The end of the year is the ideal time to review your student loans and decide on the best way to manage them the following year. If the current loan terms aren’t working for you, you may want to consider refinancing. These tips for refinancing student loans will help you maximize the benefits and minimize the downsides.
What Is Student Loan Refinancing? What Are The Benefits?
Refinancing involves exchanging your existing loans for a brand new loan. When you refinance, the lender pays off your old loans and issues you a new loan with completely different terms and a new interest rate.
So how does refinancing student loans benefit you? When you take a loan, you’re stuck with the original terms. If your financial circumstances have changed since taking the original loan, the only way to get terms that are more suitable to your present circumstances is by refinancing. Another more compelling benefit is the potential to save thousands of dollars if you qualify for a lower rate of interest.
Right now, as we enter 2022, interest rates are the lowest they’ve been in years. Interest rates were at record low rates towards the end of 2021. Although they’ve gone up since, the increase has been marginal. Rates are still low which means huge potential to save money on interest. If your credit score has improved since taking the original loan, you’ll qualify for even lower rates, racking up those savings.
If you have interest rates, now is the best time to refinance and lock in those low rates for the remainder of your loan term. These 2022 tips for refinancing student loans will help you make more informed decisions.
Tip #1. Know Your Loans
If you took on student loans every year during your years in college, you’re likely dealing with multiple loans. These would be a mix of federal and private student loans. Each of these would have different terms and different interest rates. Before you go ahead with refinancing all loans, it’s a good idea to review the terms and interest rate of each of your student loans.
Create an excel sheet and write down these details against each loan:
- Type of loan – is it a federal or private student loan
- Loan amount and interest rate
- Balance owed and loan term
- Monthly repayment amount
- Fixed or variable rate
Tip #2. Revisit Your Financial Circumstances & Refinancing Goals
Refinancing student loans to snag a lower interest rate and save money is a good enough reason for refinancing. When you apply for refinancing, the lender will quote a personalized interest rate based on the current rates and your credit profile. However, you will be able to choose the loan term and the monthly repayments.
The loan term and the monthly payments you choose have a significant impact on how much the new loan will cost you. Choosing the wrong term can be an expensive mistake.
Ask yourself these questions when choosing the best terms on your new loan:
- Can I afford to pay more towards my loan payments every month? If you have a steady, high-paying job and have spare cash at the end of every month, you should definitely increase the monthly payments. The higher monthly payments will reduce the overall loan term. A shorter term means less accrued interest, which translates to substantial savings. The shorter term also means you’ll be debt free so much earlier.
- Are my loan payments unaffordable and am I at risk for defaulting on my loans? This may happen if you don’t have a steady job or your income is on the lower side. In this case, you should choose a longer term when you refinance. This will lower your monthly payments and make them more affordable. You should know that this will also extend your loan term so you’ll be in debt longer. You’ll also pay more in interest over the longer term. Weigh the pros and cons before choosing this option.
- Do I need to free up cash to pay off more expensive debt or for some other purpose? Refinancing to lower the monthly payments can help free up much-needed cash.
Before refinancing, take some time to calculate your income and essential monthly expenses. Then determine how much you can afford towards your monthly loan payments and accordingly choose a term that works best for you.
Tip #3. Take Another Look At Your Federal Student Loans
Federal student loans require special consideration when it comes to refinancing. These loans are offered by the federal government and come with many benefits and protections.
For example, you can choose one of the income-based repayment plans, which calculate your monthly payments according to your income. This ensures that the payments are always affordable.
Another benefit is the potential to get part of your loans forgiven if you qualify for forgiveness. Borrowers who teach in underserved communities or are employed by the government meet the qualifying criteria.
However, the federal government doesn’t offer refinancing. You can only refinance with private lenders and when you do, the federal loans get converted to private loans. As private loans, they lose all protections and benefits associated with the original federal loan.
Although the benefits of federal student loans sound very attractive, the truth is not everyone avails of them. Before refinancing federal loans, you must figure out whether or not you may need those protections in the future.
- Interest rates are at record low rates right now. They are likely lower than the rate you’re currently paying on your existing student loans. You’ll save a lot by refinancing your federal student loans in 2022.
- If you have a steady job and decent income, you don’t need the income-based repayment plans. In this case, you’re better off refinancing your federal student loans.
- If your employment status and income are uncertain, you may be better off keeping your federal student loans as is. Don’t be in a hurry to refinance them. Wait till your financial situation is steady and you’re sure you won’t need the benefits and protections of the federal loans.
- To get the benefits of refinancing without losing the federal student loan protections, consider doing a partial refinance. This is where you refinance only your private student loans and leave your federal student loans federal. This allows you to get the best of both worlds.
Important Note: Consider refinancing federal student loans ONLY AFTER May 31, 2022. This is because the payment pause has been further extended. If you refinance before that, you’ll have to start making payments right away.
Tip #4. Change Your Variable Rate Loans To Fixed Rate Loans
There’s a huge difference between fixed and variable rate loans.
With a fixed rate loan, the interest rate and the monthly payments remain the same till the debt is completely paid off. The advantage of a fixed rate loan is you know exactly how much you need to pay every month for the rest of the loan term. This makes it easy to set a long-term budget. The downside is you don’t benefit when interest rates drop.
With a variable rate loan, the interest rate and monthly payments fluctuate fairly regularly. This is because they are pegged to prevailing market rates. When market rates drop, your interest rate drops too and so does your monthly payment amount. When market rates increase, your interest rate increases too and so does your monthly payment amount. The advantage of variable rates is that you benefit from rate drops. On the other hand, you pay more in a rising rate environment.
As we said earlier, interest rates are at record lows right now. We highly recommend changing your variable rate loans to fixed rate loans when you refinance in 2022. This will allow you to lock in the lowest rates on your loan for the duration of the loan term. This small step could potentially save you thousands of dollars in interest.
Tip #5. Explore Your Refinancing Options
You’ll come across hundreds of private lenders who offer student loan refinance. Not all lenders are the same. Every lender sets their own refinancing requirements, loan terms, interest rates, minimum refinancing requirements, and fees. If you’re considering refinancing your student loans, the first thing you need to do is shop around for the best lender for you.
Start by checking the refinancing requirements and shortlisting those lenders whose criteria you meet. Next you need to compare interest rates and fees. While a lower interest rate is the topmost criterion, it’s not the only benchmark when looking for a lender. Some lenders offset their rock-bottom rates with miscellaneous fees. These additional fees can increase the cost of the loan considerably.
When comparing lenders, take a look at the interest rates and additional fees. Some of the most reputable lenders don’t charge any fees for refinancing.
Luckily, you don’t have to spend hours comparing lenders and their rates. RaptorFi has done some of the groundwork and put together a list of seven of the best lenders for student loan refinance along with a detailed breakdown of each. They also make it easy for you to calculate your personalized interest rate with each of the lenders. You can complete your comparison and even submit your refinance application within minutes, savings you time and frustration. What’s more, all of these seven companies on their list are highly reputed and trustworthy. You know your money is in good hands with these refinance lenders.
Tip #6. Stay Committed To Improving Your Credit Score
Several factors go into determining the interest rate you’ll pay when you refinance. Your credit score has the biggest impact on your refinance rate. The higher your score, the lower the interest rate you’ll pay. The smallest drop in rate could save you a substantial amount in accrued interest over the loan term. Taking steps to improve your credit score can pay rich dividends.
You can’t boost your credit score overnight but there are things you can do consistently that will help improve it over time. It’s never too late to get started. Start doing these things today to improve your score by at least a few points before you refinance. These few points could make all the difference:
- Make all loan and credit card payments on time. Payment history plays the biggest role in calculating your credit score.
- Keep your credit utilization ratio as low as possible. A low ratio indicates that you’re financially comfortable and can afford the loan payments.
- Leave old credit accounts open. Age of credit history matters when it comes to calculating credit score.
- Don’t open too many credit accounts within a short period. Each application triggers a hard credit inquiries, which shaves a few points off your score. Too many inquiries within a short period can cause your score to drop significantly.
Tip #7. Check Your Credit Report
Every debt payment you make get reported to all credit bureaus. The bureaus then use this information to calculate your credit score. On-time payments will add points to your score. Missed payments will deduct points from your score, causing it to drop. Any inaccurate or incomplete entry can damage your score for no fault of yours. This low score will prevent you from getting the lowest rate when you refinance.
Before refinancing student loans, it’s always advisable to request a copy of your credit report. You’re entitled to request one free copy of your credit report annually from all three major credit bureaus – Equifax, TransUnion, and Experian. This can be done online at AnnualCreditReport.com
Go through the report and make sure that all entries are correct and complete. If you spot any errors in any of the reports, raise a dispute with the relevant bureau. They will look into it and correct your score if the error is verified.
Tip #8. Don’t Stop Payments Prematurely
The refinance process can take a few weeks. You must make all loan payments that are due after you’ve submitted the refinance application. Continue making payments until such time that you actually receive the loan papers. If you stop payments prematurely, it will be considered a missed payment and you’ll have to pay a late fee fine and interest.
Ready to refinance your student loans? Once you’ve determined that refinancing is the best option for you, check your personalized interest rates from among the top seven refinance lenders.