By refinancing your student loan, you can reduce the interest rate as well as your monthly payments. It also allows you to renegotiate your debt terms with the lender.
However, just like any other loan, you should be careful when applying for loan refinancing and ensure that it is your best bet.
If this seems like something that would help you and you are wondering how to refinance your loans, then ask these pertinent questions to understand what it means and what’s in it for you.
What is the purpose of refinancing my student loan?
Above everything else, you need to first understand your goal and your expectations from refinancing your student loan.
There are a number of reasons to choose this option such as securing a lower interest rate, reduced payments, or getting rid of your debt faster.
Depending on your situation, you should consider what works best for you. Your goal will define your decision and also help you in choosing the option that meets your requirements.
What will be the interest rate?
To enjoy reduced rates of interest, you must first know what you are currently paying. While federal loans hover between 4% and 7%, the private lenders can charge anything up to 12%.
Refinancing your student loan means you are replacing the existing one with a new, cheaper loan. You should consider this option only if your current rate of interest is higher than the refinanced loan.
Needless to say, a low-interest loan will save you tons of money and also reduce your monthly payments.
What is the total amount that will pay off my loans in full?
Don’t just focus on the interest rate. Another important aspect you need to research is the total payable amount after consolidating all your existing student loans. It may seem higher than your current balance because it has an extra component- the interest that you still owe to the lender.
The total amount is the sum of all the loans that you hope to pay through refinancing option. This amount will make up your new loan.
In case this amount is too high, it is recommended to choose a long repayment method to keep your installments manageable. However, by opting for a shorter term, you can save money on the interest.
Is refinancing right for me?
Not sure if refinancing is the right thing to do? Take some time to assess your existing debts, evaluate your income, and all the bills to know if you can afford to consolidate your student loan debt. The rule of thumb is to subtract the installment from your after-tax income. It should leave you with enough to pay your bills and other essential expenses. If your installments are eating into your monthly bill payments, then perhaps you should see where you can cut corners to accommodate an additional installment into your payment plan.
What is my credit rating?
This is one of the most important factors to consider when you are planning to refinance your loan. Unless your credit score is healthy, you may not even qualify for the loan in the first place. This is why it is important to know your credit score to make an informed decision.
You can request a free copy of your credit score from one or all of the three credit bureaus once a year. Use it to keep a track on your creditworthiness.
My credit score/income is low, what should I do?
If you have a poor credit score or your income is low, then your new lender would need additional assurance before extending the loan to you. In this case, you can add a co-signer to your account who has a healthy credit score.
Can I release a cosigner from my existing loan?
If your parents took a student loan as your cosigner to finance your higher studies and you now have a stable job, then you can refinance your loan to release the cosigner with any liability for your existing loan.
Is it possible to combine federal and private loans?
If you have taken both federal and private loan, then you would have to ensure that refinancing will cover both.
Not all lenders will give you the option to consolidate the two loans. However, there are some who might bundle the two together. Be sure to check with your private lender before you opt for Debt consolidation option.
It is also important to know that if the two are combined, you will lose access to all federal loan benefits as it will be absorbed into your new refinanced loan.