What is student loan refinancing, and, specifically, how does it work?
Student loan refinancing is the process of taking out a new loan to pay off your existing student loans. The new loan will potentially have a lower interest rate than your existing loans, which can save you money over the years on interest and help you pay off your debt faster. To qualify for refinancing, you’ll need to have a good credit score and a steady income. Plus, most lenders require that you have graduated from college and are employed full-time.
If you’re thinking about refinancing your student loans, here’s what you need to know.
Benefits of Refinancing Your Student Loans
1. Lower Interest Rates
One of the biggest benefits of student loan refinancing is the opportunity to get a lower interest rate. If you can qualify with a new lender for a lower rate, you’ll save money on interest and may be able to pay off your debt faster.
2. Save Money
Student loan refinancing can help you save money in two ways: by lowering your interest rate and by giving you the option to choose a shorter repayment term. A shorter repayment term means you’ll have higher monthly payments, but you’ll pay off your debt faster and save money on interest.
3. Customized Repayment Plans
When you refinance your personal student loans, you may be able to choose from a variety of repayment plans that fit your needs. For example, some lenders offer income-driven repayment plans, which base your monthly payment on a percentage of your income.
4. Potentially Get Rid of Private Student Loans
If you have both private and federal student loans, you may be able to refinance your loans into one new loan. This could help you eliminate your private student loans, which typically have higher interest rates than federal loans.
5. Release a Co-Signer
If you have a co-signer on your student loans, refinancing could help you release them from the loan. To do this, you’ll need to qualify for the loan on your own (which may be difficult if your credit score isn’t strong). But if you can qualify, it’s a good way to get rid of your co-signer and improve your financial situation.
Drawbacks of Refinancing Your Student Loans
1. You Could Lose Important Benefits
When you refinance your personal federal student loans, you’ll lose important benefits that come with federal loans. For example, you’ll no longer be eligible for income-driven repayment plans or loan forgiveness programs.
2. It May Be Difficult to Qualify
To qualify for new student loan refinancing, you’ll need a good credit score and a steady income. If you don’t have both of these things, it may be difficult to qualify. Plus, most lenders require that you have graduated from college and are employed full-time.
How to Qualify For Student Loan Refinancing
If you’re thinking about refinancing your student loans, here’s what you need to know.
1. Check Your Credit Score
Most lenders require a credit score of at least 650, but the higher your score, the better your chances of qualifying for a lower interest rate.
2. Compare Lenders
Not all lenders are the same. Some offer lower interest rates than others, and some have different eligibility requirements. So it’s important to compare lenders before you apply for refinancing.
3. Apply for Refinancing
Once you’ve found a lender that you’re eligible for, you can apply for refinancing online or over the phone. The process is similar to applying for a new loan, and you’ll need to provide information about your income, employment, and debts.
4. Get Approved
If you’re approved for refinancing, the lender will pay off your existing student loans and give you a new loan with different terms. Make sure to read the terms of your new loan carefully before you agree to anything.
5. Start Making Payments
Once you’ve been approved for refinancing, you’ll need to start making payments on your new loan. Your monthly payment will be based on the interest rate, repayment term, and amount that you borrowed.
Student loan refinancing can be a great way to save money on interest, lower your monthly payments, or get rid of your private student loans. But it’s important to understand the pros and cons before you apply.
Contact Financial Literacy for help with student loan refinancing.