Refinancing a student loan occurs when you apply for a new loan to pay off your current student loans, usually to lower your interest rate or extend your repayment schedule. If you have a federal student loan, you must refinance with a private lender. If you have private student loans, you can refinance with the same lender or choose a new one – that’s why it’s so important to shop around first.
What is student loan refinancing?
Refinancing a student loan replaces an existing loan with a new one, usually with better terms. Borrowers tend to refinance if interest rates have fallen since they took out the original loan. For example, the coronavirus pandemic has caused interest rates to drop dramatically, making it an ideal time for many to refinance their student loans.
Borrowers can also choose to refinance if they have improved their creditworthiness. If you have personally increased your income or your credit score, you can now benefit from a much lower interest rate when you refinance, which can save you thousands of dollars in total interest.
Refinancing also gives you a new loan repayment term. This can be viewed as positive or negative. On the one hand, choosing a longer repayment term could reduce your monthly payments. However, since refinancing essentially resets your repayment period, with most refinance lenders setting terms for a minimum of five years, this may not be the best choice if you are nearing the end of your period. current reimbursement.
How does the refinancing of a student loan work?
If you decide to refinance your student loans, you will need to choose which of your student loans you want to refinance. After that, it is time to browse the websites of the lenders to see what rates and terms are offered. Refinancing is only available through private lenders, which is an important consideration if you have federal student loans; by refinancing, you will lose federal protections such as specialized repayment plans and potential loan cancellation.
Many lenders offer pre-screening, where you enter basic information about yourself and your existing loans in exchange for a quote. Prequalification, unlike a formal application, does not hurt your credit score, so it is the best way to compare the rates available among lenders.
Once you are approved for a loan, the loan funds will be used to pay off your existing student loans. From there, you’ll start making payments on your new refinanced loan. With a lower interest rate or a shorter repayment term, you will pay less over time on your refinanced loan than with your previous loans.
If you have low credit or low income, you might not be allowed to refinance your student loans. If you are turned down for funding, the lender is obligated to give you a reason. You may need to find a co-signer in order to improve your credit image.
Student loan refinancing vs consolidation
Student loan consolidation is a type of refinance where the main goal is to merge multiple loans into one new loan. Borrowers often consolidate to simplify the process of paying off their debts because it is easier to manage a single loan rather than several.
The federal government has a formal student loan consolidation program. Borrowers who consolidate their student loans may become eligible for certain repayment plans and income-tested programs that they might not have otherwise qualified for. Thanks to this program, your interest rate will not change.
Student loan refinancing, on the other hand, is only offered by private lenders, with the main goal being to save money on interest or extend the term of the loan.
Who Should Refinance Their Student Loans?
Borrowers with high interest rates on private loans are the best candidates for refinancing because they have the potential to save the most money.
For example, let’s say you owe $ 50,000 with an interest rate of 12% and a term of 10 years. If you refinance at a 6% interest rate and a 10-year term, you’ll pay $ 19,470 less in total interest over the life of the loan.
Here are some other people who might consider refinancing their student loans:
- Borrowers who wish to consolidate several loans into one.
- Borrowers with large monthly payments who may benefit from a longer repayment period.
- Borrowers who wish to release their co-signer from an existing loan.
- Borrowers who have a higher income or a better credit rating than when they took out their original loan.
Refinancing Federal Student Loans
Because the federal government does not have its own refinancing program, the only option available to borrowers with federal student loans is to refinance them into a private loan.
When you refinance federal loans, you forfeit all related benefits and protections, including income-tested repayment plans, loan cancellation programs, and extended deferral and forbearance. If you refinance federal student loans, you will not be able to work on the Public Service Loan Forgiveness Program (PSLF) or any other loan forgiveness program.
For example, when the coronavirus pandemic hit the United States, the government temporarily suspended federal student loan payments – but that did not apply to those with private student loans.
Borrowers should also keep in mind that the federal government may offer a comprehensive loan forgiveness in the near future. If President-elect Joe Biden decides to cancel federal student loans through executive action, that will likely only apply to federal loans and not private loans. If you have federal loans and you refinance them, you will lose your eligibility.
Refinancing of private student loans
Unlike refinancing federal loans, refinancing private loans has virtually no downside. Because private loans have less protections, you don’t give up much when you refinance from one private lender to another. In fact, some people refinance private student loans multiple times to take advantage of lower interest rates.
How To Find The Best Student Loan Refinance Lenders
Choosing a student loan refinance lender should be a well-researched decision. Here’s how to compare different companies.
Find the best rates
When you compare refinance lenders, look at the total APR, not just the interest rate. The APR includes the interest rate as well as all fees, making it the best way to accurately compare lenders.
It is also wise to go through a pre-screening with lenders instead of relying on the rates advertised on their websites. All lenders will calculate your APR differently based on your credit score, income, employment, and more, so you won’t know what rates are available to you until you apply.
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Understand the loan conditions
After submitting your information to lenders, you will receive financing offers, which will include terms, interest rates, and available loan amounts.
Most of the time, short terms have lower interest rates than long terms. For example, a five-year refinance term will likely have a lower interest rate than a 15-year term. However, there is a tradeoff; because the loan is condensed over a shorter period, the five-year loan will have a much larger monthly payment than the 15-year loan.
The choice of loan depends on your current budget, other financial goals, and your job security. Since private lenders have fewer defer or forbearance options, be sure to choose a loan payment that you would be comfortable with even if you were to become unemployed. You should also consider the impact of your future goals on your budget, such as starting a business or having children.
Consider the benefits
Some private student loan companies offer additional benefits to borrowers. For example, Earnest allows borrowers to skip one payment per year, and SoFi offers a special career counseling service if you lose your job or want to change industries. Some lenders also offer forbearance programs if you lose your job or experience other economic hardship.
Before choosing a lender, also read customer reviews on sites like Trustpilot and the Better Business Bureau.