Anyone who has student loans knows they’re no fun. Having to dedicate a part of your income to loan repayment keeps you from realizing other goals. Refinancing student loans might be a good option for some consumers. Here’s how student loan refinancing works.
What Is Refinancing?
Student loans aren’t the only kind of debt that can be refinanced. Refinance is actually pretty common, as it comes with some significant benefits to borrowers when it’s done the right way.
In essence, refinancing student loans—or any kind of loan—is simply taking out a new loan in order to pay off the old one. While this might not seem like a logical or prudent decision at first, especially if you’re already uncomfortable with the idea of taking on more debt, it can actually be hugely beneficial.
How Can Refinancing Student Loans Be Advantageous?
It would only make sense for refinancing to be such a popular choice for borrowers if there were some kind of tangible advantage to it. And sure enough, there are some substantial reasons why refinancing student loans makes sense for a lot of people. These are some of the ways refinancing student loans can be a good idea:
- You can lower your payments – What’s not to like about the idea of paying less each month on your student loans? When you refinance, you can potentially lower your interest rates depending on the market conditions. It often makes sense for individuals to think about refinancing loans when market interest rates are lower than they were at the point of the original loan’s inception. By continuing to refinance at lower rates, borrowers can keep chipping away at what they owe without actually making any payments.
- Reassign loan terms – If you want to pay off your student loans faster, or conversely, you think you need to spread out your repayment more, refinancing can help. When you refinance student loans, you can typically determine a new term. Think about how extending or shortening your payoff period fits into your financial situation and future goals.
- Refinancing enables consolidation – Debt consolidation is a kind of refinancing where several student loans can be paid off by combining them together into an entirely new loan. This can help borrowers get better rates and terms on their loans, while simultaneously simplifying their repayment.
As you can see, there can be substantial advantages to refinancing student loans. But what’s the process like for actually going through with a student loan refinance.
How Does Student Loan Refinancing Work?
Borrowers with high-interest rates or loan terms they want to alter can certainly benefit from refinancing their student loans. Yet, many probably wonder if this is going to be a highly involved and difficult process. After answering the “what is refinancing” question, those who are thinking about it need to know what’s required on their end in terms of documentation, time, and money.
Generally speaking, refinancing student loans is a relatively easy process as long as you meet certain criteria. You’ll first need to gather some basic information about yourself in order to get refinancing rates. For most people, these will be easily obtainable things like your name, email address, outstanding loan balance, income, and other factors.
Once you have gathered all the credentials required by the lender, you can submit it to quickly see what kinds of deals are available to you. But you’ll want to make sure you’re getting the best possible rate on your loan. To do this, consider using a service such as Juno, which collects bids from a wide pool of lenders and only offers their members the best ones.
Before you go ahead with refinancing, however, there are a few things borrowers need to take into account about their specific loans.
Is There Anything Else to Know about Student Loan Refinancing?
There’s no doubt that refinancing student loans can be a great decision for many borrowers. At the same time, there are some more nuanced elements to this that might not be obvious at first glance.
For starters, it’s essential individuals with federal loans think twice before going ahead with a student loan refinance. If you consolidate federal loans with a new federal loan, you’re not going to get a better interest rate, just a new loan that carries the weighted average of the previous ones. Those who are able to secure a better interest rate through a private lender still might want to tread cautiously.
There are benefits associated with federal student loans that can be invaluable to certain borrowers. For instance, federal loans afford people the capability to not pay interest while they’re in school, income-based repayment plans, and, as many have experienced during the COVD-19 pandemic, the potential for forbearance on loan repayment. These benefits can be hugely important to some borrowers who otherwise might not be able to manage to pay their loans otherwise. On the other hand, some who originally got federal loans might be in a place where a low-interest rate matters more to them and might opt for that regardless of losing those other perks.
This, however, isn’t the only additional point that needs to be considered before going ahead with a student loan refinance. Consumers also need to think about how their credit score might affect their ability to get a refinanced student loan.
Unlike federal loans, private lenders care about your credit score. This is because the private lender ultimately has a profit motive, which, if it isn’t met, will result in negative outcomes for their firm. Those who are looking into private loans are generally going to have to have a decent score. A credit score of 650 or higher is generally expected, but some lenders might work with people who are a little below this mark. If you’re thinking about refinancing, but don’t have the greatest credit, you’ll want to find a way to raise your score beforehand.
As with many things in the financial world, refinancing student loans sounds a lot more intimidating than it is in reality. If you just take things step by step and don’t rush in too fast, you’ll be able to refinance your student loans in a way that’s advantageous for you.