Student loan refinancing is a great option for people who’ve incurred massive debts to pay for their education. It’s a new loan with a more favorable rate of interest and monthly repayment schemes issued in place of old debts from single or multiple sources. Note that refinancing is a good option only when the new loan features favorable and beneficial terms for repayment. Most federal and private banks as well as credit unions provide several different options for refinancing, each with their own criteria for eligibility and also offer unique perks and benefits. Let us understand and learn how student loan refinancing works.
Student loan refinancing helps ease the financial pressure. Simply put, all the money you have borrowed to pay for your education can be converted into one single loan that has a lower rate of interest and more manageable monthly payments. You exchange your current student loan for a new one and then pay off your debt better under the revised terms. Considering the perks you get, it’s a good idea to opt for student loan refinancing.
On one hand, owing to lower interest rates, you’ll be in a better position to quickly pay off the loan. But once the loan is refinanced, you effectively convert all debt into a private loan. Private loans do not qualify for Federal Student Aid including Public Service Loan Forgiveness (PSLF). This means if a qualified professional under the PSLF scheme, like a teacher or nurse, won’t be entitled to the benefits. Another advantage is the lower rate of interest when you opt for refinancing.
Many also opt for a variable rate of interest as it enables a faster payoff. But it’s important to remember that variable rates are directly influenced by market conditions and can drastically change without warning. And this is quite a worrying drawback. Private student loans also don’t qualify for beneficial federal schemes, including the income-driven repayment plan. This means the monthly payments cannot be based on a fixed percentage of your income, which is a benefit you can otherwise avail of federal student loans.
Not everyone is eligible for student loan refinancing. Banks and financial institutions will assess the ability of an applicant to effectively pay off the loans under the new terms. For most refinance loans, you must have a credit score of 650 or better and must be currently employed or have an offer letter in hand. You should earn a stable monthly income to meet payment obligations. Banks will assess your debt-to-income ratio to decide the refinance terms under the new interest rate and accordingly modify the agreement. Also, in any previous debts or loans for education, there should be no prior defaults. A default can hurt the chances of approval as the bank deems the applicant not capable of meeting timely obligations.
These are just the basic criteria that you should meet before submitting an application. In case you don’t meet the requirements, you can still apply for a refinance with the help of a cosigner, who will take responsibility for payment in case you can’t meet the monthly due. To increase your chances of approval, always apply to multiple banks and credit institutions.
No, consolidation and refinancing are two completely different things. Under a loan consolidation, the bank will combine multiple loans taken into one single debt obligation. The amount of interest and monthly payments don’t change here. You’ll only pay a single monthly amount for the total debt. A refinance also consolidates all the loans taken into a single debt obligation, but the interest and monthly amount will be revised to ease the burden of debt repayment.
The refinance will completely depend on the type of debt you already have. In this case, it can either be a federal or private student loan. For federal loans, the refinancing is done by the government-sponsored programs like the Federal Direct Consolidation Loan Program. On the other hand, private loans are commissioned by private lending institutions like banks or credit unions. Note that any type of refinancing will dismiss the benefits you enjoyed under the previous scheme.
Student loan refinancing comes with its own terms and conditions that can be favorable, depending on several factors. Also, you must understand that some private lenders may be willing to combine both your federal and private loans for a new refinance scheme.
Research shows that, on average, people in the country carry a student debt of $35,000 or more. By the time you’re employed and start paying off the debt, the high-interest rate and heavy monthly payments can hamper cash flow. Student refinancing is beneficial in the long run, provided you’re eligible for it in the first place and are willing to integrate your debt into a new loan. Many lenders also waive any origination and application fees for the new loan. This effectively saves hundreds or even thousands of dollars. Considering the benefits you can avail, a refinance can play out as an effective debt management strategy. But it’s important to know the variable factors that influence the rates, APR, and terms of the refinance.
These lenders are the best in the business when it comes to student loan refinancing: