Many borrowers take out loans to help them pay for college or other formal education.
When you take out a student loan, your school will likely act as the lender and expect you to repay the money with small installments when your education is complete.
What Does ‘Refinancing Student Loans’ Mean?
This refers to when you take out a new loan with different terms than your previous one.
For example, someone who took out a five percent loan could refinance that into a three percent loan. This can be helpful because it lowers the interest rate of your old loan(s) giving you more money to spend in total or helping you pay off your loans quicker.
Anyone with student loans can refinance their loans, whether they are in repayment already or not. However, refinancing isn’t always the best solution. Before you refinance your loan(s), make sure you think about these factors:
- What were the terms of your old loans?
- How much money do you currently owe on the loan(s)?
- What is your current interest rate?
What Happens When You Refinance a Student Loan?
When you refinance a student loan, you are essentially transferring your current debt to another lender.
This new lender will give you a new rate of interest on the outstanding balance, and ask that you make payments towards this new loan until it’s paid off.
Some lenders may also require that there is at least some amount of money left on your original loan balance before they will refinance it.
Why Should You Refinance Student Loans?
There are lots of reasons why you might want to refinance a student loan. These include:
#1. Lowering Your Interest Rate
If you have multiple loans with different interest rates or variable rates that go up and down, refinancing can lower the interest rate that you pay on all of those loans.
#2. Lowering Your Monthly Payments
Lenders offering to refinance will take into account the amount you owe, your credit score, and your income to determine whether or not they will offer a refinancing plan to you, and what the monthly repayment amounts will be.
If you have a high balance and a low income, refinancing will lower the amount that you have to pay each month.
This means you pay less towards your loans and save money over time.
#3. Repayment Period Extension
When you refinance student loans, some lenders will offer to extend the repayment period of your loan.
The repayment period is how long it takes before you pay off your loan in full. This means you make lower monthly payments but end up paying more interest over time.
#4. Taking out a Direct Consolidation Loan
If you have multiple student loans and want to consolidate them into one, refinancing can help you do this. ‘Direct’ consolidation loans are federal student loans that allow borrowers to consolidate their loans into one loan with a single servicer and extended repayment period.
You can use the calculator on the Department of Education’s website to find out more about how this might help you.
How to Apply for Refinancing
After you decide that refinancing is right for you, there are several steps that you need to take before you can apply to a lender.
#1. Check the Annual Percentage Rate (APR) on Your Current Loan(s)
This is your interest rate plus any additional fees, such as those for late payments.
You don’t want to refinance into another loan with similar terms unless it has a lower APR than your current loans.
#2. Check Your Credit Score
This can have a big effect on whether you are approved for refinancing and how much interest you will pay in the long run. When lenders pull your credit report, they look at factors such as your payment history, outstanding debt, and how good an earner you are.
The better your score, the more likely you are to be approved.
#3. Gather Financial Documents
Refinancing can have a big effect on your finances so lenders will need to see proof of how much money you earn, what debt you owe, and pay stubs or bank statements that show your income is steady.
#4. Decide Which Lender to Use
Once you have a list of potential lenders, you need to go through their terms and conditions to find out about any fees they charge for refinancing.
This is important because the costs can have a big effect on whether your savings balance is worth it or not.
Once you have found a lender that tickles your fancy, it comes time to apply.
Make sure you’ve filled in the necessary documents and planned out how much you can afford to pay each month.
#5. Be Aware of Possible Downsides
Before you start refinancing, it’s important to know about some of the downsides that might come with it. These include:
Potentially Higher Interest Rates
The most common student loan refinancing lenders offer rates that are lower than the ones on your current loans, but they may still be higher than you would like.
When you consolidate student loans through federal programs, you will get a lower rate of interest because the government subsidizes the cost.
Lenders offering refinancing student loans often charge fees for the service. These can have a big effect on your savings because you might end up paying more in fees than you save on a monthly basis.
Competition Between Lenders
Since refinancing student loans is becoming popular, some lenders may cut rates to remain competitive. This means that if another company offers you a lower rate of interest, your lender may either offer you the same rate or refuse to refinance your loan.
#6. Once You Are Approved
Once you have been approved for refinancing student loans, it is important to understand how long it will take before you can get access to the money.
Some companies need a few days while others don’t say exactly when you can expect to have your money.
You should also take note of whether you will need to pay off your old loans before borrowing more through refinancing.
The Essential Steps to Refinancing Student Loans
Unfortunately, getting into debt can leave you strapped during repayment. An excessive amount of debt might force you to put your other financial goals on the back burner. Sometimes, it might even force you to drop out of school altogether.
The American College of Financial Services reports that almost half (48%) of students in America take out student loans in order to attend college and graduate school and 44% say they never plan to pay them off in full.
Follow these essential steps If you want to refinance your student loans:
#1. Get Your Credit in Line
One of the most frustrating aspects of student loans is that you cannot escape them through bankruptcy, which only applies to private student loans, not federal.
This means that your past choices can haunt you for years. Nobody wants a bad credit score, especially when it comes from student loan debt, which has a disparate impact on minority communities.
Don’t worry though!
You don’t have to drown in your debt. With a little time and effort, you might be able to get your credit back under control.
Consider the following steps:
When it comes time to refinance student loans, lenders will look at your debt-to-income ratio.
That means, they will examine the amount of money you pay every month to determine how risky it would be to give you more money.
Ultimately, this boils down to an interest rate ─ the higher your monthly payments are, the higher your interest rates will be when lenders make assumptions about homebuyers’ capacity.
Lenders look at the payments you make on all of your bills, so they can mathematically analyze what you owe.
Review your credit report
Before choosing to refinance student loans, it’s important, to be honest about your situation.
That means looking for errors in your credit ─ both positive and negative marks. Some good news is that you can request a free credit report from each of the three major credit bureaus once a year.
Pay your bills on time
Late payments are the most dangerous part of your credit score. You can easily fix this by paying all of your bills at least five days before their due date.
That way, you give yourself some wiggle room if you get your wires crossed. Late payments can affect your credit for up to seven years, even if they are below $100.
Limit your debt
It’s better to have little debt than a lot of it. It is also possible to refinance student loans with no cosigner.
That means putting extra money toward existing bills instead of taking up new ones.
#2. Compare Your Options
Once you have your credit in order, it’s time to start thinking about what kind of rate you would like to refinance student loans at.
There are several factors that go into setting the right rate ─ including whether or not you choose a fixed-rate or variable-rate plan. both options have pros and cons.
When you want to refinance student loans, it’s important that you compare rates from multiple sources.
That includes banks, credit unions, and private lenders. Not only will the structure of your loan change depending on who lends you the money, but so might your rate.
Look for a lender that offers a low-interest rate, as well as a low application fee that will be subtracted from your loan reserves.
#3. Apply for a Loan
When you have found the best lender and transparently compared their options to those of competing banks, it’s time to apply for a loan.
Before applying, make sure you read the fine print and ask questions if there’s anything you’re unsure about. It might be tedious, but it will pay off in the end.
#4. Fund Your Account
Once you’ve applied for a loan and been approved, it’s time to transfer your money so that the lender can fund the account they set up for you. This is usually done through an electronic transfer and is usually free in some cases.
Once that has been done, it’s time to sit back and let the bank do its job ─ which is to invest your money.
Note: If you request a loan with an “autopsy” option, you will automatically make monthly payments at the repayment rate required by the lender.
#5. Watch Your Credit Score Rise
Once you refinance student loans, your credit score is sure to improve.
It will take about two years for the changes in your credit to show up on your report, so keep an eye out ─ and check it regularly.
These are some of the most effective ways to get back on track with student loans.
#6. Stay Updated on New Options
As time goes by, new options will become available for you to refinance student loans ─ although these may not be the best choice at the time.
That means staying up-to-date on what your lenders are offering so that you can continue to improve your financial situation.
By looking at refinancing student loans as a way to improve your credit score, you can earn more money–not just save it.
#7. Take Advantage of the Opportunity
By following these tips, you are setting yourself up for positive changes in your financial future ─ if you stay on top of things.
It’s always best to keep an eye out for opportunities to grow your income, rather than looking for ways to make money easier.
Avoiding debt is never a bad idea ─ even when you refinance student loans.
While paying off your college debts, remember that refinancing student loans means taking out a new loan with different terms.
This can result in additional interest charges. Be sure to compare the terms of the new loan with those of your existing loan before refinancing.
You need to be at least 18 years old, have a credit score of 640 or higher, and have graduated from an accredited college/university to refinance student loans.
It’s also possible to refinance student loans with no cosigner. If you’re able to apply on your own, you likely won’t need a cosigner.
Before refinancing student loans, remember that rates can change quickly.
Make sure that you lock in an interest rate before it changes so that you don’t need to refinance again later on! As for the actual process of getting a loan, you may need to meet with a lender in person.
They will want to verify your identity and employment information before they approve you for a loan.
During the refinancing process, be sure to ask plenty of questions about the terms of the new loan.
When you refinance student loans, it can change your repayment plan or lower your interest rate so make sure you understand how the process will affect your loan.
If you choose to take out a longer loan term, it may cost you more in the long run due to higher interest rates.
Before refinancing your student loans, remember that you cannot refinance federal student loans.
Only private lenders offer this type of service. Be aware that both private and federal student loans are eligible for refinancing.
When you are ready, start looking for a lender that suits your needs. Make sure you compare their rates against current student loan interest rates so that the savings balance out any fees and any difference in interest rates.
Be sure to explore other student loan refinancing options such as consolidating federal loans and private consolidation.
Combining your student loans into one consolidated loan will simplify the repayment process and make it easier for you to manage your money.
On top of that, it often results in a lower monthly payment and may enable you to save money in interest.
When you’ve successfully refinanced your student loans, be sure to make all of your payments on time and stay under budget to maintain a good credit score and avoid additional fees and penalties.
If this sounds like more than you can handle on your own, consider hiring a financial advisor or enrolling in personal finance classes at your local community college.