Loan refinancing is a good option for borrowers with multiple student loans and a steady income. Refinancing student loans may be an especially good option for borrowers with a combination of federal student aid and private student loans. But what are the benefits of student loan refinancing? Does refinancing make sense for you? Are you likely to be eligible for student loan refinancing, and what are the best companies to refinance with? We explain the ins and outs of student loan refinancing, including the pros and cons, and some pointers on choosing a good student loan refinancing plan.
For many students, loan repayment can be a complicated and costly undertaking that includes multiple lenders, multiple monthly repayment commitments, and multiple monthly deadlines. Loan refinancing can help simplify this process and control your costs. Many private lenders offer student loan refinancing programs that allow you to consolidate your existing federal and private loans under a single, new private loan. There are several benefits, including simplification of your loan repayment schedule and a lower overall monthly payment, but there are also some potential drawbacks with student loan refinancing, especially if you enjoy certain protections through your federal loans. Read on to find out if student loan refinancing makes sense for you!
For additional tips on managing your loans, choosing a repayment plan, or reducing your risk of default, check out our Focus on Repaying Your Student Loans.
Student loan refinancing converts multiple federal and private student loans into a single monthly payment. While federal student loan consolidation may be an option for multiple federal student loans, this is not usually an option for borrowers with multiple loans from both public and private lenders. This is where student loan refinancing comes in.
Student loan refinancing is typically offered by private lenders who are willing to consolidate both your federal and private student loans into a new loan with a single monthly repayment plan. In order to refinance your student loans, you’ll need to determine:
Student loan refinancing can offer a number of valuable benefits, especially to borrowers who must make multiple payments to both public and private lenders each month.
The number one reason to refinance your student loans is to save money. How much money can you save by refinancing your student loans? While it depends on the balance of your debt and your financial outlook, Forbes estimates that some borrowers will save as much as $20,000 over the life of the new loan just by refinancing!
A good student loan refinancing plan allows you to save money by:
In order to determine whether or not you should refinance your student loans, you should be sure that it will ultimately save you money. There are three questions you must ask first:
Refinancing is most valuable to those who are managing multiple monthly payments, especially in cases where private loans may prevent you from enjoying the benefits of total federal consolidation.
Be sure that your new loan carries a lower interest rate than that of your existing loans. Take steps to determine that your new interest rate and repayment terms will actually save you money in the long run.
Be sure that you don’t already benefit from protections or loan forgiveness opportunities through your federal loans. By refinancing, you’ll be converting these into private loans. Doing so will eliminate any federal protections or progress already made toward federal loan forgiveness.
Presuming these three conditions—that you are carrying multiple loans; that you do find a lower interest rate; and that you don’t already enjoy protections or benefits on your federal loan—you would likely benefit from student loan refinancing.
There’s a short, easy answer to this question.
You would likely qualify student loan refinancing if you have:
Lenders will use your credit score to determine your likelihood of repaying your loan, and they will use your income to determine your actual ability to pay your loans. Lenders will also look closely at your debt-to-income ratio (DTI)—which is the balance between your income and your monthly debt payments (i.e. mortgage, car payments, credit card debt, student loans, etc.). A DTI of higher than 40% (which indicates that more than 40% of your monthly income is spent paying debts) would likely limit your opportunities for student loan refinancing.
According to Forbes there are a few additional conditions which may vary from one lender to the next, but which could impact your eligibility for a beneficial student loan:
Your credit score is the single most important determinant of your eligibility for loan refinancing. Lenders view your credit score as an indication of your ability to repay your debt, and will use this figure to calculate the risk of taking on your loans. If you are viewed as a high risk, lenders will either be unwilling to take on your loans, or will only do so at a higher interest rate. In the latter case, this interest rate might ultimately overshadow any benefits from refinancing.
Your credit score is based on a scale from 300 to 850. Though credit scoring models may vary, the standard credit score breakdown looks like this:
In order to be eligible for student loan refinancing, you would need a credit score that is Fair, at a minimum. Most lenders will require a score of at least 650-680 before considering your eligibility. The higher your credit rating, the more likely you are to qualify for a favorable interest rate.
Some prospective borrowers may struggle with bad credit. If you have a history of late or missed credit card payments, you’ve had bad debt referred to a collection agency, or you’re carrying an exceptionally high debt balance, your credit score may prevent you from qualifying for loan refinancing.
It’s also possible that a very limited credit history could prevent you from qualifying for refinancing. For instance, recent graduates who haven’t yet held a credit card, auto loan, or other major credit expense in their name may lack a complete credit history. This limited data makes it harder for a lender to evaluate the risk of lending to you. As a result, you may not qualify for student loan refinancing.
In either of these cases, you do have the option of securing a cosigner with a full credit history and a good credit rating. Your parents or spouse may be a good candidate for cosigning on your refinanced loan. However, it is very important to remember that your cosigner would be directly impacted by your ability to meet your new loan commitment.
Late or missed payments, or a default on your loan, would have a negative effect on your cosigner’s credit rating and financial outlook. Be sure that you are prepared to meet your loan commitments before asking a close personal relation to take on this risk.
If you don’t have a cosigner, you may consider embarking on an effort to improve your credit rating. In fact, this is an advisable course of action either way. In order to do so:
In general, refinancing your student loans will not significantly impact your credit rating. However, when you submit an application for loan refinancing, this will prompt a “hard credit inquiry.” Typically, this inquiry will result in a roughly five-point drop in your credit rating. This is a modest decline that can usually be repaired quickly as long as you stay current on your overall debt commitments.
However, this does suggest that there is a greater risk to your credit rating in submitting multiple loan refinancing applications. This underscores the importance of doing your homework first. Find the most favorable loan opportunity available to you and reach out to the lender with any questions. Be sure you understand the terms and conditions of any new loan in full. It doesn’t cost anything to ask questions. A credit inquiry is only prompted when you actually submit your application. If you can limit yourself to just a single application, the impact on your credit score will be minimal.
In order to prevent any negative impact on your credit rating, make sure you:
While student loan refinancing can be beneficial to the right borrower, there are drawbacks for less-than-ideal borrowers. Most notably, consolidating your loans with a private lender will result in the loss of any protections or forgiveness opportunities on federal student loans.
For instance, your federal loans may allow you to enter into an income-driven repayment plan. This ensures that your monthly loan repayments don’t exceed a threshold which is determined by your actual income. In this case, the federal loan provides certain assurances in the case of lost income or financial hardship.
Your new loan will eliminate this possibility, which means you would likely have less recourse and fewer options in the event of lost income. If you lack stable, long-term employment security, you may want to consider a federal income-driven repayment plan in lieu of student loan refinancing.
To learn more about this and other repayment plans, check out our Focus on Repaying Your Student Loans.
The same risk holds true for student loan forgiveness programs. If you are enrolled in a student loan forgiveness program that would ultimately eliminate the remaining total of your loan debt after meeting certain conditions, or exceeding a certain number of years, refinancing would eliminate this possibility. If you are already far enough along on the path toward forgiveness, you would likely want to avoid refinancing.
For more on these programs, check out our Focus on Federal Loan Forgiveness.
This also underscores the greater value of refinancing earlier in the life of your loan. The greater benefits of student loan refinancing may be felt across the lengthy duration of your loan repayment. Moreover, refinancing at that juncture would add additional time to the length of your repayment plan. If you’re already relatively close to meeting your debt responsibilities, the effort of refinancing might outweigh the benefits. In this case, only seek refinancing if you are presented with the opportunity for a considerably lower interest rate opportunity.
In a general sense, this will depend largely on the interest rates on your current loans. The primary goal is to find a new loan with a lower interest rate. Your interest rate eligibility will depend on your credit rating, income, and DTI. Interest on refinanced loans will typically range between 3% and 6.5%.
How favorably you view these interest rates will depend on your current interest rate. Do your research, make contact with reputable lenders, and ask plenty of questions before submitting an application to refinance.
Simply stated, the best company to refinance student loans is the company that will give you the most favorable conditions, including a low monthly payment, a lower interest rate, and a number of protections in the event of financial hardship. Of course, you want to be sure that your lender has a positive reputation in general, and is recognized specifically in the area of student loan refinancing.
Shop around and get quotes from multiple lenders before proceeding. According to its criteria, which include interest rates, flexibility, and consumer protections, Investopedia identifies the following as its Top Ten Student Loan Refinance Companies:
For additional tips on meeting your student debt responsibilities, check out our Focus on Repaying Your Student Loans.
For more on the borrowing process, check out our Guide to Financial Aid for College.Photo: Calculator with the text Student Loans on the display by Marco Verch under Creative Commons 2.0
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