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5 Things to Consider When Refinancing Your Student Loans

by Allison Wignall on December 8 2021

Refinancing is the process of replacing one or all of your existing student loans for a new loan. This is generally a great option for anyone looking to renegotiate the terms of their current loans, however, as with any financial decision, you should know the facts first. Depending on your financial circumstances and long-term goals, refinancing may not necessarily be the best solution for you.

Here are 5 things to consider when refinancing your student loans so you can make an informed decision.

#1- Identify Your Goal for Refinancing Your Student Loans

There are several compelling reasons for refinancing student loans. You can save money by locking in lower rates, increase monthly payments to clear the debt faster, or lower monthly payments to make them more affordable. It’s important to be clear about the outcome you hope to achieve from refinancing.

Every decision you make during the process will impact the outcome. Being clear about your goal will guide you towards making the right decisions that best meet your needs. More importantly, they’ll prevent you from making mistakes that could push you further into debt.

So why exactly are you considering refinancing your student loans? What’s the outcome you’re hoping for? A lot will depend on your current financial situation as well as your long-term financial goals.

  • You want to save money on interest – And why not? You absolutely should refinance if you can get a lower rate of interest. This is especially true if you have high-interest loans. When you apply for refinancing, lenders will calculate a personalized rate for you based on your credit score. If your credit score has improved from the time you took the original loan, you may qualify for a lower rate of interest. The smallest reduction in rate could potentially save you thousands of dollars in interest over the life of the loan. If you’ve been working towards improving your credit score, now’s the time to reap the benefits.
  • You want to pay off your loan faster – The earlier you get out of debt, the earlier you’ll be free to spend your money the way you want. The only way to pay off your loans faster is to increase the monthly payments when you refinance. Before you do this, you must be 100% sure you can afford the higher monthly payments consistently. Missing a payment because it’s too high can be a major setback. Choose this option only if you have a steady job with a consistent income. Use a refinance calculator to determine the best loan term for you. With the shorter loan term you’ll save a substantial sum in accrued interest and get out of debt faster.
  • You need to lower your monthly payments – Maybe your income is not sufficient to meet your daily expenses and you’re struggling to cover the monthly payments. This increases the chances of payment delays and potentially defaulting on the loan. The late payment fees and interest will only increase your debt, so here, refinancing can help lower your monthly payments and make them more affordable. You’ll pay more in interest over the loan term but that’s better than defaulting. Besides, you can always refinance again to increase the payments when your finances improve.

As you can see, no one option works for everyone. Identifying your short and long term goals will help you choose the terms that work best for you.

#2- Review Your Credit Report & Credit Score

Your credit history and credit score are central factors that lenders take into consideration when assessing your application. This is to see if you’re a responsible borrower and can be trusted to pay the money back on time.

Your credit history reflects how well you manage your debt. Do you make all loan and credit card payments on time? How much debt do you have in relation to your income? A low debt-to-income ratio means your income is high enough that you can afford to take on the new debt. With each timely payment that you make, a few points get added to your credit score, improving it slowly and steadily. On the other hand, a single late payment can cause your score to drop. More than one late payment and your credit score will drop sharply.

A high credit score indicates that you are financially responsible and manage your debt well. This will get you approved more easily. Lenders will even reward you by quoting a lower interest rate. The better your score the lower the interest you’ll pay, which can increase your savings substantially.

While the exact credit score requirement varies among lenders, most require a minimum score of 650 to 680 just to get approved. It’s important to know that this minimum score is only to get approved for refinancing. It won’t qualify you for a low interest rate. With this borderline score, you’ll pay a high rate on your refinanced loan. You’ll need excellent credit of 700 or above to qualify for lower rates.

Reviewing your credit report and credit score will help you determine if refinancing is worth it with your score.

When reviewing your credit report, make sure to see if there are any inaccuracies or incomplete entries that are hurting your score. If you come across wrong entries, you can file a dispute and get them corrected. This will boost your score and help you get a lower interest when you refinance.

#3- Compare Rates and Terms from Different Lenders

Every lender sets their own eligibility criteria, interest rates, and terms and conditions. Once you’ve decided to go ahead with refinancing, you’ll need to find a lender that’s a good match for you.

When you do an online search, you’ll find thousands of refinancing lenders. Start by narrowing your shortlist based on their eligibility criteria. Lenders very rarely change their criteria. If you don’t meet a lender’s requirements, delete them from your shortlist right away.

Compare interest rates of the lenders still on your shortlist. While you want to identify lenders offering the lowest interest rates, that’s not the only factor to consider. Some lenders offer rock-bottom rates and make up for it by adding hidden fees. These could be in the form of application, processing, or some other fee. When added to the loan, these fees increase the cost of the debt considerably and cut into your savings. Browse through each lender’s website or ask them if they charge additional fees. Ideally, choose a lender that doesn’t charge additional fees.

When comparing lenders, also ask about their loan terms and conditions, and if they offer any borrower protections such as flexible payment or deferment options. Very few lenders do but it’s worth asking. It could influence your final decision. You may not think you need borrower protections but it’s nice to know there’s a fallback in case you experience financial difficulties in the future.

#4- Consider Whether You May Need Federal Student Loan Protections In The Future

Do you have a mix of federal and private student loans? Federal student loans are low-cost loans that come with several benefits and protections. Private student loans on the other hand have higher interest rates and no protections. You have nothing to lose and a lot to gain by refinancing your private loans if you get a lower rate and better terms on the new loan.

However, when it comes to federal student loans, you must weigh the pros and cons before choosing to refinance. The federal government does not offer refinancing, which means you’ll have to refinance your federal student loans with a private lender. When you do this, the loans become private and lose all benefits and protections associated with the original loan.

These are some of the protections you’ll give up if you refinance federal student loans:

  • Income-driven repayment options – These payment options set your monthly payments to a small percentage of your income. Paying a percentage of your monthly income means no matter how high or low your income, the payments will always be affordable. This lowers the risk of defaulting. Income-driven repayment options are not available with private student loans.
  • Deferment or forbearance options – These options put your monthly payments on hold temporarily, which can be a life-saver if you’re experiencing a financial crisis. Very few private lenders offer these protections and their terms tend to be harsher than federal student loans.
  • Loan forgiveness – There are multiple Federal Forgiveness Programs that will forgive or cancel your outstanding debt if you meet certain criteria. Individuals working in eligible public service jobs or teaching in underserved neighborhoods may be eligible for forgiveness. If you’re working towards forgiveness, you may want to hold on to your federal loans.

Only refinance federal student loans if your finances are strong and you’re sure you won’t need any of the federal student loan benefits. If you’re not sure, it’s best to keep them as is.

Refinancing is irreversible. This is one of the most important things to consider when refinancing your student loan. Once the lender has issued the new loan, you will permanently lose access to the protections that came with the original federal student loans.

#5- Can You Get A Cosigner?

If you don’t meet lenders’ requirements or you don’t qualify because of a low credit score, don’t give up yet. You may still be able to refinance your student loans with a credit-worthy cosigner.

A credit-worthy cosigner is anybody who meets the lender’s requirements in terms of credit score, income, and debt-to-income ratio. This could be a parent, sibling, grandparent, or any other relative or friend. Refinancing with a credit-worthy cosigner will make it easier to get approved. It will also help you snag a lower interest rate.

The challenging part can be finding a cosigner. When somebody cosigns your loan, they are in fact agreeing to share responsibility for the loan. If you miss a payment, the lender will approach your cosigner to make good on the payment. If you default, it will damage your credit score as well as your cosigner’s. It’s a huge risk that very few people are willing to take.

If you do find someone willing to cosign your loan, make sure to have an honest in-depth discussion about how it would work. Listen to your potential cosigners concerns and address each one of them. Most important of all, stay committed to making your loan payments on time so you don’t compromise your cosigner’s credit score.

Is refinancing your student loans the right course of action for you? Understanding what to consider when refinancing student loans can help in making the right decision. We make it easy for you to calculate your personalized refinancing rates with multiple lenders so you can identify the best lender for you.

We hoped you enjoyed this article! Remember, you can and potentially lower your monthly student loan payments and save money.