Should you refinance a student loan?

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Table of contents

  • How does student loan refinancing work?

  • 5 things to consider before refinancing

  • How to Refinance a Student Loan

  • Other ways to manage debt

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It is easy to feel like you are paying off your student loans over a period of several months, and yet the overall balance has not budged – what gives?

High interest rates are to blame. If your loans have a high interest rate, interest charges may accrue quickly, preventing you from making any progress in lowering your main balance. Refinancing can help you save thousands, but there are significant drawbacks to be aware of.

Connected: Top Lenders to Refinance Student Loans in 2021

How does student loan refinancing work?

Student Loan Refinancing is a term that refers to a specific process for managing student loan debt. When you refinance your debt, you are applying for a loan from a private lender who can cover some or all of your existing student loans as a new loan. By using a new loan to pay off your current debt, you will get completely different conditions than before, with a potentially lower interest rate.

Refinancing has several main benefits:

  • Lower interest rates… One of the main reasons to consider refinancing student loan should be based on whether the current rates are lower than your existing student loans. As of June 2021, some lenders offer fixed rates as high as 1.87%.

  • Reduced payments. If you are eligible for a lower interest rate or decide to extend your maturity, you can lower your monthly payments and get more breathing room in your budget.

  • Simple, one-time payments. Chances are, you have taken out several loans to pay for your studies, and it can be difficult to keep track of them all. When you refinance your debt, you can combine your loans into one with a single monthly payment.

Consider this example:

refinancing student loans

refinancing student loans

If you had student loans of $ 35,000 at 6% per annum and a 10-year maturity, you would have paid a total of $ 44,548 by the time the debt was paid.

If you refinanced and got a seven-year loan at 3% per annum, you would pay just $ 38,847. By refinancing your loans, you will save about $ 5,700 and get out of debt years earlier.

5 things to consider before refinancing

Loan refinancing has many advantages, but student loan refinancing is not a good idea for everyone. When deciding whether to move forward or not, ask yourself these five questions.

Connected: Top Lenders to Refinance Student Loans in 2021

1. What is your loan?

There are two main types of loans: federal student loans and private loans. If you have federal student loans, debt refinancing comes with significant drawbacks.

When you refinance federal loans, you transfer them to a private lender. Once the process is complete, your debt will no longer be eligible for federal loan programs such as income-adjusted repayment, government service loan forgiveness, or federal deferral. If you want to use these programs later, you should not refinance your debt.

2. What is your credit rating?

To qualify for student loan refinancing, you usually need a good to excellent loan. If your loan is less than stellar, you may be denied a loan, or you may receive a relatively high interest rate, which negates the value of refinancing.

3. What are your goals?

Refinancing a student loan makes sense if you have high interest debt. By refinancing, you can get a lower interest rate, which will save you money and pay off your debt faster.

If your goal is to lower payments, you may be better off taking advantage of other debt management options, such as signing up for an alternative payment plan.

student loans

student loans

4. For how long do you want the loan?

Before refinancing your loan, think about which loan term is right for you and your budget. While a longer term can be attractive because it lowers your monthly payments – and some lenders offer up to 20 years – you’ll end up paying more interest due to the longer repayment period.

Lenders also generally charge higher interest rates on refinancing loans for longer periods. The lowest rates are usually for borrowers who choose between five and eight years.

5. Do you have a joint signing?

If you don’t have perfect credit or don’t meet income requirements, it can be difficult for you to find a lender willing to work with you. But if you have a parent or relative willing to co-sign your loan application and share responsibility for the loan, you may be eligible and probably get a lower rate than if you received it yourself.

Connected: Best Lenders to Refinance Student Loans in 2021

How to Refinance a Student Loan

Here’s how to start the student loan refinancing process.

  • Collect your documentation. When applying, you need to provide your driver’s license, social security number, employment information, and account numbers of your existing loans. You may also need to provide proof of your income, such as a pay slip or tax return.

  • Compare rates. Rates can vary from lender to lender and each company has different requirements for borrowers. It’s a good idea to get rate quotes from multiple refinancing lenders so you can find the best deal. To get started, check out top refinancing lenders of 2021

  • Submit your application. Most refinancing applications can be completed online and you will usually receive a response within minutes. Once approved, it can take several weeks for the lender to pay off your existing loans, so keep making the minimum monthly payments until you get confirmation that the loans have been paid in full.

Other ways to manage debt

If you decide that refinancing is not right for you, but you still need help with loans, you have several other options:

  • Income-oriented repayment (IDR) plans: If you have federal loans and cannot afford the monthly payments, apply for an IDR plan. Under the IDR plan, your payments are based on your discretionary income and longer maturity, so you can get a much lower payment.

  • Patience: While federal leniency usually lasts longer than the leniency offered by private lenders, it can still be a useful solution. If you cannot afford the payments or are currently experiencing significant difficulties, contact your lender and explain your situation. You can defer payments while the recovery is in progress.

  • Debt repayment strategies: For those borrowers who want to repay their debt aggressively – but do not want to refinance – consider using a repayment strategy such as debt or snowball methods. You can pay off debt faster and save money.

Still undecided? Use student loan refinancing calculator to see how refinancing your debt can affect your monthly payments and the total cost of paying off.

Connected: Best Lenders to Refinance Student Loans in 2021

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