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Should You Refinance Your Student Loans? Let’s Find Out

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  • David John
  • 303
  • Thursday, January 19, 2017
Refinance Student Loans

For years, you felt stuck with your student loan interest rates. Borrowers had little to zero options when it comes to changing their repayment situations. But as more and more borrowers go through the harsh reality of student loan debt repayment, a brand new industry came into existence to help make the situation more manageable: Student Loan Refinancing.

Have you heard about student loan refinancing? If yes, then still a myriad of people just like you aren’t sure if it is the right deal for them. Well, here in this post, you will get to know everything that you need to learn so that to take a firm decision of whether you should opt for refinancing of your student loans.

Let’s begin with the introduction of Student Loan Refinancing.

What Is It?

In the layman’s terms, it is known as the process of attaining a new loan at a new interest rate. Usually, there is this option of refinancing both your federal and private student loans, which involves closing your old loan and getting a new one, with different repayment terms and an improved interest rate.

There is a difference between student loan refinancing and consolidation, though many people mistakenly use the terms interchangeably. Typically, consolidation refers to taking out a Direct Consolidation Loan and merging all of the federal student loans into one loan with only one interest rate.

While consolidation has some similarities with refinancing, it does not provide interest savings. In addition to this, borrowers with private student loans are not eligible for consolidation. Due to this reason, refinancing can be a decent option for private student loan borrowers, or for those who have both federal as well as private student loans on their hands.

Among many advantages of refinancing, there is this one key benefit which allows the borrowers a chance to save thousands of dollars in interest over the lifespan of the loan. For instance, borrowers with Grad PLUS loans have interest rates nearly around 7%, but with the help of refinancing option, one could get approved for a much lower interest rate, thus, saving a lot of money.

So, through these savings, you could pay more money towards your principal balance, make an investment, or start an emergency savings fund.

What to Consider if Refinancing?

Student loan refinancing is recognized as a reliable way to make payments more manageable, but there are some vital things to keep in mind before you decide to go for it.

The process of refinancing means that you are basically applying for a private loan. If you already have private loans, this might not be a problem for you. But in case you have federal student loans, you will have to give up your federal student loan protections such as:

  • Income-Driven Plans- When it comes to refinancing federal student loans, you will become illegible for income-driven plans, including Income-Based Repayment, Pay As You Earn, and many more. You might not feel the need for these options right away, but if times get tough, they could be a real lifesaver.
  • Loan Forgiveness - Federal student loans come along with some loan forgiveness options, through the Teacher Loan Forgiveness Program, Public Service Loan Forgiveness program, etc. Though these loan forgiveness options abide by their own set of terms and conditions, loan forgiveness will not be considered as an option at all if you choose to refinance your loans.
  • Deferment and forbearance - If you got trapped under serious financial hardship, then postponing your payments through deferment or forbearance can really help. However, choosing to refinance leaves you with limited options to postpone your payments.

When you refinance your student loans, you get to work with a private lender and lose the federal protections which are provided to you with your federal student loans. This doesn’t mean that refinancing isn’t a viable option to consider seriously.

One thing which is a must to know is that the process of refinancing is irreversible. So, you cannot go back and take these benefits at a later date. Once done, you will be with your refinancing agency for the complete duration of your repayment.

How to Conclude Your Refinancing Eligibility?

As student loan refinancing firms fall under private sector, there are a plethora of options in the student loan refinance marketplace to choose from. But before you make you final decision, it is important to determine your eligibility.

When talking about student loan refinancing companies, they tend to have strict eligibility terms and conditions. So before going through the hassle of applying, conducting your research in regards to the eligibility requirements for every lender is a must.

Numerous lenders demand a good credit score, which usually revolves around 700. They also need a solid proof of a stable income in order to support the new loan. Besides financial needs and requirements, some lenders only deal with those borrowers who are in specific career fields or work in particular schools.

To see if you are eligible, search for eligibility information offered by the lenders’ websites. Be sure to read the fine print because refinancing might not be available in every state.

How to Find a Perfect Student Loan Refinancing Company?

Have you assessed your eligibility and narrowed it down to few possibilities? If your answer is yes, then it is time to select the best lender. Let us throw some light on things that you can consider to find the best one for you:

  • Does your lender provide variable, fixed interest rates, or both?
  • What are the repayment terms and how they will affect your monthly payment?
  • How much could you save with their interest rate? You can use a refinancing calculator to calculate your potential savings.
  • What are the opinions of others about the lender? Do they have a good reputation? You can check out the reviews to hear from your peers.
  • Do they offer any perks?
  • Is there an origination fee or prepayment penalty?
  • Do they offer any kind of option to delay your payments in case you lose the job or face hard times?
  • What is the amount (minimum and maximum) of debt they will refinance?
  • What kind of customer support do they offer?
  • Are they easily accessible?

After a comparative analysis between lenders, select your top four and apply.

The question that may arise in your mind is why four? The answer is that even after you have assessed your eligibility and picked your top four lenders, you still have to get sanctioned for refinancing. Different lenders have their own particular needs & requirements and some are severer than the others. Based on your credit score as well as your income, one lender may be more likely to favor you than another.

All in all, it is important to have options to find the top lender for you.

How to Get Ready for Refinancing?

Before you apply for student loan refinancing, it is essential to conduct a quick financial audit and prepare the needed documents to help the process move along effortlessly.

Mentioned below are few steps that can help you prepare for refinancing.

  • Make a list of all your private and federal student loan totals.
  • Note the interest rates of your loans next to the total.
  • Include the information of your loan servicer like phone number, email address, etc. in the third column.
  • Collect your latest pay stubs. Also, look at your after-tax monthly income to see how does it match to your projected monthly payments?
  • Gather last year’s tax return.
  • Go through your credit reports
  • Note down your credit scores.

Following these steps will surely help you get ready for refinancing your loans and keep your information together.

How to Choose Your Refinancing Terms?

With the help of student loan refinancing, you can select from different repayment terms as well as loan interest rates.

Carefully study your repayment term and evaluate its effect on your monthly payment. In simple words, will your monthly payment increase or stays the same or goes down? This will depend on the repayment terms which you will choose.

A number of refinancing firms provide repayment terms of 5, 10, 15, or 20 years. Of course, it is always best to clear your loans as soon as possible. But it is also important to confirm that whatever repayment term you pick is convenient enough for you to follow while allowing you to fulfill your other financial goals, for instance, retirement saving.

When it comes to interest rates, wisely measure the impact of selecting a fixed or variable interest rate. Fixed rates are usually a bit higher as compared to variable rates, but they are fixed, which means that they won’t fluctuate during the loan duration.

On the other hand, variable interest rates are lower and presently counted as the first and foremost choice of many borrowers. The reason behind this is that they are associated with the Federal Reserve and from the last few years, interest rates have been plunged to historic lows.

But before opting for the variable rate option to save money, understand that rates can go up or down anytime without any warning, and it is a possibility that you could wind up having a higher interest rate on hands than if you had selected the other rate option.

If you are ready to aggressively pay off your loans in just a few years, then a variable rate loan could be the optimum way for you to achieve that. But if you want to stand beside a longer repayment term, then it may be better for you to go for a fixed interest rate.

Refinancing your student loans can be an ideal way to save some money on your student loans, but it is still a major financial decision. You should carefully assess all the costs and benefits of student loan refinancing so that to choose the right option for you.

In the end, if you have made up your mind to refinance your loans, then it is the right time to start thinking about what you will do with the extra savings so that you can put that money to work.

Don’t let student loan debt hold you back!

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