Student Loan Refinancing – All you need to Know
Student Loan Refinancing is replacing an old loan or group of loans with a single new loan. i.e when you take out the new loan, your old loans are paid off and you make payments toward your new one. You’ll have new terms, a new interest rate, and sometimes a new lender.
While current rates are still at historic lows, refinancing your student loans could help you pay your loans off sooner or save on your monthly payment.
What is Meant by Student Loan Refinancing?
During student loan refinancing, the original lender pays off the existing loan in exchange for a new loan that is more favourable to the graduate. The new loan can be more appealing in a variety of ways. Indeed, the new loan may have lower interest rates and lower monthly payments.
Refinancing your loans will save you money in the long run. Refinancing allows borrowers to take advantage of low-interest rates, or switch from a variable interest rate to a more steady fixed rate.
Should I Refinance My Student Loan?
You should consider refinancing student loans because refinancing is a good idea in many cases, although it’s not best for everyone—especially those who need to take advantage of federal student loan protections.
Here’s How to Know if You Should Refinance Your Student Loans
- First, identify whether you qualify – Most student refinances lenders require a minimum credit score of 650. You’ll also generally need to show stable income, a low debt-to-income (DTI) ratio, and a history of on-time debt payments.
- Secondly, know if you’re eligible for student loan refinancing – Now, look at your current loans’ interest rates. If they’re significantly higher than the rate you’ll likely get when you refinance—which you can check using lenders’ prequalification tools on their websites—refinancing might make sense for you.
- But remember, if you refinance federal student loans, you’ll lose access to federal programs such as flexible forbearance, income-based repayment, and Public Service Loan Forgiveness (PSLF). If you rely on these programs (or think you might in the future), think twice before refinancing.
Who Should Consider Student Loan Refinancing?
When you’re weighing your refinancing options, make sure your credit is in tip-top shape. To see if refinancing is worth it, consider your:
- Current loan interest rate – If you have high-interest private student loans, you may want to lower your interest rates to lower your monthly payments, as well as your total loan amount. “High” interest is relative based on what you’re paying; if you can stand to get a lower interest rate, refinancing might be worth it.
- Savings – Refinancing might not be a good idea if you can’t significantly save on your interest rate, monthly payments, overall loan payment, or a combination of them all. In your refinancing calculations, make sure you’ll be able to cut costs in some way.
- Credit score – If you have a solid credit history, you’ll likely be eligible for more types of student loan refinancing. A good credit score is around 670, according to FICO, but the higher your credit score, the more lenders you’ll qualify to work with, and at the lowest rates offered.
How to Refinance Student Loan
- Compare around before you apply: Most refinancing lenders allow you to prequalify for a loan. To do so, you’ll enter a few personal details and the lender will complete a soft credit check—which has no impact on your credit score—before showing your estimated fixed and variable interest rates for your desired loan. Do this with several lenders to see who might offer the best deals.
- Submit an application: Once you’ve decided which lender you want to work with, submit a formal application. This is a more in-depth form, and you may need to include extra documentation about your income and other details. The lender will then do a hard credit check to confirm your information. If you’re approved, you’ll receive an overview of the final loan terms. Review the documents, and if all looks good, you can sign the paperwork to receive your loan.
- Be sure your old loan is closed, and then start making payments. Your new lender will likely pay off your old loan directly. However, keep making payments on your old debt until you receive confirmation that it’s been paid off and your account has been closed. Once that happens, you’ll start making regular payments to your new lender on your refinanced loan.
How to Choose the Best Student Loan Refinancing Lender ( 3 simple tips )
- Choose the lender that offers the best: Since the goal of refinancing is to save money on interest, you’ll likely want to choose the lender that offers you the lowest rate you qualify for. Variable rates tend to be lower than fixed rates, but they could go up in the future; only opt for a variable rate if you plan to pay off your loan quickly.
- Have strong incomes and job stability: Similar to private student loans for those attending school, refinance loans aren’t required to offer the same consumer protections that federal loans do, such as income-driven repayment plans or forgiveness. But some refinance lenders provide more than the standard 12 months of forbearance throughout the loan term, and/or additional loan modification options for borrowers having difficulty making payments. Refinancing is typically best for those with strong incomes and job stability. But life is unpredictable. If you think you might need to take a pause from payments or lower your monthly bill, consider choosing a lender with a more generous forbearance policy.
- Go with a lender that offers a cosigner release policy: Also, if you choose to refinance with the help of a co-signer, go with a lender that offers a co-signer release policy so you can take on the full repayment obligation when possible. That will protect your co-signer’s credit from the negative marks that could occur if you fall behind on payments.
3 Benefits of Student Loan Refinancing
You can potentially save tens of thousands of dollars throughout the life of your loan by refinancing. There are three main benefits to refinancing student loans;
- You can get a lower monthly payment, freeing up cash for other expenses.
- You can pay off your loan faster, saving you money in interest.
- A lower monthly payment decreases your debt-to-income ratio, which can make it easier to qualify for a mortgage or other large purchase.
Unlike refinancing a mortgage, there are typically no fees to refinance student loans. These include origination, application, and prepayment fees. But read your loan agreement carefully to make sure you understand costs you could incur in the future, like late fees.
If you decide to refinance student loans, compare multiple lenders to see which offers you the best deal. If you have similar offers, give greater weight to lenders that offer the most flexibility with payments and the longest possible forbearance options. Consider which offers the best student loan refinance bonus as well.
What is Student Loan Refinancing Calculator
A student loan refinancing calculator is a kind of calculator that can help you evaluate how much you can save when you refinance your loan. Here is a link to a free online student loan refinance calculator
Types of Student Loan Calculators
Student loan payoff calculator: Find your debt-free date and see how extra payments can make it arrive more quickly.
Student loan calculator: Determine your monthly student loan payment based on your interest rate, term length, and the amount you borrowed.
Student loan consolidation calculator: Compare your payments under federal loan consolidation plans with your current bills.
Parent PLUS loan calculator: Find out how much you’ll pay monthly on federal direct PLUS loans.
Discretionary income calculator: Determine what you would pay under federal income-driven repayment plans.
Weighted average interest rate calculator: Determine the combined interest rate on all your student loans. You’ll need that average to estimate your loan payments under federal loan consolidation programs or to compare student loan refinancing offers.
Related: What are Student Loans? All You Need to Know About Student Loan
Student Loan Refinancing Vs Consolidation
While private student loan refinancing and student loan consolidation are similar, they’re not quite the same. Refinancing means you take out a new loan that replaces your old debt, and in the process, you turn any federal loans into private student loans.
Consolidation is a strategy that combines multiple federal loans into one, giving you an interest rate that’s the weighted average of your previous rates. Your federal loans remain federal, so you still get all the useful repayment benefits the government offers.
Consolidation is only available for federal student loans and there’s no credit check required. It’s a solid choice if you have multiple federal loans and you want to simplify things by having just one monthly payment—but it won’t reduce your interest rate.
When Should You Avoid Refinancing Student Loans?
- When you Can’t Find a Trustworthy Co-signer
Some student loan refinancing lenders allow you to take on a new loan with the help of someone else. A co-signer is someone who agrees to sign onto your loan and vouches for your creditworthiness—usually someone with a good or excellent credit score. If you can’t pay back your loan, your co-signer will be on the hook. If neither pays, your credit score will plummet, and so will your co-signer.
If you need a co-signer and can’t find one—or you found one, but their credit score isn’t so great—you might not qualify for student loan refinancing. Instead, focus your attention on improving your credit score so you can be eligible to refinance on your own in the future.
If you can only qualify by using a co-signer, make sure that person understands the potential risk they’re taking on. You can also consider opting for a loan that offers co-signer release after a certain number of on-time payments. That will ensure your co-signer isn’t responsible for payments until the end of the term if you can’t make them.
- When your Potential Rates Are Too High
When you research lenders, many will offer the option to prequalify, letting you see what your potential interest rates and monthly payments would be within minutes. If you end up with a higher interest rate than what you have now, refinancing likely isn’t worth it.
- When You’re Behind on Payments
If you’re having trouble affording your student loans and you’ve missed a few payments, lenders will notice. Payment history is the biggest determining factor in your credit score. So if you can’t afford your current loan, your credit score will reflect that, and lenders will hesitate to give you a new one.
Student Loan Refinancing Alternatives to Consider.
Keep in mind that even if you’re not eligible to refinance right now, you can take steps to qualify in the future.
Get Up-to-date on Your Loans
If you’re behind on your loans, your first course of action should be to bring them current again. This not only increases your chances of getting approved for refinancing, but it also boosts your credit score and could help you secure a lower interest rate down the line.
Make Extra Loan Payments
If you have the means, start to pay your loans more frequently, such as every two weeks rather than once a month. You can also increase your minimum monthly payment to put more money toward your balance. By paying off your debt more quickly, you reduce the amount of interest you pay over time without officially refinancing loans.
Use a Debt Payoff Plan
If you have many different student loans, consider paying them off through the debt avalanche or debt snowball methods. List out your loans including your lender, how much you owe, your monthly payments, and your current interest rates for each.
Using the debt avalanche method, you’ll tackle the loan with the highest interest rate first. Make minimum payments on all your other debts, but put any extra cash on hand toward the loan with the highest interest rate. When that’s paid off, put all your cash toward the loan with the next-highest interest rate. You’ll do that until all your loans are paid in full.
The debt snowball method is similar but tackles loans from the lowest amount owed to the highest. Pay off the smallest debt first, then use that cash to pay off the next-lowest debt, until all your debt is paid off.
Ask for Alternative Payment Plans
Since some private lenders don’t have deferment or forbearance programs, you’ll need to talk to your lender about what it can do for your individual situation. If you’ve recently lost your job or you’re otherwise not able to afford to make payments, ask about hardship assistance. Some lenders have payment-reduction options to lower monthly payments, the interest rate, or both.
I hope this article was able to answer all your questions relating to student loan refinancing.
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