If you have ever thought about what a student loan refinance can mean for you, it can be a huge potential for savings in most cases.
Most of your student loans are based on fixed set rates by the US Government and possibly mixed in with some private loans as well. When you refinance, you can work to get a better rate with an online lender, credit union or even a bank. This is based on competitive interest rates that are calculated not on a fixed US government term but on your income, credit history and other financial pieces.
That means if you find yourself with excellent credit scores and a stable income, combined with high-interest student loans, you can easily refinance your student loans at a lower and better rate. Of course, this applies to those PLUS loans that your parents have under their names and alleviates them of the responsibility.
What to look for when making a comparison of your refinance lenders?
There’s one major refinancing goal here: paying as little interest on those loans as possible. That means looking for lenders that help support that goal and understanding the difference between variable and fixed rates. Variable rates may appear better initially, but they can always change down the line based on market conditions. Fixed loans give you consistency and peace of mind.
“Look at the terms, such as repayment terms and interest rates, as well as customer service and fees. While focusing on low rates is good, make sure to review the whole package and read all the terms and conditions to fully understand the loan terms or other issues.” – CEO of Student Loan Hero, Andrew Josuweit.
Remember what you’re giving up when you switch to a private student loan refinance. You won’t be able to do programs such as income-based or income-driven repayment plans, and no forgiveness options are offered with federal loans. At the same time, many lenders offer flexible forbearance options and other support for borrowers who have issues making a payment.
It’s a great option for people with enough income and stability to pay off the loan as any normal loan. Either way – check out those pausing payment options to see what can be done, just in case.
“when it comes to private student loan refinancings and a co-signer, you want to check to see if they give a release policy to the co-signer. This helps to protect your co-signer down the line, in case you aren’t able to make those payments.” – Kyle Chezum, Student Loan Expert from The College Investor.
So how does it all work?
While it may seem or sound complicated, it’s basically taking a fresh loan, at preferred rates and options, that will then pay off the student loans that you currently have. This new loan will also have a new payment term on top of the new rates and could lead to lower payments as well. It’s also possible to do refinancing on several loans and combine them into one major loan where you only have to make a single payment monthly.
“Through this private student loan refinancing, you have the possibility to refinance your student loans. However, keep in mind you’re losing your federal benefits on those loans as they become private loans, such as income-based repayments and forgiveness programs.” – Savingforcollege.com publisher, Mark Kantrowitz.
If you currently have been using the benefits associated with federal loans, or want to keep them, then don’t refinance them privately and see if you can still consolidate your loans into a loan. It tends to average your rates on the different loans, and the repayment terms can go up to 30 years.
“Even with losing those federal benefits that may not even apply to you, or you only have private loans. Feel free to use refinance calculators to estimate your savings.” – Shannon McNay, Student Loan Expert from Student Loan Hero.
So should I still refinance?
This all depends on some initial criteria. You want to look at three areas to see if refinancing is even possible and works for you.
The first component is whether you even qualify for student loan refinancing. Remember you’re using your personal credit history, and there’s a minimum typically of 650. Then it’s about showing other factors on top of that, such as proof of income and paying your debts on time to name a few.
Once you find yourself eligible, then it’s all about shopping for the best package and combination. Of course, the better your credit score and financials, the better rates you’ll get, so keep that in mind, and you may want to take some time to boost your credit score if it helps you get preferred terms.
Finally – as a reminder and as Seth Frotman said, who is from the Student Borrower Protection Center and serves as Executive Director there, “refinancing to private loans or consolidation will eliminate your borrower benefits. Make sure to see first if you’re eligible for any of the lower income-based repayment plans, and also understand that you no longer will be eligible for any programs that offer student loan forgiveness”
If you’re willing to accept that and fall under the rest of the criteria, private student loan refinancing may be for you.
What are the core steps of student loan refinancing?
You’ve decided to go ahead, so let’s take some next steps.
Always go Shopping. Many lenders allow for prequalification, which means soft credit checks. You just need to put in some minimal financial information about yourself, and you can see what your estimated package looks like.
Rachel Kaschner, a Student Loan Expert at Credit Karma, agrees and says, “Always shop for the best student loan refinancing offer. It doesn’t harm your credit, and you can ask as many questions as you want. There are even times where there’s room for negotiation after the prequalification”.
Commit and Submit. You need to eventually pick one offer and fill out the official and formal application. Typically you’ll need to submit additional documentation for the final application, such as your income, paystubs and whatever else the lender will require. Then comes the hard check on your credit. If you get approved, you’ll get the final terms of the loan, from the rate to how much to pay monthly. Review everything given to you, and only then you should sign and execute the loan.
Make sure your old debt is paid off. Most lenders handle the processing and paperwork to pay fully off old loans. So you keep paying your old loan until it’s fully paid off with the proceeds of the new loan. Then you can start moving on making those payments to the refinancing loan.
When making informed financial decisions, it is essential to seek professional advice. While the information presented on this website can provide valuable insight, it is not intended to replace a financial expert’s treatment, diagnosis or advice. To ensure you make the best decisions for your particular situation, always seek the advice of a qualified professional. Don’t wait for or sacrifice professional advice; make informed decisions by putting your financial well-being first.
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