Many college graduates would not have been able to complete their education without the help of student loans. Such loans are easy to obtain because they are guaranteed by the federal government. However, the fact that they have to be paid back at some point brings up the question of whether it is better to keep the loans in their present form or refinance them.
To help you make that decision, here is what you need to know about student loan refinancing.
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What Is Student Loan Refinancing?
In its most simple form, student loan refinancing means obtaining a new loan and using its proceeds to pay off one or more existing student loans. The process could be thought of as shifting debt from an existing loan to a new loan designed for that purpose.
The steps are:
- You have a student loan with certain terms that you would like to improve upon.
- You find a lender who is offering loans with better terms than your existing loan.
- You apply for a loan with the new lender and are approved.
- You obtain the new loan, which is used to pay off your existing student loan.
- You begin to make payments on the new loan and continue to do so until it is paid off.
In some cases, you might be able to consolidate multiple student loans into one loan. It is also possible to combine a refinance and consolidation by taking out one new private loan to pay off multiple student loans. That way, you would only have one student loan payment to make each month instead of multiple payments.
Is It a Good Idea to Refinance Student Loans?
There are several reasons why you might want to refinance your student loans.
Perhaps the monthly payments make it difficult for you to meet your other obligations, such as auto loan payments or mortgage payments.
On the other hand, your financial situation may have improved significantly since you graduated from college, and that improvement is reflected in your present credit score. In that case, you may be able to qualify for a new loan that provides some or all these benefits.
Save Money on Interest
You may be able to secure a loan with a lower interest rate. This could save you a significant amount of money over the life of the loan. This is especially true for large loans paid back over extended periods of time.
Lower Your Monthly Payments
A new loan may come with a lower monthly payment. If so, this could make it easier for you to manage your cash flow and increase your savings.
Shorten the Term of Your Loan
You might be able to shorten the term of your loan so you can pay it off faster. For example, you might be able to refinance an existing loan with a 30-year term into a new loan with a 15-year term.
This is especially true if you are able to secure a lower interest rate.
Change Your Loan Type
You might be able to convert a variable interest loan into one with fixed interest. This would offer protection against future rate increases.
Is Refinancing Student Loans Worth It?
Refinancing student loans is usually worth it if you can get a significantly lower interest rate. This will give you the option of lowering your monthly payments or paying off your loan faster. In fact, Forbes has estimated that this strategy could save you more than $20,000 over the life of the loan.
However, to secure a low-interest rate, you will most likely need a credit score in the high 600s or even in the mid-700s. Additionally, you will need enough income to convince the lender that you can comfortably handle the monthly payments along with your other debts. Remember, a private loan is not guaranteed by the federal government.
Plus, it is important to realize that if you convert a federally backed student loan into a private loan, you will be giving up some benefits and protections. For instance, you will lose access to such things as loan forgiveness programs and income-driven repayment plans.
How Do You Know Which Lender to Refinance With?
All other factors being equal, you will probably want to go with the lender offering the lowest interest rate. However, if rates are similar, you should look into other benefits, such as the ability to restructure the loan in case of financial hardship.
On top of this, you should take the opportunity to ask these questions:
- What are my existing student loan payoff amounts?
- What interest rate can I get?
- What would my new monthly payment be?
- What would be the term for my new loan?
- Does the new lender offer flexible payment arrangements?
- What type of customer support does the new lender offer?
If you are considering refinancing some or all your student loans, you have several options available to you. You might be able to get a lower interest rate, which could lower your monthly payments and save you a considerable amount of money over the life of the loan. Also, you might be able to shorten the term of the loan or to change it from a variable interest rate loan to a fixed-rate loan.
However, you owe it to yourself to investigate various lenders and their loan packages to see which one might be right for you. And don’t forget that if you refinance your student loans through a private lender, you will give up some of the benefits and protections provided by the federal government.