Refinancing Student Loans 101
Refinancing your student loans could be a brilliant decision that saves you tens of thousands of dollars while accelerating your financial freedom by a decade…or it could be a costly mistake that you’ll regret.
How to figure out the right path for you? Read on.
Each month you make a payment you probably tend to look away at how much of your payment goes toward interest. It can really make you cringe. That is why looking into refinancing can be worth the effort.
Refinancing is simply the process of paying off one loan with another. Why would you do so?
- Getting a lower interest rate is the goal and can save you thousands over the term of your loan.
- If you have multiple loans, you can consolidate them into one loan making it simple to pay.
- You can lower your monthly payment.
- You can also cut down your loan term.
Lenders that offer student loan refinancing usually offer lower interest rates as well as potentially lowering your monthly payments. Lowering both an interest rate and monthly payment means extra savings towards your principal or maybe a rainy day fund. But before you get too excited, there are some things to consider before refinancing.
Since you move your balances to a new lender when you refinance, you are subject to the terms of the new loan. So, if you have federal loans, you might be losing benefits that federal loans can offer. The major benefits of federal loans are the income-driven repayment plans, loan forgiveness, and options for deferment and forbearance. Some refinance lenders do offer periods of forbearance, so it is best to check to see what they offer. If you don’t want to lose the benefits of federal loans, you might keep your loan with your current servicer and consider different payment options or consolidation in order to make it easier to pay. Private loans usually don’t have the same benefits as federal loans, but they often have higher interest rates, which makes them good candidates for refinancing.
Of course, any refinancing will be subject to certain qualifications, such as credit score requirements, debt-to-income ratios, and income. Specific requirements will vary by lender, of course, so it pays to shop around. Here are some additional tips to consider when you are deciding whether you should or shouldn’t refinance your student loan.
You should consider refinancing your student loans if you:
- Have a good paying career that you expect to continue.
- Have credit score ranges from good to great. You borrowed loans while in school with little to no income and now you have established your credit history.
- Feel comfortable with your current loan repayment term or possibly feel you can even shorten it.
- Want to save (if the first three points are in order).
- Want to be student loan free as soon as possible.
You probably shouldn’t refinance your student loan if you:
- Don’t have a steady job with a steady income.
- Are struggling with your current repayment.
- You are on an income-driven or loan forgiveness repayment plan.
- Your credit score is not in the best shape
- Have a very low interest rate on your current loan
If it seems like refinancing is a good option, here are some next steps.
Should you choose a fixed rate or a variable rate for your interest? A fixed rate stays the same over the lifetime of your loan, but typically is higher. Variable rates are subject to change; meaning you can get a lower rate, but it can increase over time. A variable rate could be an acceptable choice if you are going to try to pay off your loan in a few years. However, it may not be the right choice if you choose a longer repayment term.
Refinancing gives you the ability to choose a loan term that fits your repayment goals and budget. Most refinancing lenders offer terms from 5 to 20 years, whereas federal loans are often 10 to 30 years. It is often advantageous to keep your loan terms similar to what you have set with your current loan or even shorten the time to repayment.
Student loans are tough, but there are plenty of options to look into that can make them a little more manageable. Refinancing your student loan is a great way to pay off your loan faster, while saving tons o’ bucks too. But like anything that involves student loans, you want to make sure it makes financial sense. Assess all your finances and choose what option works best for you!