If you are looking for ways to better afford your student loan payments, you may come across the option to refinance. Before you actually jump in with both feet, make sure that you have considered all options. Below, we will go over some of the reasons why you may want to refinance your student loans.
What Is Refinancing?
Refinancing is a process where a private banking institution or lender will take your loan and provide you with a new interest rate. The idea behind refinancing is to help make your payments more affordable and allow you to better manage your payments.
Benefits of Refinancing
When it comes down to it, you do not want to refinance your student loans if it is not going to benefit you in any way. It is important to understand just what it does offer, so that you can decide if it is something you want to proceed with.
Benefit 1: Lower Interest Rate
When you refinance your student loans, you will receive a lower interest rate than the one you are paying. Many students who have a variable interest rate will choose to refinance, so that they can receive a fixed rate.
Unlike Federal Direct Consolidation, which just takes a weighted average of your loans, refinancing gives you a completely new, unrelated interest rate that is usually much lower and can save tons of money.
Benefit 2: Shorter Repayment Terms
Though you may have a higher monthly payment, you can refinance to shorten the length of your loan. Instead of being on a 10-year repayment plan, you could switch to a 5-year plan, for example, to pay your loans off faster. If you have the finances to do it and it makes sense, it is a great option.
Benefit 3: Lower Your Monthly Payment
Though it won’t usually save you money, you can lengthen the loan by an additional year or two, which means that your payment will be lower from month to month. When you lengthen your repayment term, however, more interest will accrue over time and you will end up spending more over the life of the loan.
Benefit 4: Improves Your Credit
When you do refinance your student loans, you can build up your credit score by making monthly payments on time. It is important to make sure that you are always making the minimum payment to maintain and uphold your score anyways.
Other Things to Keep in Mind
When it comes time to refinance your loan, there are some things that you need to keep in mind. First, you need to have a good credit score and a decent amount of income to be able to refinance with a private lender. If you do not, you will likely not qualify for this option or you may need a cosigner to sign for you, which would require them to meet the qualifications.
Another thing to take into account is that there is not much protection for you in the event that you do lose your job or run into a financial snag. Your payments will still be due and there is no hold button to place them on the backburner while you catch up.
Another thing to consider is whether or not you are eligible for a loan forgiveness program. If you are, then you may find that when you refinance, you lose the qualification under the forgiveness program. If you are absolutely sure that you may qualify for a forgiveness program, it may be worth it to wait it out and continue paying your federal student loan payments. The reason behind this is because you usually need to make 120 payments before forgiveness kicks in and if you refinance, it will start those payments over.
Be sure that you are checking all of your options and making sure that you qualify to do so before refinancing your student loans. If you find that you do not, there are other options to keep you from defaulting on your loans.
Lastly, if you do plan to apply for refinancing, you need to make sure that you continue to make your student loan payments until you receive the letter that your refinancing has kicked in, otherwise, you may end up defaulting on your loan.