About 7 out of 10 graduates from the class of 2015 left school carrying both a diploma and massive student debt, with the average graduate owing just over $35,000. Lenders don’t care if you’ve secured a job or how much you make. They just want their money. If you’re struggling with your student loan repayment, or just want to start saving, refinancing your student loans may be a great option.
What is Student Loan Refinancing?
Refinancing your student loans is just like refinancing your car or home. The new lender pays off your old loans and gives you a new one with new terms. Depending on your situation, you will typically receive a lower interest rate or lower monthly payment. In addition, refinancing is almost always completely free, as most lenders charge no fees.
A lower interest rate will save you money over the life of your loan. For example, say you have $50,000 in student loan debt at a 5.00% interest rate and have 10 years left for repayment. If you refinance this loan to a 2.50% interest rate and still choose to repay the loan in 10 years, the interest you will end up paying will drop from $13,639 to $6,562. If you chose to shorten the repayment length to only 5 years, you will end up only paying $3,242 in interest!
Alternatively, extending your repayment length means a lower, more manageable monthly payment. It is important to remember that if you spread your repayment over a longer amount of time, you will most likely be paying more over the life of your loan.
You can refinance both federal and private student loans, and you can even consolidate loans of different types into one. Not only can refinancing save you money, it can also help make the repayment process easier.
Who is Eligible for Student Loan Refinancing?
Refinancing is only offered to those who have already graduated from an accredited college or university and eligibility is based on credit worthiness. You must have a track record of on-time, consistent payments to be considered.
Often, when students graduate they obtain a well-paying job and start to build credit. Lenders are able to offer these lower interest rates because they trust that borrowers will be able to successfully pay back their debt.
Typically, lenders require a credit score of at least 660, a maximum debt-to-income ratio of 40%, and an annual gross income of at least $24,000. Each lender’s eligibility criteria varies, however, and some are much more strict.
What are the Benefits of Refinancing My Student Loans?
There are many benefits that come along with refinancing your student loans besides a lower interest rate or monthly payment.
First off, you may be able to switch your interest type. There are two main types of interest: fixed and variable. Fixed rates stay the same over the life of the loan while variable rates change with the market. For example, if you have a variable rate but want to switch to a fixed rate because of the Fed’s recent announcement that they would be raising interest rates, you will be able to select a fixed rate when refinancing.
Another great benefit of refinancing is that you will be given a new servicer. Many people dislike their servicers for a variety of reasons—whether it is subpar customer service, poor communication, or something else. When you refinance, you will be given a new servicer who often deals with less customers and can, therefore, offer more personalized attention.
The final advantage of refinancing is the ability to release a cosigner from your loans. Often, when taking out a federal or private student loan, students will have their parents cosign them. After graduation when borrowers can afford their monthly payments, they may want to release their cosigners. This not only alleviates the cosigners of their legal responsibility for repayment, but also frees up some credit so they can be approved for large purchases, such as a new car.
Are There Any Downsides to Refinancing?
Though refinancing may seem too good to be true, there are some things to consider before moving forward with it. Because refinancing is done through a private lender, you will lose any benefits that came along with your federal student loans.
Some of these benefits include income-based repayment plans, deferment and forbearance options, and student loan forgiveness programs. It is important to remember, however, that most of these programs have strict eligibility requirements and most borrowers do not qualify. In addition, many of the refinance lenders offer similar options to their customers.
If you are considering refinancing, make sure to see what federal benefits you may be eligible for and what you would be giving up. If you happen to be eligible for one, or will soon be, calculate if that program or refinancing would save you more money in the long run.
If you have graduated college and obtained a solid job, but still feel like your student loans are constantly looming over your head, refinancing may be able to help alleviate the anxiety. If you are eligible, refinancing could save you thousands over the life of your loan. As with anything, it is important to shop around for the best rates and to consider what you may be giving up.
written by Dave Rathmanner