In the right circumstances, student loan refinancing can result in significant savings.
Let me show you how it works: Usually, a bank, credit union, an NGO or online lender—pays off the student loans you choose to refinance, and you receive a new loan with an interest rate determined by your credit history, income, and other factors.
So, basically, you make the monthly payments to the new lender.
Follow me closely as we proceed in this journey. I’ll show you all you need to know about student loan refinancing.
What is student loan refinancing?
When you refinance your student loans, you take out a new loan to pay off your existing loans, leaving you with only one loan and payment to deal with. Depending on your credit, you may be able to cut your interest rate through refinancing, which might save you money on interest and perhaps allow you to pay off your loan sooner.
You could also choose to extend your repayment period by refinancing, which could lower your monthly payments and reduce the strain on your budget. Just bear in mind that if you choose a longer repayment term, you will end up paying more in interest.
So, in a nutshell, refinancing your student loan means taking a new loan to pay off an old student loan.
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What kinds of loans are eligible for refinancing?
Refinancing is available for a variety of student loans, including those for undergraduate, graduate, and professional degrees. Among these loan types are:
- Medical loans
- Private loans
- MBA loans
- Law school loans
- Federal student loans
Are there benefits of refinancing a student loan?
Yes. There are several benefits you stand to gain if you refinance your student loan. In the lines to come, we’ll look at them. Just stay on.
1. Access to cheaper interest rate
Depending on your credit, you may be able to lower your student loan interest rate by refinancing. This may save you money on interest rates and may possibly allow you to pay off your loan sooner.
2. Lowers your monthly payments
If you choose a longer repayment term, you could be able to lower your monthly payments. Just keep in mind that doing so will result in higher interest payments over time.
3. Merges various loans
When you refinance your student loans, you will only have one loan and payment to worry about. What this means is that every other loan of yours is taken care of by the lender and then you’ll get to pay only the lender.
Are there any downsides to refinancing a student loan?
While refinancing could be a smart move in some cases, there are also some potential downsides to consider:
1. Limited interest rate
If you have poor or fair credit, it could be harder for you to get approved for refinancing. Additionally, you might not qualify for the best interest rates if you have less-than-perfect credit.
2. Loss of federal benefits
If you refinance federal student loans into a private loan, you’ll no longer have access to federal benefits and protections — such as student loan forgiveness programs and federal forbearance options. However, keep in mind that if you’re refinancing private student loans, you won’t have to worry about this risk.
3. Lack of repayment options
Private student loan repayment options are generally much more limited compared to federal loans. For example, private refinanced loans typically don’t offer income-driven or extended repayment plans.
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What criteria must I meet in order to refinance my student loans?
The requirements to qualify for refinancing can vary by lender. However, there are a few common eligibility criteria you’ll likely come across, including:
Outstanding credit: You’ll typically need good to excellent credit to qualify for refinancing — a good credit score is usually considered to be 700 or higher. While some lenders offer to refinance for bad credit, these loans generally come with higher interest rates compared to good credit loans.
Verifiable income: Some lenders have a minimum required income while others don’t — but in either case, you’ll likely need to provide documentation showing proof of income.
Low debt-to-income ratio: Your debt-to-income (DTI) ratio is the amount you owe in debt payments each month compared to your income. Lenders typically like to see a DTI ratio of 50% or below — though keep in mind that some lenders might require lower ratios than this.
Loan information: The lender will need information regarding each of the student loans you want to refinance, such as loan balances, your current lenders, and what schools you attended.
How do I refinance my student loans?
Looking to refinance your student loan? Here’s a step to step guide on how to do student loan refinancing.
Do your homework?
Take out some time to conduct some background check on the lenders you want to work with. Be sure to compare as many of them as possible to find the right loan for you. Consider not only interest rates but also repayment terms, any fees charged by the lender, and eligibility requirements.
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Pick your loan option
After you’ve compared lenders, choose the loan option that best suits your needs.
Complete the application
Once you’ve decided on a lender, you’ll need to complete a thorough application and provide any necessary evidence, such as tax returns or pay stubs.
Manage your payment
If you’re approved, continue making payments on your old loans while the refinance is processed. Afterward, you’ll start making payments on your new loan. You might also consider signing up for autopay so you won’t miss any payments in the future — many lenders offer a rate discount to borrowers who set up automatic payments.
Conclusively, refinancing is a good idea if you qualify for a lower rate and you’re comfortable giving up the benefits that come with federal student loans. But the disadvantage is that when you refinance federal loans, you lose access to income-driven repayment plans, loan forgiveness programs, and other federal loan perks. So, make your choice very wisely.
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