A Guide To Refinancing Your Student Loan

“Thank you, student loan, for getting me through college. I don’t think I’ll ever be able to repay you!” LOL!

Hopefully, you’ve just bent over laughing at my super-hilarious opening line. In all seriousness, student loan debt is no joke. It’s a major source of stress for college graduates who are struggling to make ends meet. You may have heard of refinancing and it can come in quite handy as a possible solution.

What Does Refinancing Mean?

Great question. The name implies altering the terms of your current loan but that’s not the case. Called “refi” for short, student loan refinancing means taking out an entirely new loan with lower interest rates.

This new loan effectively replaces the agreements you’re working with now. Perhaps they should have called it “replacing”, but hey, you park in a driveway and drive in a parkway.

Similar to getting out of a car lease early, the new lender pays off your current loan,  and from that point forward, you pay off your new lender. The lower interest rate is what makes refi an attractive option for many as you can save substantial amounts of money over the long term.

Potential Benefits of Refinancing Your Student Loan

The most obvious benefit of refinancing your student loan, as mentioned, is saving money. Fox Business reports that interest rates on student loan refinancing are lower now than ever. This means along with saving moolah on interest, you could lower your monthly payments. Winner, winner, chicken dinner.

Refi can also shorten your repayment terms and help you pay off your loan sooner. If you’re considering buying a home in the future, a refi can make it easier to get a mortgage. That’s because it reduces your debt-to-income ratio, a major factor in qualifying for a home loan.

It doesn’t cost any additional money to refinance your student loan. However, similar to any payment due, there are penalties for a delayed or skipped payment.

How Do You Qualify for Student Loan Refinancing?

Not everyone will qualify to refinance your student loan.

• Are your current finances in good shape?
• Have you kept up with current student loan repayments?
• Is your credit score 650 or higher?

Hopefully, the answers are all “yes.”

Some lenders will consider other factors if your credit history isn’t long enough, such as your academic record and employment history.

If you don’t qualify on your own, you might be able to refinance if you can find someone to co-sign the agreement. The co-signer will need to be in solid financial standing with a strong credit record and you’ll still be solely responsible for repaying the loan. Whether a relative or friend, you’re putting a third party at risk if they co-sign. Your late payments or failure to pay will not only impact your credit score but theirs as well.

What To Consider When Deciding To Refinance

Before you start looking for refinancing opportunities, take stock of your current status and gain a full understanding of what you’re looking for.

Personal finances

Your credit record needs to be long enough and mostly blemish-free. A score of 650 is the minimum, but some lenders may require a higher score. The good news is you can increase your score, but it doesn’t happen overnight.

You’ll also have to think about how much debt you currently have aside from your student loan. That may include a car payment or a home mortgage. Don’t forget to consider monthly expenses like rent and utilities.

Most importantly, you’ll have to have kept up with repaying your student loan up to this point. If you’ve had problems doing so, refinancing might not be the choice for you.

Desired terms of repayment

When you refinance your loan, you may have a few options for how long you’ll choose to pay it off.

• Short-term plans will likely have higher monthly repayments but can save a lot in interest.
• Long-term plans have lower monthly costs, but higher interest over time.

Which one should you choose? Part of your decision should rest on how much debt you’ve repaid thus far. If you’ve already repaid fifty percent or more of your loan, think seriously about a shorter term. You’ll pay off the debt faster and save bundles on interest.

There are other factors to consider as well.

• Are interest rates fixed or variable?
• Will it apply to your total existing debt or just a portion of it?
• Does the lender have a solid reputation and good customer service?

Future federal protections

Your existing federal student loan comes with some protective measures, which include plans to recalculate monthly payments if your income changes. You might also qualify for job-related debt forgiveness plans, or three-year, interest-free deferments.

If you refinance a federal student loan, you’ll be switching to an agreement with a private lender, which means you could lose these federal protections.

These have not been easy times for anyone. Before student loans get attention, people are struggling just to make ends meet. The CARES Act passed back in March 2020, gave “forty-two million student loan borrowers a break from making their monthly student loan payments (plus interest) amid the pandemic,” reports CNBC.com.

Now, almost a year later, Biden extended this freeze through at least September 30, 2021. It’s important to note that if you have a private student loan, there is no current freeze on your payments, and “your lender still expects you to make your payments as scheduled.”

What are your other options?

When you refinance a federal student loan, the agreement is permanent. You can’t reverse course and get those federal protections back. While you’re thinking about refinancing, make sure to consider alternative strategies as well.

Income-driven repayment plans are very helpful. For example, your employer might contribute to paying down your student debt. How awesome is that? Some occupations, especially those in public service, may qualify for partial debt forgiveness.

Federal loan consolidation may be an option if your loan is currently handled by multiple servicers. Consolidation can convert variable interest rates into fixed ones, and there are no application fees. There are, of course, trade-offs if you go that route.

If you’ve read this far you’re now armed with important information that will lead you in the right direction when it comes to refinancing your student loan. You’ll find several online student loan refinancing calculators to check if your current finances can support a refi.

If you’re a private student loan borrower, now is a great time to take advantage of low-interest rates. If you’re a federal student loan borrower, a refi would no longer make you eligible for the freeze. It’s a lot to think about but the fact you’re thinking about it means you care about your financial health now and in the future. Kudos to you!

Hope You Enjoyed the Read!