Are you wondering how to pay off student loans faster? You could be saving a lot of money each month and over the life of your loans by refinancing. Refinancing your student loans will not only help you save money, but it will also help you on your path to getting out of debt and having financial freedom.
According to the Wall Street Journal students graduating with student loans owe an average of $35,051.
When I paid my first student loan bill, I was shocked a measly $3 went towards principal, and the rest went towards interest.
Refinancing your student loans will help you pay down the principal faster while potentially saving thousands in interest payments. The private student loan market has been growing in the past few years with new ways to refinance. I’ll explain what you need to consider to save money, and where to shop for the best rates to refinance your loans.
Should I refinance my private student loans?
As a general rule, if you can get a lower interest rate on your private student loans, it’s a good idea to refinance them to pay them off faster.
Note: This article doesn’t address federal student loans. Refinancing federal student loans (public student loans) has many other considerations.
When it’s not a good idea to refinance your student loans
When I suggest people refinance (student loan, car loan, personal loan), it’s with the goal of paying off the debts faster, not taking longer to pay off the debts.
Increasing the payoff length of your student loans at the same time you decrease the interest rate, can result in you paying more money over time.
Here’s an example:
With a starting loan balance of $35,000 and term of 10 years, if all you did was refinance to a lower interest rate you would save $1,471 if the new loan had the same 10-year term.
But stretch your new loan out to 12-years, and you will pay an extra $591!
The goal of refinancing your student loans is to save money, and that’s it. You save money by getting a lower interest rate and keeping the term the same or less than your original loan.
What if you can’t get a lower interest rate without a longer loan term?
Often you’ll find when you try to refinance you can get a lower interest rate, but the term may be longer. The lender makes money by stretching out your payments over a longer term.
You can still save money! Two things have to happen:
- You must have discipline
- There must be no pre-payment penalty on your refinanced loan
Pretend you refinance your student loan and the new term is 20-years long:
As you can see even though your interest rate has gone from 5.7% to 4.99%, the extra ten years of payments will cost you an additional $9,392.
But if you continue to pay your new loan by sending in the same monthly payment as you were before refinancing – $383/month – you will both save money and have the loan paid off in less than 10-years.
If you follow a written spending plan and make a budget you’ll maximize your savings in the shortest amount of time.
The keys to pay off student loans faster
There are two things you must do to save the most money and pay off your loans faster when refinancing:
1. Comparison shop
The most important decision you can make is something most people never do when it comes to getting a car loan or a mortgage – comparison shop.
It’s so easy to compare, yet people forget to do it or don’t bother doing it. You might think the biggest lenders will give you the best rates, but it’s simply not true:
I refinanced my private loans, but NOT with Sofi. They denied me, and when I applied I had a 778 FICO score and no other debts!!!! Good news is that I was able to refinance with CommonBond (FirstMark) for 7.48% which is still high, but lower than what I would’ve been paying otherwise. I only refinanced the highest loans (about $35k). – Felicia, age 29
2. Pre-pay your loan
Once you find a new and better interest rate, continue paying the same (or more) monthly payment as you have with your existing student loan.
By paying extra money each month (pre-paying), your loan will be paid off faster and you’ll save more money.
I was able to pay off my student loans in 2 1/2 years instead of the 10 the lender allowed because I paid extra every month.
Using the example from above the original monthly payment is $383, and the new monthly payment is $371. Since you’re used to paying $383 each month – keep paying that amount.
The extra $12/month pre-payment will reduce your principle a little each month. It doesn’t seem like much, but the loan will be paid off around 6 months early.
When you get into larger loans in the amounts of $60,000, $100,000, even $200,000 or more, the time and money savings can be significant.
It takes discipline.
Warning: Automating your payments will avoid the temptation to spend the extra you would have in your bank account each month.
Top student loan refinancing companies
The deal around here is we don’t play favorites. We educate first, then provide you with several options so you can make an informed decision. When you do your research be wary of other sites that say ‘so-and-so is best.’
The best choice for you is the one that saves you the most money, not the company that is paying to be listed first or shelling out big advertising dollars. Our list is in alphabetical order – check them all out!
You might also call up your local credit union or local bank to see what offers they have.
CommonBond is a lender that helps lower the cost of your loans. They offer 10-year and 15-year repayment terms.
About CommonBond – CommonBond was founded to provide better service to borrowers seeking student loans, and better interest rates.CommonBond requires a hard credit pull, and it will show up on your credit report. If you have a credit freeze to [protect yourself from identity theft](/the-single-best-way-to-protect-yourself-from-identity-theft/), you’ll need to thaw your credit first.
Credible gives you personalized rates from multiple lenders at one time. It’s very convenient because you’ll save the most money if you shop around for the best rate. Credible makes that easy to do.
Earnest gives you the ability to lower your interest rate, lower your monthly payment, or pay off your loan faster. They are a lender, rather than a service that shops around for multiple rates.
About Earnest – Earnest lending allows you to:
- Tailor your exact minimum monthly payment
- Increase payment anytime to pay off loan faster
- Save on interest with optional bi-weekly payments
- Make extra or early payments without fees
- Skip a payment and make it up later
- Consolidate your private and federal loans
LendKey will give you multiple refinancing quotes.
LendKey simplifies the refinancing process using a single platform that allows you to find, customize, and fund your loan through our network of credit unions and community banks. Credit unions and local banks often provide the best loan terms on *autos and mortgage*. These same low rates are now available to student loan borrowers as well. LendKey does a *soft-pull* of your credit score. The query will not show up on your credit report or harm your credit score.
LendEDU is a marketplace for student loans and student loan refinancing. With one short submission, LendEDU allows you to compare up to 12 different student loan lenders.
LendEDU provides quotes from some of the other lenders in this article. It might seem a bit redundant, but it’s worth it to visit the other lenders individually just in case.
LendEDU works with all of the top student loan lenders including SoFi, DRB, U-fi, LendKey, CommonBond, iHelp, Education Success Loans, College Ave Student Loans, and Upstart.LendEDU does a *soft-pull* of your credit score. The query will not show up on your credit report or harm your credit score.
SoFi is the largest provider of student loan refinancing. SoFi was the first company to stop using credit scores as part of their application process. They tend to prefer borrowers that are high-income earners.
As you can see from the quote above from Felicia, even though SoFi is the largest lender, it doesn’t mean you’ll get the best rate or even qualify for their loans. However, that shouldn’t deter you from checking out SoFi as an option.
Save thousands today
For the 2015–2016 school year, the average price for tuition at a public college was $24,061. If you plan on attending a four-year school, the cost will be in the neighborhood of $100,000.
If the student loan damage was done and you’re saddled with debt, consider refinancing your private loans. Refinancing to a lower interest rate will help you pay off student loans faster.
Shopping around for student loan refinancing has never been easier. In just a few minutes you can save hundreds of dollars each month and thousands of dollars over the lifetime of a loan.
The best way to save money is to check with all of online lenders and brokers above, as well as calling around to your local credit unions and local banks. They’ll often give you a better rate than the big lenders and big banks with much better service.
What do you think? Have you tried to refinance your loans?
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