For those who are dealing with student loans, there seems to be few ways to get ahead. There is student loan forgiveness for those lucky enough to qualify as well as some income-driven payment plans that can reduce monthly payments.
A very small proportion of people qualify for forgiveness, though, and income-driven repayment plans will end up costing the borrower more money in the long run, so is there really any ways for these people to save money?
Actually, there is, and it’s called student loan refinancing.
Student loan refinancing seems to be a bit complicated, but it really doesn’t have to be. There are several basics and key aspects of refinancing that are important to understand. By the end of this article, you can decide if refinancing student loans is the right move for you.
How Student Loan Refinancing Works
Generally, student loan refinancing works the same as refinancing a mortgage or car loan. If approved, you will take out a new loan to pay off your old loan(s). Afterwards, you are left with just one student loan which ideally has a lower interest rate than your previous loan(s).
You have the opportunity to restructure your repayment term length as well. I recommend keeping your repayment term the same or shorten it, as to save the most in interest, but you can extend it if you’d like.
It should be noted that both federal and private loans are able to be refinanced; the end result would be a single private loan.
The benefits of refinancing your student loans are simple. With the ideal refinance, you will be able to lower your interest rate or rates. A lower interest rate will save you money simply because less accrues onto the total balance each month.
In addition, if you currently have several loans from multiple lenders, then refinancing centralizes all your payments to one loan, simplifying your monthly bill. You also have the option to extend your repayment term which would reduce your monthly payment. This can benefit struggling borrowers, but it does lead to more interest capitalization down the road.
There are a few other benefits to mention. Most refinancing companies do not charge origination fees – a low-cost aspect of the process. Finally, another perk is the ability to pick a variable or fixed interest rate. If you’re tired of fluctuating variable rates, you can opt for a fixed rate. If you want to try and take advantage of a low-rate environment, then you can opt for a variable rate.
Risks of Student Loan Refinancing
Refinancing is not for everyone, and it is not without its risks. When you refinance federal loans, you lose certain federal protections like deferment, access to income-driven repayment plans, and eligibility for loan forgiveness. These benefits aren’t available with private student loans – including refinanced loans.
On top of this, lower interest rates are not always guaranteed through refinancing. Your rate is determined by your credit history; someone with a low score has a lower chance of saving money through refinancing or even being approved in the first place. If you can’t get a lower interest rate, then the main benefit of refinancing is null and void.
Do I Qualify for Refinancing?
Although each company is different, the general requirements are the same across the industry. Typically, the applicant must have solid credit and an established, consistent income. This ensures that an applicant can secure a lower interest rate. So, you need a good track record with debt management, and you’ll need a stable job. Most lenders also require applicants to have a college degree.
How to Find Lenders
Finding student loan refinancing lenders is not too hard, and the search can be done mainly online. Some of the larger refinancing companies are SoFi, Earnest, LendKey, and Common Bond.
While you can go to these websites directly and compare their offers, there are other websites that compare each lender’s rate and terms in one place. These can be especially helpful when figuring out who to work with. Applications can be done mainly online as well.
There you have it, the key aspects of refinancing student loans, now the question is will you be refinancing your student loan?
This is a guest contribution from Tom at FIREd Up Millennial – where he writes about his relentless pursuit of Financial Independence so he can Retire Early.