Dear Student Loan Hero,
I am looking to refinance my student loans and repay them faster, but I’m not sure about the terms. Should I refinance to a higher interest rate but lower the number of years so I pay it off sooner?
Dear Student Loan Borrower,
If you’re seeking a black-and-white answer, here it is: You’ll never benefit by increasing the overall interest rate of your student loans. The higher your rate, the more interest you’ll pay.
Also, you could achieve your praiseworthy goal of shortening your repayment without refinancing. Instead, make larger payments on your current (lower-rate, longer-term) loan. This way, you’d save money on accruing interest and retain the ability to pay off the debt early.
Use a prepayment calculator to set your preferred timeline. Just be sure your lender doesn’t charge fees (also known as prepayment penalties) for repaying the debt before it’s due, and that the money is applied to your principal rather than going toward interest.
Of course, you might have better reasons to refinance at a higher rate, even if selecting a shorter repayment term isn’t among them.
It could make sense to refinance, for example, to consolidate your debt so that you make one monthly payment to a single lender. That might bring you a peace of mind that outweighs the math.
Similarly, refinancing could help you escape an unruly loan servicer. You might be worried that your servicer won’t apply your extra (large) payments the way you’d like, for example.
You could accept the trade-off of a higher rate from top refinancing companies if it nets you an important perk, whether that’s consolidation, better service or something else. Sometimes, the rationale goes, restoring your sanity is worth a few extra bucks every month.
How much interest you’re willing to shell out in this exchange is an individual question — and only you can answer it.
Check out these additional resources as you make your decision:
Wishing you a happy repayment,
Student Loan Hero
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