To refinance or not to refinance? That’s a great question.
After the dust settles and repayment reality hits, many student borrowers are forced to ask that very question.
The answer, like most things in life, is not always cut and dry.
Refinancing your student loans can potentially lower your interest rates, decrease your monthly payments, or help you pay down that debt faster. But all of those positives are subject to a host of factors including your loan type, rates, and term, as well as your credit score and monthly income.
So, is refinancing for you? Here are seven big questions you need to ask before refinancing your student loans:
1) Will Student Loan Refinancing Save You Money?
Most borrowers refinance their loans with the goal of lowering their student loan interest rates. When you receive a lower interest rate, you will pay less in interest over the life of the loan as long as the new term length is shorter or the same as the current remaining repayment term on your loans (and sometimes even if it is longer).
If approved for refinancing, be sure to check if your new interest rate is lower than those of the loans you are trying to refinance. If it isn’t, then refinancing probably doesn’t make much sense for you.
Even if your rates are lower, be sure to consider the total loan cost. If you extend the repayment term to lower your monthly payment, you might end up paying more over the life of the loan, even with a lower interest rate.
For example, say you have $10,000 left on your student loans, are paying 6% interest, and your term is up in 10 years. If you refinance at 5.25% but your repayment term increases to 15 years, your payments will decrease, but over the life of the loan you’ll be paying close to $1,000 more.
2) Will the Refinance Actually Lower Your Monthly Payment?
Many borrowers also refinance with the goal of decreasing their monthly payment, but student loan refinancing doesn’t always guarantee this, and in some cases, moving your loans can have the opposite effect. The best way to determine if your payments will be lowered is to do a good old fashion comparison.
Look at your current payment, rates, and terms of your current loans and compare them to those currently being offered by the refinance lender. To do this, we suggest using a student loan calculator, which can help you analyze several scenarios.
In the end, the outcome depends entirely on the student loan refinancing offer, but knowing your loan rate and term “sweet spot” can help you identify when an offer represents a good opportunity or if you’re better offer staying your current repayment course.
3) Do You Need a Cosigner?
Student loan refinancing rates, terms, and even approval is contingent on a variety of factors, most of which are tied to the perceived financial risk associated with the borrower. To determine that, lenders often look at your income, debt-to-income (DTI) ratio, and your credit score. If you have steady income, a reasonable debt-to-income ratio, and a good credit score (mid 600s or higher) a cosigner may not be necessary.
However, if you don’t meet those requirements, a cosigner may increase your chances of being approved and securing lower rates and better repayment terms.
4) Are You Willing to Lose Federal Loan Protections If You Refinance?
When you refinance your federal student loans they will become one new private student loan. This means that you are no longer eligible for benefits, protections, and repayment plans that are only available for federal student loan borrowers.
Some of these include income-driven repayment plans, forgiveness programs, and forbearance and deferment options. These safety net provisions can help borrowers during emergencies or life changes that negatively impact their abilities to keep up with monthly payments.
That’s not to suggest you shouldn’t refinance federal loans, but it does mean that you should do so with caution. If you’re confident you can continue to meet the requirements now and in the future, it may be a good idea. If you are currently facing financial instability or see that as a likely part of your future, then refinancing federal loans may not be the best decision.
5) What Do You Need From the Refinance Lender?
There are many lenders that offer student loan refinancing which means that you’ll need to shop around to find the perfect fit. Before you start shopping around, it’s important that you determine what you need from the refinance lender.
Here are few things you’ll need to find out:
- Approximate new loan rate based on your credit
- Repayment term lengths available
- Eligibility requirements, including credit threshold, income requirements, DTI limits
- Minimum or maximum student debt requirements (How much debt you need or can refinance through the lender?)
- Financial hardship options (Will they pause your payments should you lose your job or meet any other financial setback?)
- Cosigner release options (Can your cosigner be released from the loan under certain circumstances? If so, what are they?)
- Rate reduction opportunities (Such as from using auto-pay)
- Additional benefits offered by the lender (Discounted rates on future loans, educational or professional resources, etc.)
By determining the aforementioned items, you will get a better picture of what your future relationship with the student loan refinancing lender will be like while making the best decision for your needs.
6) Should You Refinance Your Student Loans or Opt for a Federal Consolidation Loan?
If you have federal loans, you may want to consider federal consolidation as opposed to student loan refinancing. Though the rates (which are a weighted average of the rates for all loans being consolidated, plus a small percentage extra) aren’t always lower, consolidation does have its perks.
That’s particularly true if you plan on taking advantage of income-driven repayment plans or forgiveness programs, since many protections offered to federal borrowers are not available should you refinance those loans with a private lender.
Refinancing your student loans can have long-lasting implications for your financial future, for better or for worse, so it’s important to evaluate all of your options before jumping into a new loan. These seven questions should help you lay the groundwork for a good decision based on your unique situation.
Author: Jeff Gitlen
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