What is student loan refinancing? – Forbes Advisor


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If you want to save money on paying off your student loan, you may have been advised to refinance. Depending on your financial situation, this may indeed be the best way to go.

But how exactly does refinancing save you money and what should you consider before submitting an application? Here’s what to know about this strategy and how to decide if it might be right for you.

What is student loan refinancing?

When you refinance a student loan, you take out a new loan from a refinancing lender; this lender will pay off your old student loans and you will start paying off your new debt. By refinancing your existing debt into a new loan, you could get a lower interest rate, a lower monthly payment, or both.

If you have multiple student loans, you can choose to refinance all, some, or just one of them. For example, if you have federal and private student loans, you can choose to refinance only the private loans. Combining multiple loans into one can also help simplify your repayment.

While the government offers you the option of consolidating your federal student loans, refinancing federal loans will convert them into private debt. This means you will lose access to federal loan benefits such as income-contingent repayment (IDR) plans and loan forgiveness programs. For this reason, refinancing federal student loans generally has more disadvantages than refinancing private debt.

How does student loan refinancing work?

To refinance your student loans, you must apply to a new lender and provide your contact information, employment details, and financial statements. The lender will perform a credit check and verify your income before approving you. Some lenders may require a cosigner if you don’t meet credit score and income minimums.

If you are approved, the new lender will contact your current lender to initiate the repayment process. Once this is complete and your old loans are closed, you will begin making regular payments to your refinance lender.

5 factors to consider before refinancing

Before filling out a loan application, you should stop and consider whether refinancing is worth it. Here are the main things to think about beforehand:

1. The type of loans you have

Borrowers with private student loans are generally better off by refinancing than those with federal loans. If you have federal student loans, you have access to a host of benefits like IDR plans, which calculate your monthly payments as a percentage of your income. You may also be eligible for loan forgiveness options as well as longer deferment and forbearance programs.

For example, when the Covid-19 pandemic started, the federal government suspended federal student loan repayments and set interest rates at 0%. Since March 2020, federal student loan borrowers have not had to make any payments. Private student borrowers, on the other hand, are not eligible for these benefits.

If you have federal student loans, be sure to carefully consider whether refinancing is worth it. But if you’re not eligible for loan forgiveness and have a steady job with a solid emergency fund, refinancing your federal loans with a private lender could help you get a lower interest rate. and pay less total interest.

2. Your credit score and income

Your credit score and your income are the two most important factors that will determine whether you qualify for a student loan refinance. Most private lenders have a minimum required credit score of around 670. The income threshold varies among lenders, but generally starts around $20,000.

While you may qualify for a refinance if you meet these minimums, those with average credit or irregular income will be offered higher interest rates than applicants with excellent credit and stable income.

If your income or credit doesn’t meet the lender’s requirements, you’ll likely need to add a co-signer to qualify for refinancing. A co-signer is an adult, often a relative or close friend, who has good credit and agrees to be registered on the loan with you. If you can’t afford your payments or fail to repay the loan, the co-signer is responsible for repaying the remaining balance.

3. What interest rates can you claim

A common reason to refinance is to get a lower interest rate. Reducing your rate adds up; you could potentially save hundreds or thousands of dollars over the life of your loan.

Many refinance lenders will allow you to verify your personalized interest rate estimate before submitting a formal application. Compare this interest rate range to your current interest rate, which you will find on your monthly statement. You can use a refinance calculator to see how much you could save by switching to a better rate.

If you can’t find a lender who can beat your current rate, it probably doesn’t make sense to refinance.

4. What loan terms are available

The repayment term is the number of years you have to fully repay your debt. Lenders generally offer lower interest rates for shorter repayment terms and higher interest rates for longer repayment terms. Your monthly payments will be higher with short-term loans and lower with longer-term loans.

Many student loan refinance lenders offer loan terms of five, seven, 10, 15, and 20 years. Be sure to check the amount remaining over the term of your current loan. If you refinance and significantly extend the term of your loan, you will likely end up paying more interest over the life of your loan.

5. How the lender can help you if you can’t pay

Although interest rates and repayment terms may be similar among major lenders, there is a greater variety of additional benefits and features. Some lenders offer special programs to help you manage your debt, while others won’t do much to help you if you’re having trouble making your payments.

For example, SoFi offers help with the job search process if you lose your job. You also won’t have to make payments for up to 12 months while you’re unemployed, while other lenders may offer a maximum forbearance period of just six months or less.

How to Apply for Student Loan Refinance

  1. Research potential lenders. The first step is to compare refinance lenders, select the ones that give you the best deal, and see if you can prequalify with those lenders. Prequalification allows you to view estimated interest rates and terms you may be eligible for after submitting some basic information.
  2. Complete the application. Once you have chosen your top lenders, submit a complete application online with each one. The exact requirements vary, but expect to provide your personal information, income, and details of your existing student loans.
  3. Determine if you need a co-signer. If you are not approved for a loan, you may be able to add a co-signer to improve your chances. Contact the lender and see if they will accept a co-signer with your application. Even if you qualify for a loan, adding a co-signer could help you get better interest rates.
  4. Finalize your choice. If you are approved for the loan, you should receive the final interest rates and loan terms for which you qualify. Review the documentation and make sure the interest rate, repayment term, forbearance options, and any other features are acceptable.
  5. Complete the refinance. Once you’ve signed the final documents, the new lender will usually repay your old loans directly. Be sure to continue making payments on your old loans until this happens. Also confirm that your previous lender records the loans as closed on your credit report when the refinance process is complete.
  6. Start making payments. Log into your new account on the refinance lender’s website and see when your first payment is due. Sign up for automatic payments, if possible, as they’ll likely come with a discount on interest rates and prevent you from missing a payment.

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