Graduating from college doesn’t only imply a heavy burden of loans. If you are lucky enough to land a job quickly, you can expect a paycheck, which will help facilitate repayments. If you weren’t that lucky, well then, you still have a number of options to go with. Refinancing your loan/s is one way to help ease the burden of heavy loan payment. There are a number of benefits as-well-as a few drawbacks. In this segment, we will clear the air around student loan refinancing. From clarifying basics and taking you through the technical aspects, we have all the information for you here.
What is Student Loan Refinancing?
You can also merge private debts with your student loan, pay them off with a new loan, and then make one single payment. Usually, this new rate of interest is lower than the previous student loan. The terms of repayment vary too. So, you end up saving thousands of dollars that you would otherwise pay as interest and reduce your monthly burdens.
That was simple, right? And it seems like a bargain too. But there are many more things to consider before you opt for refinancing. Sometimes you have to pay service fees while refinancing, and you let go of certain benefits and embrace higher risk. We cover it all in the following sections.
Is It Different from Student Loan Consolidation?
Yes. When you consolidate your loan, you only put multiple loans together to get one loan amount and one interest. This finally gives you the option of making only one monthly payment. It makes things easier and uncomplicated. Consolidation, however, does not entail taking a new loan. Students Loan Resolved has a separate segment for you if you want to consider Student Loan Consolidation instead. You may decide to take up refinancing after consolidating your loan.
What Are Things to Keep in Mind Before Taking Up Refinancing?
1. When Not to Refinance – If you are facing financial problems and cannot afford your monthly payments, refinancing is not a good option. In the state of delinquency, you should change your strategy altogether.
2. Forgiveness Options – You must know that refinancing takes away federal protection benefits you might be receiving on student loans. These benefits include Teacher Loan Forgiveness. If your federal loan qualifies for forgiveness, and if you work in the Public Service Sector, you must avoid refinancing. What’s better than having your loan forgiven?
According to the latest 2019 statistics, as of July 2019, 1% of the applications were accepted for forgiveness. Let’s make it sound better for you. $52 million were extended in Public Service Loan Forgiveness alone. You could assure eligibility in such forgiveness programs and reap significant benefits.
3. Pay Attention to APR – Annual Percentage rate should not be variable. This can set you further back. Low monthly payments alone don’t take you a long way. If you are confident that you will pay off your loan within the coming year or two, a variable APR is just fine. However, if you opt for a loan with a variable APR when you have several years before paying off the loan, it becomes perilous. What if the interest rate is even higher than your student loan interest? Such blunders come from frisky, careless financial planning.
4. Federal Loan Protection Benefits – Federal Loans give you flexibility. They also provide access to Income-based repayment Programs, and PAYE (Pay As You Earn). So, if you don’t have a stable financial position, federal loans seem to outweigh private loans. There is also the possibility to get discounts on student loan tax. Thus, if you are willing to embrace some financial risk, only then you should opt for refinancing.
How Can I Prepare Better for Refinancing?
Ensuring the eligibility for refinancing is not the easiest task. This is because student loan refinancing companies tend to have stricter loan parameters as compared to federal loans. You should not have a negative student loan track record. You might need a cosigner for student loan refinancing process.
1. Ensure Stable Income – A stable income implies a good credit score. You can reap greater benefits of refinancing by getting lower interest rates with a good credit score. And as we mentioned before, if you have a low income, you should stick to student loan benefits of flexibility and terms which are not risky.
2. Consider Other Debts – Credit-Card loan, mortgage payments, and other smaller debts might hang heavy on you along with student loans. Make sure that your total debt-to-income ratio is low. This reduces your risk factor and ensures eligibility as well.
3. Evaluate Your Credit Score – It is essential to have a good credit score if you want to be eligible for refinancing. Anything above 650 is a ‘good’ score. 720+ scorers land the best deals.
Getting Best Rates
Qualifying for a creditor who offers the best interest rates is a dream come true. The average Refinance Rate for 2019-20 was 3.14% to 8.82%. This is the average for loans with fixed rates. Education Loan Finance’s fixed interest rates start from 3.14%. With variable loans, you can go to as low as 1.90%. It may sound mythical but really isn’t! LendKey offers this rate on variable interest loans. It has integration with community banks and credit unions. Thus, it has a reputation for a personalized experience. On average, rates for variable loans range from 3.14% to 9.02%.
With some banks, you can get an extra 0.25% discount on interest by opting for automatic payments. This will ensure on-time payments. However, average rates are not the only thing to consider. Banks may have varying terms of payment. It’s all about finding a suitable lender who offers you a competitive rate.
Refinancing Changes in 2020
Democrats proposed The College Affordability Act in October 2019. The name speaks for itself. It seeks to revamp the higher education system. It’s not just the quality of education that will improve. It proposes flexibility and support for student loan’s needs. It will enable debtors to refinance their loans easily – a green flag for all planning to go with refinancing this year. The Higher Education Act is set to see updates too. In fact, this presidential campaign has seen adamant spirit to turn around the debt scene altogether.
The rules for student loan refinancing and repayment might change this year. Democrats like Bernie Sanders have proposed to wipe out student debt worth $1.6 trillion! Elizabeth Warren has introduced plans to benefit those with household income less than $250,000. We, at Student Loans Resolved, cover the latest trends and news regarding student loans. Recently, we analyzed Trump’s student loan forgiveness proposals for you. Tune in for more info on all the latest updates to the market and changes to regulations that impact lenders and borrowers alike.