As much as you wish it would, your student loan debt isn’t going to magically disappear. Counting on student loan forgiveness might not work, especially if you can’t afford to make 120 on-time payments. And what if you make too much to qualify for an income-based repayment plan? Fortunately, if your student loan burden is too big to bear, it may be possible to refinance your student loans.
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What It Means to Refinance Your Student Loans
When you think about refinancing, a home refinance probably comes to mind. When you refinance a mortgage loan, you take out a brand new loan and use it to pay off your old one. Homeowners often choose to refinance when they want to lower their loan interest rates and monthly payments.
Student loan refinancing works the same way. You’re getting a new loan that’s meant to cover the debt for one student loan or multiple loans at a time. Having a new student loan means you’ll have new loan terms and hopefully a lower interest rate than you had before.
Generally, there’s a lot of confusion regarding the difference between refinancing and consolidating student loans. Let’s clear that up.
To consolidate means to combine multiple parts into one unit. So when you’re consolidating your student loans, you’re putting them together. Instead of having four loans and four separate payments to make each pay period, you’ll only have one bill.
When you consolidate a federal student loan, your loan servicer averages all of your interest rates to come up with a new interest rate. Consolidating can also be a good choice if you have some loans with variable interest rates because you’ll get a new, fixed interest rate that won’t change over time. If you’re trying to lower those rates, however, consolidating likely won’t do that for you.
Qualifying for a Student Loan Refinance
If you decide that you like the sound of a loan refinance, you’ll have to meet your lender’s requirements to be eligible for one. First of all, you’ll need to have a good credit score and documents to prove that you actually graduated. Plus, you’ll need a steady job that serves as a stable source of income.
Refinancing might be out of reach, especially if you’re a recent college graduate without an extensive credit history or you’ve had a hard time landing a job. To compensate for these risk factors, your lender might be willing to consider some additional factors, such as the amount of savings you have in your bank account and how profitable you might be in the future based on the type of degree you’ve earned.
Lenders who offer student loan refinancing include banks like Citizens Bank, credit unions and private startups such as SoFi.
Refinancing Private Student Loans vs. Federal Loans
Not surprisingly, there’s a distinction between refinancing loans that come from the federal government and the private sector.
Federal and private student loans can both be refinanced so that the borrower ends up with a new private loan. But there’s no such thing as refinancing a private loan and getting a new federal loan.
In order to refinance a private student loan, you may have to consolidate your other loans. Once your multiple loans become one loan, you might get a new interest rate based on your credit score and other details that make up your financial history. In contrast, federal loan refinancing and federal loan consolidation are completely different processes.
Is Refinancing My Student Loans the Right Move?
Refinancing could give you the chance to reduce your monthly student loan bill and the amount of interest you owe. If the new loan you pick has a shorter term, you could pay it off in five years instead of 10. In the meantime, you could bump up your savings or stick the money you would have put toward your student loans in a retirement account.
Maybe you can’t afford your student loan payments and you need to refinance so that a co-signer can help you pay down your debt. Or on the flip side, maybe you feel comfortable paying your bills on your own and you want to refinance so that your co-signer is no longer responsible for your student loans.
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Keep in mind, though, that refinancing could potentially do more harm than good. If you refinance and lengthen your loan term, you’ll have more time to pay it off but you’ll ultimately pay more interest. Your total interest amount could also go up if you switch from a fixed rate to a variable interest rate, although you might be paying less interest in the beginning.
And if you trade in your loan from the government for a private student loan, be prepared to give up all of the benefits that come with being part of a federal program. That means you’ll lose access to student loan forgiveness and special repayment plans that you might need if you’re laid off from your job. If you have a co-signer and you default on a loan you refinanced, both of your credit scores could take a hit.
Refinancing your student loans might make sense if you have a decent job and you’ve worked hard to improve your credit score. After all, who wouldn’t want a lower interest rate? Taking out another loan could provide you with some much needed relief if your student loan payments eat up a significant portion of your income.
But before you sign up for a brand new loan, it’s important to think about the perks you’ll forfeit and the risks that refinancing can bring.
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