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5 Reasons to Refinance Your Student Loans

Christy Bieber, The Motley Fool

Refinancing your student loans can make a lot of sense -- in some cases. Read on to find out five reasons you may want to refinance your educational debt.

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Owing student debt is never fun. But, when you're in debt for your education, it's important to be proactive about how to repay what you owe. One of the options available to you is to refinance your student loans.

Refinancing involves working with a private lender to borrow in order to repay the loans you owe. You'll take out a new loan and use the proceeds from it to repay existing educational debt. You can refinance both federal student loans and private student loans, and there are many reasons why you may want to consider taking this step.

In fact, here are five reasons refinancing your student loans may make sense for you.

1. To simplify repayment  

Many people who owe student debt have multiple lenders they owe. This could mean making payments each month to several different loan servicers, including both private loan providers and the federal government.

Keeping track of multiple payments could be a major hassle that you don't want to deal with.

If you can get a large enough refinance loan, you can easily pay off all the lenders you owe with your new loan. This would leave you with just one lender to deal with and one payment to make -- which is a lot easier to manage.

2. To lower your interest rate  

By refinancing your student loans, it may be possible to drop the interest rate. If you're able to lower your rate, more of your payments will go towards principal and you should pay less in total over time as long as your new loan doesn't make the repayment period much longer.

Shop carefully to find a lender offering you a competitive rate and make sure you'll actually see savings by refinancing. Be aware as you compare lenders that some offer variable rate loans with low introductory interest rates. While these rates may start off lower, they're tied to financial indexes and could go up over time -- so you're taking a risk if you refinance using a variable rate loan.

3. To lower your monthly payment 

If you're having a hard time making payments on your existing debt, refinancing could allow you to lower your monthly payment so you can better meet your financial obligations.

Refinancing could lower payments for a few different reasons. If you refinance to a lower rate loan, your payment should go down unless you shorten your repayment period. This means you'll end up paying less each month and less over time.

You could also refinance to a loan that allows you to pay over a longer timeline, which should also lower your monthly payment even if your rate stays the same. Be aware, though, that if you keep your interest rate the same and stretch your payments out over a longer timeline, your monthly payment will go down but you'll pay more in total over the long term since you'll be paying interest for a longer time.

4. To switch your loan servicer  

Some student loan servicers are difficult to deal with and have a terrible reputation for providing bad customer service and even misleading borrowers. If your loan servicer is not applying your payments properly or is otherwise treating you unfairly, you may decide to try to refinance to find a better lender to deal with.

Be sure to check the Better Business Bureau and the Consumer Financial Protection Bureau's database of complaints to find out if a new lender you're considering refinancing with is likely to be any better before you move forward with refinancing.

5. To free a cosigner of a legal obligation to repay your debt

If someone had to cosign for private student loans with you when you first took on your educational debt, that cosigner shares legal responsibility for payment with you. The debt you owe shows up on their credit report, which could impact other borrowing opportunities they have. They could also be made to pay your debt if you die before paying it off.

You may decide you don't want your cosigner to continue to be responsible for your debt. If you do, refinancing in your own name only could be one possible way to absolve the cosigner of legal liability. The other option, if your lender allows it, is to ask for cosigner release -- but this isn't always possible on all loans and there may be a long wait before you become eligible.

If you can qualify for a refinance loan on your own based on your income and credit score, you can immediately pay off the existing debt and your cosigner will no longer need to worry about this financial obligation interfering with his or her finances.

Is refinancing right for you?

While there are benefits to refinancing, there are also some big downsides -- particularly if you have federal student loans. You give up important borrower protections, including the option to pause payments on your loans if you return to school or have financial hardship. You also give up the chance to have your loans forgiven for qualifying public service work.

Still, if none of these downsides apply to your situation, the ability to save money on interest and get a loan with a better repayment term can make it worth the effort to go through the refinance process. Just be sure to shop around and find the right refinance lender so you can save the maximum in interest and get your student debt paid off ASAP.

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