What to Consider Before Refinancing
For a long time, borrowers were stuck. They had no way to improve their student loan interest rates or repayment terms. But as more students have had to rely on federal and private loans to help finance their undergraduate and graduate education, more options for repaying those dollars have also become available. For working professionals with good credit and income, student loan refinancing may be the ideal way to save money, create a monthly payment plan that better suits your situation and reduce interest rates.
What Is Student Loan Refinancing?
Student loan refinancing enables borrowers to pay off their original student loans and obtain a new loan with different repayment terms and a potentially lower interest rate. You can choose to refinance all or just some of your federal and private loans.
Why refinance? How could student loan refinancing save money?
Typically, student loan refinancing is an opportunity for those looking to:
- Lower their interest rate(s) and save money;
- Pay off their loans faster;
- Lower their monthly payments;
- Change from a fixed rate to a variable rate or vice versa; or
- Reduce the number of loans in repayment
There are many benefits to refinancing your student loans, but before you start the process, here are some things to consider:
- Achieve your financial goals. What is your primary reason for refinancing? Are you looking to lower your monthly payment? Pay off the loan more quickly? Reduce the total cost of the loan?
- Set your budget. How much you can afford to pay each month will depend on your income and your other debts. Federal income-based repayment programs take 10-15 percent of your discretionary income (difference between your adjusted gross income and 150 percent of the poverty line for your family size and state of residence) and could be a good option if you are having trouble making monthly payments. If you could pay more but still looking for some financial flexibility student loan refinancing offers the opportunity to customize a repayment plan that suits your financial situation.
- Know your credit score. The better your credit, the easier it may be to qualify and get favorable terms.
- Consider your ability to consistently repay. You will need to consider whether you may have to use federal options and other protections in the future, these could include income-based repayment, loan forgiveness, and forbearance and deferment options.
Maximize Your Savings: Explore Federal Loan Repayment Options
Federal student loans come with some provisions that can offer relief should your financial situation change for the worse any time during repayment. These include income-based repayment options, deferment and forbearance. While deferment and forbearance can help you avoid default, they do not save you money over the life of the loan. In some cases – as with forbearance – you would increase the total amount you owe. The best way to save money on a federal loan is to have your student loans forgiven, an option which is only available under certain circumstances.
Refinancing Is Not Consolidation: Refinancing vs. Loan Consolidation
Compare Refinancing vs. Loan Consolidation
Consolidation simply combines two or more loans into one loan with one interest rate. When federal student loans are consolidated into a Direct Consolidation Loan, the new interest rate is based on the weighted average of the original loans’ rates. Consolidation does not offer any interest savings, and private student loans cannot be consolidated with federal student loans, but any options and benefits associated with your federal loans are retained.
With refinancing you pay off one or more of your existing loans and a new one is created. The key benefit of refinancing is the potential to save thousands of dollars in interest over the life of the loan by lowering your interest rate or shortening your loan term.1 This savings can be used towards paying down the principal balance, investing or starting an emergency savings fund.
Evaluating Your Options: Research Student Loan Refinancers
Once you’ve decided that refinancing is right for you, look at more than just interest rates. Of course, interest rates are important, but as you shop around, make sure the rate isn’t just a “teaser,” but a real offer based on your information. You also want to evaluate the lenders, including their overall reputation and customer service reviews. And you want to look at other benefits they offer, such as what options they offer for economic hardship should the need arise.
How To Apply For Student Loan Refinancing
Applying for Student Loan Refinancing can be a lot easier than you might think. The most critical step is making sure you are eligible, and whether private loan terms will be more beneficial to you than your current Federal loan terms.
While each lender has its own specific qualification criteria, the key factors in determining eligibility and rates typically include your credit profile, total monthly debt payments and income. Those who are in good financial standing, have good credit scores and have shown they are responsible with other debts and monthly budgeting are more likely to be approved.
Borrowers who choose student loan refinancing have worked hard to complete their degrees and establish their careers. It is time to reap the rewards of those efforts. Seize the opportunity to potentially reduce your interest rates, pay down your debt faster, and save more. At Laurel Road, we believe your hard-earned money should fund your future — not your past.
- Savings vary based on rate and term of your existing and refinanced loan(s). Refinancing to a longer term may lower your monthly payments, but may also increase the total interest paid over the life of the loan. Refinancing to a shorter term may increase your monthly payments, but may lower the total interest paid over the life of the loan. Review your loan documentation for total cost of your refinanced loan.
In providing this information, neither Laurel Road or KeyBank nor its affiliates are acting as your agent or is offering any tax, financial, accounting, or legal advice.
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