Are you drowning in student loan debt? Do you cringe every time you see how much money you’re paying toward interest?
You might have heard about the student loan refinance movement that’s been building up since last year. There are more companies offering student loan refinancing services than ever before, and these companies are attempting to make refinancing as accessible to borrowers as possible.
Some lenders also acknowledge that upon graduating, young professionals in their 20s might not have much of an established credit history. As a result, many make the decision to lend to potential borrowers based on other factors, such as education, employment history, degree, salary, and how much debt they already have.
Essentially, lenders want to make sure you can afford to pay back your loans, and they realize that your credit score is only a small part of a much larger picture.
If you’re interested in refinancing your student loans, read on to find out what questions you need to ask before starting the process.
What Does It Mean To Refinance Your Student Loans?
First, you need to know exactly what it means to refinance your student loans, and why doing so may be a good option for you.
Refinancing your student loans is the process of applying to receive new terms on them. For example, if you need a longer repayment period for a lower monthly payment, then you can refinance to extend your term from the standard 10 years to 15, 20, or 25 years.
If your interest rates are high (say, 8%), you might be able to refinance to a lower interest rate, like 4.5%.
If your current loans have a variable rate, you can refinance to a fixed rate (and vice versa).
Lastly, if you owe multiple lenders, refinancing can help simplify your payments. You’ll only owe one lender – the one you refinance with. Your other loans will get paid off with the money from your new lender, and you’ll begin repaying your new lender for that one loan.
Refinancing is a great way to get better terms on your loans, but it’s not a magical cure-all solution. Here are a few other considerations to make before applying with a lender.
Do You Have Federal or Private Student Loans?
The distinction between federal and private student loans is critical for the purpose of refinancing.
If you refinance federal student loans, you’ll lose the benefits that are guaranteed with those loans. These benefits include repayment assistance such as deferment, forbearance, forgiveness, cancelation, discharge, and income-based repayment plans. You may also be eligible for additional benefits if you’re a service member.
Certain lenders offer these benefits to some extent or another, but they’re not guaranteed. That means your lender can change things up and decide not to offer them at any point in the future.
These benefits shouldn’t be overlooked, either. If your financial situation changes in the future and your income decreases or dries up completely, deferment and forbearance can help out a lot (you won’t have to make payments for a certain period of time). Not to mention if you become disabled and unable to work, you may be eligible for getting your loans discharged.
However, if your student loans are private, you have less to lose when refinancing. While many private lenders are improving their benefits, similar to refinancing, they’re not guaranteed. If the math works out in your favor, refinancing can be an easier decision when you have private loans.
Many lenders will also let you refinance both federal and private student loans together. Just keep tax deductions in mind. If you currently claim the student loan interest tax deduction, double check to make sure when you refinance, your student loans will still be considered student loans for that tax purpose.
What’s Your Credit Score and History?
While lenders have different algorithms to determine your creditworthiness, it’s still worth checking into what your credit score and history say about you.
Most lenders have loose credit requirements. For example, some may want to see a score above 600, while others want to see a score over at least 700.
Additionally, having late payments or delinquencies on your record generally isn’t good. If you have any recent dings on your history, you might benefit from waiting until they fall off or you repair your credit.
If you don’t have any credit score or history, don’t worry – a handful of lenders are willing to lend to you based off other criteria.
Do You Have a Fixed Rate or Variable Rate Loan?
Fixed rates don’t change over the life of your loan – the rate you have is permanently locked in. Variable rates can and do change over your loan term.
Those that currently have a variable rate loan may benefit from refinancing to a fixed rate loan for stability.
Not knowing what your monthly payments will be in the future could be a cause of financial stress. After all, how are you supposed to budget for your other expenses when your student loan payment could rise every few months or years?
If you don’t want to deal with any nasty surprises, refinancing to a fixed rate that stays the same may work better for you.
On the other hand, if you currently have a fixed rate payment, but can manage making extra payments every month, refinancing to a variable rate loan may actually benefit you.
That’s because variable rate loans start lower than fixed rate loans. If you can refinance to a variable rate of 3.50% (instead of a 5% fixed rate), and pay off your loan before the rate rises, you’ll end up paying less. Paying extra knocks the principal balance down quicker, so you’ll pay less in interest overall.
What Repayment Term Should I Choose?
Repayment terms can be tricky. Keep in mind that whenever you extend your repayment term, your loan becomes more expensive.
Let’s look at an example.
Say your current loan is $25,000 on a 6.8% fixed rate over 10 years. Your monthly payment is currently $287.70. The total amount you’ll end up paying over the life of the loan is $34,524.
Then, you refinance that $25,000 loan to a 4.5% fixed rate over 25 years. Your monthly payment will be $138.96, but the total amount you’ll end up paying is $41,688.
That’s a difference of $7,164.
So while the lower monthly payment with a longer repayment period may look like a good deal at first, remember how much money you’re paying toward your loan overall.
Of course, you can always pay your loan off early if your circumstances change. This cuts down on the cost of the loan, and most lenders don’t have prepayment penalties.
Are There Any Hidden Fees?
Here at MagnifyMoney, we hate to see borrowers pay any hidden or unnecessary fees. That’s why you should read the fine print before accepting any loan.
Here are a few fees you should be on the lookout for when refinancing your student loans:
- Origination Fees: Paying for an origination fee is costly. Thankfully, a majority of student loan lenders don’t charge origination fees, but it’s important to know how they work. An origination fee is charged to cover the administrative costs of issuing a loan. This fee typically ranges from 1% to 3% of your loan amount. If you refinance that $25,000 loan and have an origination fee of 3%, your fee will be $750. Origination fees are usually bundled into the loan, so you’ll actually end up owing $25,750.
- Late Payment Fee: As with any loan, if you pay late (generally 15 days past due), you’ll incur a late fee. These tend to be around $15-$25.
- Unsuccessful Payment Fee: The most convenient way to pay for your loans is to have it automatically debited from your bank account. Unfortunately, if you don’t have enough money in your account, you’ll face fees not only from your bank, but also from your loan servicer.
- Prepayment Penalty: Again, most lenders don’t have prepayment penalties, but it’s always worth checking. Some lenders make it difficult for you to make extra payments or to pay your loan off early, and they charge a fee for it since they’re losing out when you do this.
Are Cosigners Allowed?
If your creditworthiness isn’t enough to get you a loan, you may be able to apply with a cosigner that has more established credit, such as a parent.
Some lenders don’t allow you to apply with a cosigner, and some may or may not offer cosigner releases. In the event a lender does offer a release, after a set amount of timely payments (typically 36 payments or more), your cosigner can be released from his or her obligation.
What’s Your Education History?
Lenders have different education requirements for their refinance programs.
For example, SoFi* has a set list of schools and programs its program is available to, and CommonBond* only refinances graduate and professional loans. Citizens Bank refinances smaller amounts for bachelor’s degrees and larger amounts for graduate degrees.
Knowing your total student loan debt is a must when refinancing to know if you qualify or not, though there are a few lenders (like SoFi) that don’t have a maximum on the amount they refinance.
What Are the Values of Your Lender?
If you’ve been frustrated by your current student loan servicer, you know how big of a deal customer service is. Some lenders are great at it, and others aren’t very helpful.
Before going through the refinance process, get a feel for the potential lenders out there. It’s best to shop around regardless, but don’t be afraid to ask questions when you call to gauge how helpful and committed a lender is to serving you.
Our student loan refinance table is a good reference for this. We assign grades to lenders based on their transparency, so you know which ones are trustworthy.
Are There Other Options?
If you have federal loans, we recommend exhausting your options there first. There are income-based repayment programs you may be eligible for that could lower your monthly payments and extend your term. If you don’t have to go through the refinance process, save yourself the trouble and work with what you’ve got.
Have private student loans? It’s still worth calling your loan servicer to find out if they can do anything to assist you. As we mentioned, some may be able to give you the option of deferring payments. More and more lenders are trying to work with borrowers to make their payments affordable.
Overall, refinancing makes the most sense when you can secure terms that give you more manageable monthly payments. If you’re currently struggling to pay the minimum on your student loans, refinancing might be able to help.
Never Be Afraid to Ask Questions
If you find yourself with any extra questions, never be afraid to ask a lender for clarification. We try to make navigating the fine print easier, but lenders are constantly changing their policies and fee structure.
When you’re borrowing a significant amount of money, you want to be crystal clear on the terms. After all – that might be what got you into this situation in the first place, given that so many college students don’t fully understand the repercussions of student loans.
Finally, always remember to shop around and compare lenders. If you decide to refinance, it’s important to get the best terms and rates possible to make it worth your while. Some lenders use soft credit reports to give you an initial rate estimate, while others use hard credit inquiries. Shop around within a 30-day window regardless and your credit score won’t suffer as much.
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