When it comes to student loan refinancing there's a lot to learn. We'll help you make the best financial decision if you are wondering should you refinance your student loans.
But let's take it from the beginning.
You walk across the stage, receive your diploma, and like that you are a college graduate! You spend the rest of the day celebrating, but the following day, reality sets in. You remember you now need to get a job and start paying back all the money you borrowed to get through school. You may ask yourself the following questions: Did I get the best deal on my loan? Should I refinance? How do you go about refinancing? Fortunately, for many graduates, refinancing can be a great opportunity to help with loan payments. The tips below will help you determine if refinancing is your best option, and how to make the process painless and effective.
Where do I start?
First, you have to ask yourself why you are refinancing. Do you want to lower your interest rate, or would you like a longer term to lower your payments?
Once you have determined why you want to refinance, I would recommend reviewing your credit report. If there are any discrepancies in the report, dispute them. This could improve your score and, in turn, improve the terms of the loan.
To chalk it up, the choice to refinance your student loans is a great way to tackle college debt and lower your monthly payments. Learn 5 benefits of refinancing student loans and start saving.
5 Key Benefits of Refinancing Student Loans
Making any decision that has to do with your finances is a big step and an important task. Finances are tricky, and it’s crucial to approach it in the right way and weigh your options. According to CNN, student loan debt in the United States has recently reached $1.5 trillion, which means there are a fair amount of college graduates still in debt. While no one likes to be in debt, lots of people are constantly looking for new ways to approach paying off their student loans in an efficient way. Refinancing your student loans is an option when trying to save money in the long run, so it’s definitely something to consider.
When you start to think about refinancing your student loans you may be on the fence about it because it may or may not be the best step for you. You’ll want to way the pros and cons of refinancing to decide what is the right decision for you and your finances. Before making the decision you may want to think about a few things like, how much money you owe, what you can afford, and if there has been a change in your credit score or salary recently.
Asking yourself these questions will help steer you in the right direction if you should refinance and who you should refinance with. Overall, there are many benefits to refinancing your student loans that have a positive outcome on you and your financial state.
The benefits of refinancing student loans
If you have a secure job, emergency savings, strong credit, and are unlikely to benefit from forgiveness options, it may be a choice worth considering if you're looking to lower your payments.
Let's look at the other benefits of refinancing your student loans.
1. Lower monthly payments
Let’s be honest: who doesn’t want to save money on their monthly bills? One of the most popular reasons people choose to refinance their student loans is to lower the monthly payments. When you refinance, you may have a lower monthly payment which will help you save money each month that can be used in other areas such as paying bills, paying the interest faster, or putting into a savings account.
Lower payments mean you may be able to afford to make an extra payment every once in a while, and you’ll save overall on the amount you owe. Here is how much you can save by refinancing your student loans:
2. Simplify/Consolidate Loans
Depending on who you choose to refinance with and what type of loan you have, many companies give the option to consolidate multiple loans when you choose to refinance. Consolidating your student loans means you are taking different loans that have different interest rates and are combining them into one new loan.
The benefit of this is you are simplifying your debt and making it easier on you every month for payment purposes. You’ll have one low monthly payment each month for your student loans instead of multiple to keep track of.
3. Release Co-signer
When you first started college and applied for student loans, you may have had someone co-sign to help your chances of getting approved. Your parents or another relative might have co-signed your loans if you didn’t have enough credit built up to make the process of borrowing easier. At the time, it may have been the only chance to attend college but now that you are out of college, you’re likely in a different financial situation with more credit built up and a yearly salary.
Refinancing will allow you to release your co-signer so you are the sole individual listed on the loan. This benefit is extremely important because your co-signer is just as responsible for the loan as you are. So now that you are capable of paying your loan, it is time to release your co-signer from legal obligation.
4. Change the Loan Term
Refinancing your student loans will allow you to explore more options for how long your loan term is. There will be options to either shorten your loan or to extend the loan. The repayment plans could come in 5 to 20 year sections depending on what you are looking for. It is important to look at your financial standing now and potential financial standing in the future before choosing a new loan term repayment plan.
The longer the term, the more in interest you will pay but the shorter the term means there will be a higher monthly payment. You can take the time to weigh the pros and cons of each option the refinancing company is giving you to decide what is the best choice.
5. Lower Interest Rate
Josh Hastings, the founder of the personal finance blog MoneyLifeWax, says when it boils down to it, paying off student loans is a really simple process once you understand how student loans work.
“Another option is to look into refinancing to reduce interest rates, but always make sure you know the pros and cons of federal versus private student loans,” Hasting says.
In fact, another popular reason that people choose to refinance their loans is to lower their interest rate. When you first applied for loans for college you may have had bad credit or even no credit at all, making your loans have a high-interest rate. Depending on where you are at right now, you could have had a salary increase, built up your credit, or even worked on your credit for a better score.
No matter what your situation is, refinancing will help lower the interest rate which helps you save money in the long run. There is no set interest rate that every individual receives, but you can research potential companies and they will give an overview of what their fixed interest rates range from.
Benefits from new refinancing companies
When you choose to refinance your student loans with a new company, they may have a set of benefits for their customers. Some refinancing companies have options to make bi-weekly payments to help with interest or to even have the flexibility to skip a payment during a difficult month. It is good to research your potential companies before choosing who to refinance with and base your choices on the benefits they give.
The choice to refinance your student loans can be a great way to tackle college debt and lower your monthly payments. Everyone wants to save money, and refinancing could be the option for you to pay off your debt sooner and possibly build up your savings a little bit more. While refinancing your loans may not be the best option for everybody, weighing your options will help decide if refinancing might be good for you and your bank account. With lower interest rates, refinancing may help you save a lot of money on your overall student loan debt.
What lending company should I choose?
There are hundreds of companies out there that will help you refinance your student loans, but a select few rank above the rest. The five best, as provided by Student Loan Hero, are SoFi, Laurel Road, CommonBond, LendKey, and Earnest.
All of these companies offer competitive rates with a variety of term lengths, ranging from 5 years to 20 years:
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If you have private and federal loans, SoFi may be your best bet, as they will refinance both loan types together. Be careful when refinancing a federal loan because you could be giving up some perks, including income-based repayment and loan forgiveness.
It is important to apply to several different lenders. Odds are not all of them will offer the same interest rate and terms, so shop around and get the best deal you can find. Also, you will want to take into consideration flexible payment options. This would give you the ability to change your payment amount or defer your payment for a few months if you hit a rough patch. Lastly, make sure to select a lender you are comfortable with and exhibits good customer service.
What will my interest rate be?
The interest rate you pay depends on your credit score, as well as things like income level, other debts, and employment.
Before starting the refinance process, pay down your debts as much as possible. Companies like to see a debt to income ratio below 30%. For example, if you make $100,000 they would like to see your total debts below $30,000. Another way to reduce the ratio would be to increase your income.
There are two different types of interest rates. There is a fixed rate, which will stay the same throughout the life of the loan, and a variable rate, which changes as regular interest rates change. Variable rates are generally lower than fixed, but you run the risk of interest rates increasing in the future.
Some lenders may reduce your rate slightly, usually .25%, if you sign up for automatic payments. This will withdraw your payment on the same day every month and apply it to your outstanding balance.
What will I need?
Whether you apply in person or log onto a website to begin your refinance process, you will need to have your social security card, your Driver’s License or state issued ID, your most recent pay stubs, and statements from your current student loans. Make sure the statements include the original balance, date of disbursement, and a full history of repayments.
Miscellaneous tips
If, unfortunately, you don’t qualify for a lower interest rate or the terms are not favorable, you can always ask someone to co-sign with you. If your co-signer is a parent with better credit and a stable income, that will look more favorable to the lender and, likely, will improve the terms of the loan.
After you submit your application, make sure you continue to make your current loan payments. The approval process takes about two to three weeks, so it’s important to not lapse on any of your current liabilities.
If you have a high balance, use longer-term periods in order to keep your monthly payment manageable.
Conclusion
Student loan refinancing can be a long and complicated process, but if you do it correctly by utilizing the tips provided, it can save you a lot of money in the end. You can also look into side hustles to pay off student loans if you wanted to get creative about paying off your debt.
Use the comments section below to ask any questions or to provide feedback.
Interested in refinancing student loans?
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