Refinancing Your Student Loan: Is It a Good Idea? Here’s Everything You Should Know
Before deciding whether or not to refinance your student loan, examine the following five factors.
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It’s easy to believe you’ve been making payments on your student loans for months, but the overall number hasn’t changed—what gives?
The cause is high-interest rates. Interest charges can quickly accumulate if your loans have a high-interest rate, preventing you from making any progress in reducing the principal debt. Refinancing might save you hundreds of dollars, but there are some drawbacks to consider.
How Does Refinancing Student Loans Work?
The term “student loan refinance” refers to a specific technique for managing student loan debt. You apply for a loan from a private lender to cover some or all of your existing student debts as a new loan when you refinance your debt. You’ll get entirely different conditions and a potentially lower interest rate if you use the new loan to pay off your present debt.
Lower interest rates. One of the most important factors to consider when refinancing your student loans is whether the current rates are lower than those on your old loans. Some lenders are offering fixed rates as low as 1.64 percent as of November 2021.
Payments will be reduced. You can cut your monthly payments and acquire more breathing room in your budget if you qualify for a lower interest rate or opt to prolong your repayment period.
Simple, one-time payments You probably took out several loans to pay for school, and keeping track of them all might be difficult. You may consolidate your debt into one loan with a single monthly payment when you refinance your debt.
Before refinancing, there are a few things to think about.There are many benefits to refinancing your student loans, but it isn’t the best option for everyone. Ask yourself these five questions while determining whether or not to continue forward.
- What are the different types of loans you have?
Federal student loans and private student loans are the two most common loan forms. If you have federal student loans, refinancing them has a lot of disadvantages.You transfer federal loans to a private lender when you refinance them. Your debt will no longer be eligible for federal loan programs like income-driven repayment, Public Service Loan Forgiveness, or federal deferral after the procedure is completed. You should not refinance your debt if you wish to take advantage of these programs later.
- How Do You Know What Your Credit Score Is?
You’ll usually need strong to outstanding credit to qualify for student loan refinancing. If your credit isn’t perfect, you could not be qualified for a loan or receive a loan with a high-interest rate, offsetting the benefits of refinancing.
- What are your objectives?
If you have high-interest debt, refinancing your student loans makes the most sense. You can acquire a reduced interest rate by refinancing, which will help you to save money and pay off your debt faster.
If you want to cut your payments, you could be better off looking into other debt management alternatives, such as signing up for an alternate payment plan.
- What is your preferred loan term?
Consider what loan term is best for you and your budget before refinancing your debts. While a longer-term may seem enticing since it reduces your monthly payments—some lenders offer durations up to 20 years—you’ll end up paying more in interest because of the longer payback period.Refinancing loans with longer periods are likewise subject to increased interest rates. Borrowers who choose a period of five to ten years typically get the best rates.
- Do you have a co-signer on your loan?
You may find it difficult to locate a lender ready to deal with you if you don’t have flawless credit or don’t fulfill the income standards. You can qualify for a loan and likely obtain a reduced rate if you have a parent or relative willing to co-sign your application and share responsibility for the loan.
Refinancing Student Loans: What You Need to Know
Get your paperwork in order. You’ll need your driver’s license, Social Security number, job details, and account numbers for any current loans when you apply. You may also be required to provide proof of income, such as a pay stub or tax return.Rates are compared. Rates differ from one lender to the next, and each has its own set of conditions for borrowers. It’s a good idea to seek rate quotations from a few different refinancing lenders to see which one offers the greatest bargain. Check out the finest refinancing lenders of 2021 to get started.
Send your application in. The majority of refinancing applications may be done online, and you’ll often receive an answer within a few minutes. It may take a few weeks for the lender to pay off your previous debts once you’ve been accepted, so make your minimum monthly payments until you receive proof that they’ve been paid in full.
Other Debt Management Options
If refinancing isn’t suitable for you, but you still need help with your debts, there are a few alternative options:
IDR Plans (Income-Driven Repayment): Apply for an IDR plan if you have federal loans and can’t afford your monthly payments. Your payments under an IDR plan are based on your discretionary income and have a longer payback period, so you may pay a lot less.
Forbearance: While government forbearance often lasts longer than private lender forbearance, it can still be a viable option. Contact your lender and explain your position if you can’t afford your payments or are now facing a major hardship. You might be able to defer your payments while you get back on your feet.
Debt payout strategies: For debtors who want to pay off their debt quickly but aren’t willing to refinance, consider employing a debt avalanche or debt snowball repayment approach. You may reduce your debt and save money by paying it off faster.
Are you still undecided? To understand how refinancing your debt may influence your monthly payments and overall payback cost, use a student loan refinance calculator.
