The end of the year is a good time to review your finances and make a financial plan for the new year. This is especially important to those who have a lot of student debt to pay off and limited income. With a financial plan in place, you’ll find it easier to manage your debt payments.
When making a financial plan for 2022, one thing you should take into consideration is the payment pause extension on federal student loans. The federal government put a pause on student loan payments to help borrowers whose income had been affected by the pandemic. This pause was set to expire on Jan 31, 2022 but has been further extended to May 31, 2022. While this certainly helps ease the payment burden, you still have to make payments on private student loans. If you’re exploring options to make your loan payments more manageable, you should definitely consider refinancing.
What Is Student Loan Refinancing?
Refinancing essentially means giving up your existing loans for a new loan with different terms and interest rates. When you take on a student loan, you’re stuck with the interest rate and term till you’ve paid off the debt completely. You can’t change the original terms when your circumstances change. Refinancing the loan is the only way to change the original terms to something that’s more appropriate to your current circumstances.
When you refinance, the lender pays off the old loan and issues you a new loan. This new loan has no connection with the old loan in any way. The lender sets a new interest rate based on your credit score and other financials, while you can choose a loan term that works for you.
Powerful Benefits Of Refinancing Student Loans
The ability to tailor your existing loan terms to suit your current circumstances as well as your long term financial goals offers a multitude of benefits.
Money-saving potential – You can potentially save a significant amount in interest if your credit score has improved since you took the loan. When you refinance, lenders quote you a personalized interest rate based on your score. A high credit score will earn you a lower interest rate, which translates to substantial savings.
Possibility to pay off your debts earlier – If you’re earning a decent, steady income, refinancing to increase your monthly payments is a smart strategy. The higher monthly payments will reduce your loan term so you’ll be debt-free earlier. In addition, less interest accrues over the shorter term so you save money too.
Ability to make the payments more affordable – The pandemic affected almost everybody’s earnings. If your income has dropped and you’re struggling with your monthly loan payments, refinancing to lower your monthly payments will make them more affordable. With this strategy, you will take longer to pay off the loan and you’ll also pay more in interest over the longer term. However, that’s still better than missing payments and paying hefty late fees and interest.
The Most Compelling Reason To Consider Refinancing Student Loans In 2022
The most compelling reason to consider refinancing student loans in 2022 is to take advantage of low interest rates.
Interest rates on loans dropped to record lows around mid-2021. Although they’ve gone up since then, they are still very low as we enter 2022. If you refinance right now with a fixed rate loan, you’ll be able to lock in these low rates for the life of the loan. This one step can help you save thousands of dollars in accrued interest. Regardless of your finances circumstances or long term goals, refinancing student loans should be your top financial strategy for 2022.
If you have variable rate loans, this is the perfect time to refinance and change them to fixed rate loans. With variable rate loans, your interest rate and monthly payments fluctuate with the market conditions. Right now, you’d be paying low interest rates on your loans. However, the interest rates and monthly payments will start increasing as markets begin to get stronger. With fixed rate loans, the interest rate remains constant until the debt is fully paid off. You won’t be affected even if rates go up through the year. Refinancing your variable rate loans and changing them to fixed rate in 2022 will save you a whole lot of money in interest over the loan term.
Some Things To Think About When Refinancing Federal Student Loans
Federal and private student loans work quite differently.
Private student loans don’t come with any protections. If you’re getting better terms, you should definitely go ahead and refinance your private loans.
Federal student loans, on the other hand, come with some powerful benefits and protections such as income-based payment plans and loan forgiveness programs. With income-based payments your monthly payments are calculated as a percentage of your monthly income. This makes the payments always affordable, no matter how low your income drops. With loan forgiveness, you may be eligible to get part of your loans forgiven if you meet certain requirements.
If your income is unstable or you’re pursuing forgiveness, you may want to hold off on refinancing your federal student loans. This is because the federal government doesn’t offer refinancing. You can only refinance with a private lender and when you do, the federal student loans become private loans. As private loans, they lose all protections associated with the original loan. This process is irreversible, which is why you must think carefully about refinancing federal student loans.
Another reason not to be in a rush to refinance your federal student loans is because of the latest payment pause extension. If you do have federal student loans, consider refinancing them only after May 31, 2022.
5 Things To Do Before Refinancing Student Loans In 2022
#1. Check your credit report – The entries on your credit report affect your credit score, which in turn impacts the rate you’ll pay on your new loan. Before applying for refinancing, it’s a good idea to check your credit report and make sure that all entries are accurate. If you find any inaccurate entries, file a dispute with the credit bureau and ask them to correct it and recalculate your credit score. The improvement in your score may help you score a lower interest rate.
#2. Consider your refinancing goals – Think about your financial circumstances and what you hope you achieve with refinancing. If you’re earning a steady income, choose to reduce the loan term by increasing the monthly payments. If you can’t afford the current monthly payments, choose to extend the loan term and lower the monthly payments. Do your calculations to determine how much you can afford towards payments every month.
#3. Know your loans – Create a spreadsheet highlighting details of each of your student loans. Write down the outstanding amount, interest rate, loan term, and type of loan (whether private or federal). Also make a note of whether the loan is a fixed or variable rate. Consider whether you want to refinance all loans or only your private student loans. Also consider whether it makes more sense to convert your variable rate loans to fixed rate. Under the current circumstances, it’s probably a good idea to do this.
#4. Compare lenders – Interest rates, eligibility criteria, and fees vary considerably among lenders. But comparing the hundreds of online lenders in search of the best lender can be overwhelming. A quicker and more reliable way to compare lenders is by going to Refi.me. At Refi.me you can compare some of the top-rated lenders and even get personalized rates within minutes. Once you’ve identified the best lender for your needs, you can submit your application directly from the site.
#5. Keep making payments on your current loans – It takes time to process loan refinance applications. Until such time, you are still liable for the payments on your current loans. If you stop payments prematurely, they will be considered missed payments and you’ll be charged late fees and interest on the outstanding.
Final Thoughts On Refinancing Student Loans In 2022
With interest rates at near-record lows, no better time to refinance your private student loans than right now. At these rates, you’ll stand to save a considerable amount in interest regardless of any other factors including your credit score.
When it comes to federal student loans, you may want to hold them a bit longer because of the payment pause. Consider refinancing your federal student loans only after payments resume after May 31, 2022.
