Student loans remain the only way to get higher education for millions of US residents. According to the data of Federal Student Aid, nearly 43 million of Americans hold federal student debt. While student loans help young people reach their career goals and a better financial future, they also bear high financial burden borrowers face after graduation or even while at school.
Luckily, there are several options you can consider if your student loan seems out of control. Student loan refinance is one of them. Besides the multiple benefits it has, it also comes with several considerations borrowers need to keep in mind before making any financial decision. Here's how student loan refinance programs work and when they might help or harm your finances.
Student loan refinancing is a process when you take out a new loan from a private lender, often at a lower rate, and use the funds to cover your existing student debt. While student loan lenders are banned from charging any prepayment penalties, origination fees, or application fees, refinancing doesn't cost you anything. Moreover, it can result in significant savings or reduce the financial burden your current loan bears on a monthly basis.
There are three major ways you can benefit from student debt refinancing. They include the following:
Lower loan cost. You can reduce your total loan cost by getting a loan at a lower interest rate while remaining the same repayment period. This may be possible if you have a good credit score or can add a co-signer to your new loan application;
Decreased monthly loan payments. You may get a new loan for a longer time compared to what you currently have to repay the loan. As a result, your monthly loan payment will be lower, reducing the burden you carry each month. Just note that this option may result in a higher overall loan cost in the long run;
Faster student debt repayment. If your financial situation is stable, you can take out a loan for a shorter period and repay your debt much faster.
There are several steps you need to take to find the best student loan refinance deal. Here's a comprehensive guide:
Review your outstanding student loan balance. This will give you an idea of how much money you need. It's also wise to re-check your current interest rate, so you can compare it with the offers available on the market.
Shop around. Learn more about lenders offering student loan refinancing in your area. Consider options from banks, credit unions, and online lenders. Review their rates, repayment periods, eligibility criteria, and other terms that may affect your decision. We also recommend you check the lender's reputation and read customer reviews before entering any deals.
Pre-qualify. Many lenders now allow borrowers to get a preliminary loan offer by simply filling out one online form. This process doesn't affect your credit score. It only gives you a better understanding of your potential loan terms and allows you to compare offers from multiple lenders based on the terms offered.
Complete your final application. Once you find a lender with suitable terms, provide all the required documents and info to complete your application. Make sure to prepare everything you need in advance. You'll typically need loan or payoff verification statements, proof of income and employment, proof of residency, proof of graduation, and a government-issued ID.
Get the final loan decision. At this stage, the lender will perform a hard credit check to make an approval decision and finalize your interest rate. If approved, make sure you review your loan terms carefully, as they can differ from what you've been initially offered. If everything is fine, sign a loan agreement. You typically have up to 3 days to decide and accept or cancel the loan.
Get funded. When it comes to refinancing, you typically don't get the money on hand. The new lender will transfer the sum directly to your existing loan provider. The process may take up to 2 weeks, so make sure you have enough time before your next due date comes.
Each lender may set their own minimum credit score requirements. On average, your FICO rating needs to be at least 580 or 600, but some loan providers may only accept borrowers with credit scores of 680 or higher. Keep in mind that the higher your credit score, the lower the interest rate you will be offered, which will potentially result in more savings over the loan life.
Although student loan refinancing comes with several significant benefits, some pitfalls also exist. Let's take a closer look at them.
If you take out a new debt for a longer term, your total cost of borrowing will increase due to more interest you will pay over the loan life. Thus, you need to consider whether you're comfortable with this hike in total interest paid, taking into account a lower monthly payment that will decrease the financial burden you carry monthly.
If you refinance your federal student loan, you're no longer eligible for income-driven repayment plans, loan forgiveness programs, and other federal loan perks. Therefore, it's worth assessing your potential benefits along with this drawback to make an informed decision.
Student loan refinance is not the only way to manage your student debt more effectively. Here are a few other ways to reduce the financial burden of your student loan:
If you manage several student debts, combining them into one with a single payment can be a great idea. Debt consolidation will make debt management easier and can potentially result in a lower monthly payment. Additionally, if you're going to combine your federal student debts using a Direct Consolidation Loan backed by the federal government, you will be able to access various federal benefits and perks. Still, you may face a higher loan cost until you take out a private debt consolidation loan at a lower rate than those on your current debts (which is quite uncommon).
Student loan forgiveness programs are only available for federal student loans (including Direct Consolidation Loans). Depending on the program, certain conditions, and your current financial situation, you can have your federal debts forgiven, canceled, or discharged. Thus, you won't have to pay back some or all of your loans. You can find more details on the Federal Student Aid website.
When it comes to difficulties in managing your private loans, start a dialogue with your lender and explain your situation to them. They may be willing to offer you an extended repayment plan or even a temporary deferment. Be honest with your loan provider and demonstrate your responsible approach by providing a long-term debt repayment plan.
Student loan refinance may be a great option for effective debt management. It may help you decrease your loan interest rate, get a lower monthly payment, or repay your debt faster. Still, there are certain considerations regarding a potential increase in the loan cost and the loss of access to federal student loan benefits. Therefore, it's recommended to consider all your options and seek professional advice before making a final decision.
Sure, you can refinance both private and federal student loans. Private lenders don't set any restrictions.
As student loan lenders are prohibited from charging any origination and application fees, as well as prepayment penalties, there will be no additional costs associated with your refinancing. An average APR on a fixed-rate refinance is about 7.23%, while a variable-rate loan can cost you between 6.14% and 9.99% annually.
Refinancing is offered by private lenders, meaning that your federal debt will be replaced with a private one. Thus, you won't be eligible for Student Loan Debt Forgiveness programs.
When you apply for a new loan, a lender will check your credit score via major credit bureaus. This procedure typically reduces your credit score by up to 5 points. Thus, student loan refinancing can temporarily hurt your credit score. Over time, paying on schedule will help you offset this effect and improve your rating.
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