you are vetting out may offer flexible repayment for their borrowers who experience any financial stress. This may include payment adjustments, forbearance and alternative repayment plans. Make sure you have a full understanding of the policies in place for borrowers who are struggling or suddenly become unable to repay.

At Ion Bank, we have financial professionals on staff who can help families manage college expenses from the start. To learn more about our savings programs, contact us today at or 203.729.4442!

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