Tips on student loans refinancing
I like to start by saying that you can only refinance student loans with private lending institutions. If you have federal student loans, government will not refinance the loans for you. Interest rates on federal student loans are usually fixed. Therefore, there is no room for refinancing them. The only option you have is to refinance the loans with private lending institutions. Some private lending institutions will allow you to consolidate both federal and private student loans through refinancing. But if you plan to refinance your federal student loans, it must be done with caution as you tend to lose some benefits that usually associate with some of them such as loans forgiveness, deferment, forbearance and flexible repayment plans such as early repayment and income based repayment programs.
What is student loan refinancing?
Refinancing student loans means that you are taking a new loan to pay off the existing loan(s) with the aim of achieving lower interest rate and more favourable payment terms. I will like to mention that student loans refinancing is not the same thing with student loans consolidation. The term student loans consolidation is common with federal student loans. This means that you are taking just one loan in replacement of one or more loans. While consolidating federal student loans, you will not be able to reduce your interest rate. The interest rate on the consolidated loan is calculated as the weighted average of the interest rates on the loans you are consolidating. The new rate is always rounded up to the nearest one eight of one per cent. Therefore, the interest rate on consolidated student loan may be slightly higher than weighted average of the interest rates on the loans you are consolidating. So, it is important to know that consolidation will not save you interest but you can have a more flexible repayment plan thereby helping you to avoid or get out of default.
How to refinance student loans
There is an adage that says, “It is easy to buy meat on credit, but to repay is usually a problem”. This applies to student loans. If you are having difficulty paying back your student loans, it may be a time to refinance the loan. But student loans refinancing is not what anybody should rush to do. If it will not help you reduce your interest rate, it may not worth the efforts. Following the steps highlighted below will help you refinance your student loans.
Get your credit report: Before you apply for student loan refinance, I suggest that you obtain your credit report and review it for possible errors and omission. You are entitled to one free credit report from each of the three major credit reporting agencies namely Experian, Equifax and TransUnion every year. You can apply from the three credit bureaus at the same time or at different times. The advantage of applying for your credit report from the three major credit reporting agencies at the same time is that, you will be able to compare the reports. The reports from these credit reporting agencies may be different because your creditors may not report your credits to all of them. Unfortunately, the three credit reporting agencies don’t share information among themselves. It is possible that one of your payments was not reported in your credit report. You can also come across transactions such as hard inquiries that you did not authorise. If there is any of such, it can actually affect your credit score. You will need to report this to the credit bureau immediately to investigate. You can apply for your free credit report from AnnualCreditReport.com.
Improve your credit score: It is not automatic that your application for student loans refinancing will be approved if you apply. If your credit score is low, you may be denied. I mentioned that you should not rush the process. It is important that you improve your credit score first. It is one of the criteria used in assessing your credit worthiness and this will determine the interest rate lenders will ask you to pay on the loan.
Increase your income: You may not qualify for student loans refinancing until you have graduated from school and start working. If you earn good income that will allow you to increase your monthly student loans repayment effortlessly, it may be a time to refinance your debts. Shortening the length of your loan will help you save money on interest payment. To increase your income, you may want to change your job to the one that pays more. Or, it may means that you cut down your expenses so that you have more disposable income left which you can channel towards repaying your student loan debts. You may also consider combining two jobs or engage in side hustles if your current job will allow that.
Pay or reduce other debts: It may be difficult getting your student loans refinanced if you are having loads of other debts such as mortgage loan and auto loan. Having a lot of debts is an indication that you may find it difficult to meet your obligations and this may result to defaults in payment. Of course, no financial institution will like to lend money to people that have tendency to default in payments. Essential indicator that you may be carrying too much debt is your debt to income ratio. If this ratio is high, it means that some of your income will be going toward loans servicing. To refinance student loans, you will need to lower your debt to income ratio. Before you may see any bank or credit union that will be ready to take on the risk of refinancing your student loan debts, it will like to ascertain that you will be able to repay the loan based on the terms you will need to agree to.
Apply for refinancing: When all is set, you can now apply for the student loans refinancing. It is better to apply to three or more lenders so that you can compare their terms. Shopping around is a good way to get cheap interest rates. The lenders will like to make inquiries on your credit. Therefore, it is suggested that you do the shopping within a short space of time. This will make the credit reporting agencies to consider all the inquiries as one and this will limit the impact the inquiries may have on your credit score. I will implore you to ensure you do a proper background checks on the loan servicer you want to choose. Just of recent, I conducted a search about a particular lending institution (name withheld), the comments I read from different students were not okay at all. Some students called the company scammer while others complained about hidden charges that cost them a huge amount of dollar amount. In fact, I concluded that all these students cannot be wrong. Therefore, you need to be sure that you are dealing with trustworthy and reputable company.
Get a cosigner: If you approach some banks and credit unions and it seems you are not getting good rates, you may need to find somebody to cosign your loan for you. That person can be your parent, spouse or friend. I mentioned that if your income is low or your credit score is not good enough, a cosigner can help you in this case. The function of a cosigner is to agree to pay back your loan if you are unable to repay. The person is expected to have good credit history and good level of income. This will help you refinance your student loans at a good rate.
Advantages of student loans refinancing
You should not refinance your student loans without having a strong reason for it. You should also have the assurance that the step will help you achieve your aim(s). Some of the reasons you may want to refinance student loans include the following:
- Lower interest rate: In most cases, when students apply for education loans, they don’t have credit history. This may make the interest rates on their loans to be quite high except they apply for federal student loans which don’t require any credit check. When they start earning income after graduation, they may have access to lower interest rates. This may be due to the general fall in interest rates or because they have built up their credit through prompt payments of their loans. If you know that your circumstances have improved significantly, refinancing your student loans can help you lower the interest rate on your loans. This will help you save costs on interest payments. Also, more of your monthly payments will be going towards the repayment of the principal.I want to mention that if the sole reason for which you want to refinance your student loans is to be able to lower the interest rates on the loans, you may try other options especially if your loans are federal student loans. If you enrol in automatic monthly payments and you have been consistent in paying every month, your loan servicer may grant you special discount on the interest rate you are paying. With this, you will not necessarily give up the privileges you enjoy under federal student loans program.
- Lower monthly payment: When you refinance student loans, you are getting new loan with different terms. If you are finding it difficult to make your monthly payment, you can choose to refinance to a longer period. This means you will be expanding the duration of the loan. However, longer period means more interest payment. If you don’t plan this very well, even though you are getting lower interest rate, you may end up paying more interest because of the longer repayment period. Nonetheless, you will be able to adjust your monthly payment to the amount that will be convenient for you to pay without default. You may consider lowering your monthly payment if you are experiencing reduction in your income. On the other hand, it might be that you have other responsibilities which may make it impossible with your monthly payments under the current loans terms.
- Release a cosigner: If you got your student loans with the help of a cosigner, it may be a time to release the person so that he will be able to expand his own credit limit or line of credit. To achieve this, you may want to pay off the existing student loans so that you can get a new one through student loans debt refinancing. Refinancing will help you get a new loan with different terms which may not require that you provide a cosigner. Possibly you must have improved your credit score which may make it unnecessary to get a cosigner before your loan can be approved. Immediately you pay off the existing student loans, the cosigner will no longer be responsible for whatever happens to your new loan.
- Change from flexible rate to fixed rate: Unlike interest rates on federal student loans which are usually set at fixed rates, interest rates on private student loans can either be fixed or flexible rates. Private lending institutions may adopt low flexible interest rates to woo students to borrow from them. Later, they may increase the rates to reflect the index rate. When the index rate is high, flexible interest rates go up too. But if there is a general fall in the interest rates, it may be a good time to lock in the rate by refinancing the loan at fixed interest rate.
- Change of lender: Are you comfortable with the supports you are getting from your loans servicer? If you are not, refinancing your student loans can be a smart way to change to a better lender. But you need to carry out information and ask questions before you make the move so that it won’t be a continuation of the experience you are having with your current lender.
- Ease of payment: If you are having many student loans, you may be having difficulty making payments to many loan servicers every month. It is even possible that the loans have different repayment dates, therefore making it more difficult to keep with the dates in order not to miss payments. With student loans refinancing, you can consolidate all your student loans into one. In this case, you will only need to be making a single payment to one loan servicer every month. This makes things easy.
Disadvantages of refinancing student loans
- Loss of Benefits: If you are refinancing federal student loans, you can only do that with private lending institutions. That means you will be giving up the benefits that come with some federal student loans such as loan forgiveness program, flexible repayment terms, deferment and forbearance programs. Federal student loans allows early repayment but if you refinance with private lending company, you may be required to pay penalty fee for early repayment.
- Grace period: If your loans are still within their grace period, you will lose the unexpired period immediately the refinancing is completed. This means that your monthly payment will be due at the end of the month.
- Terms and Conditions: The terms and conditions that usually come with private student loans may not be as friendly as that of federal student loans program.
- Not as cheap as expected: When you refinance student loans, the lower interest rate offered you may just be a disguise. Students may end up paying more in the long run because of the extended payment period. The longer you owe debts, the more interest you will need to pay. Some lending companies will charge you origination fee. They charge origination fee to cover the costs of research they carry out on you and other closing costs.