Student Loans: Should You Refinance and Other Options For Paying Off Debt
In years past, people were stuck with their loan interest rates. They had very few or no options to change their repayment situations.
But as an increasing number of people started to feel the strain of student loan debt repayments, an entirely new solution emerged to make things more feasible- the student loan refinancing option.
While you might have heard about this, you may not be very sure whether it's an option you should consider. Here we discover student loan refinance, look at how it works and what its pros and cons are.
What is a Student Loan Refinance?
It is the process of obtaining an entirely new loan at a refreshed interest rate. Typically, you have the option to refinance both your private and federal student loans. It involves paying off your older loans and applying for a new one. The latter will have different repayment terms as well as a better interest rate.
It’s important to understand that student loan refinancing isn’t the same as a consolidation, although many individuals use these terms interchangeably.
Consolidation refers to opting for a Direct Consolidation Loan and then combining all of your federal student loans into a single loan with just one interest rate.
It's essential to check what changes have occurred in the student loan refinance rates 2019 as those will apply until any amendments are made in 2020.
While there are some similarities between refinancing and consolidation, the latter doesn’t offer interest savings of any kind. If you have a private student loan, the consolidation option isn’t available to you.
This is why refinancing can prove to be a better option for a person with a private student loan or someone that has a mix of private and federal student loans.
Pros of a Student Loan Refinance
If you have a consistent income and an excellent credit history, you should consider Earnest student loan refinance, Chase student loan refinance, Sofi refinance student loans or other options sooner than later, because:
- It potentially enables you to save thousands of dollars just in interest over the entire life of the loan.
- Help you consolidate multiple student loans into a single monthly payment
- Possibly bring down your overall monthly student loan payments.
For example, effective July 1, 2018, the federal Direct PLUS Loans have a 7.60% interest rate. Via refinancing, you may get approved for a far lower interest rate, which helps you save a significant amount of money. You can use those additional savings to clear more of your principal balance, create an emergency savings fund or even invest.
Cons of a Student Loan Refinance
- When you are refinancing your student loans, you will work with private lenders. It means you lose out on all the federal protections that come with the federal student loans you have.
- Top lenders that offer student loans refinancing have specific eligibility criteria in place. The basic criteria include the applicant being a legal resident as well as holding an undergraduate/graduate degree.
- These refinancing companies also require the borrowers to have excellent credit if you want to get the best rates. Well-established private student loan companies often need applicants to have an excellent or good credit score (generally 660 or above) to qualify. If you do not meet these eligibility criteria, you would not be able to refinance your student loan.
- Refinancing is an irreversible process. If you opt for it, you can't get the benefits later on. Once you refinance, you will have to be with that refinancing company for the remainder of the repayment duration.
How it Works
If you choose to refinance your student loans, you essentially apply for an entirely new private student loan. This one will pay off all the existing loans (private and/or federal).
It is just like applying for any line of credit or loan, and this is how it works:
- You’ll first need to submit a detailed application that documents all your financial accounts, loan balance(s) and employment.
- The bank will action a credit check (some student loan lenders overlook poor credit scores if you have healthy finances).
- If you get approved for refinancing, the new lender will clear your older loans, and you will then have a consolidated student loan. This will have a single interest rate and due date.
- To qualify for a student loan refinance, you will need to have either a stable income, good credit history or at least a co-signer.
- Some people are concerned about the fact that they’re joined at the hip to their cosigner. But most top lenders offer very clear pathways that permit cosigner release. For instance, you may be able to remove a cosigner from your student loan agreement after you have made a certain number of consecutive timely payments.
Important things to Keep In View
Most student loans refinance options need excellent credit. It means you need to have a minimum of three years of very responsible credit use. If this duration is longer, it’s even better.
Certain lenders like Earnest and SoFi, however, may also approve loans based on various other factors such as employment and history, even if you do not have any established credit yet.
As mentioned earlier, you can apply with a co-signer so the bank might approve your loan based upon that person's credit history and income.
However, even with a co-signer, it is your full financial responsibility to repay your student loan.
You can use an online student loan refinance calculator to determine how much you would be paying as interest for the loan amount and duration of the bank student loan refinance.
Since there are so many different aspects that come into play while refinancing a student loan, you would need to conduct a significant amount of research and assimilate information from various lenders.
Check to refinance student loans Reddit and other avenues as well. As mentioned earlier, student loan refinance is an irreversible process and you would be associated with that lender for the remaining duration of your loan, so make a wise choice.