Student Loan Refinancing: A Free Guide

Sarah was a graduate who had several student loans attached to her name and needed to pay back the loan within the shortest possible time and with a low interest too. As Sarah thought of what way to repay the loan, the idea of combining all her loans through finance came to mind.

After combining her loans, she was able to pay back the loan with lower interest just as she wanted, and at the time she had planned to pay — even though it took her almost 5 years to fully pay back the loan.

Are you like Sarah, drowning in student loans and needing a break? With the right strategies, you too can streamline all your debts and make the process much easier to handle. We’ll explore how to do this via student loan refinancing.

Student Loan Refinancing

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Table of Contents

    What is Refinancing?

    Refinance may be defined as getting a new loan to pay an older debt, or in the most simple way, it means to finance again, that is, taking out a new loan to pay one or more outstanding loans.

    What is Student Loan Refinancing?

    This is the process of taking a new loan to pay off your existing student loan such that you get to pay a lower interest and save money either for a short term or a long term — whichever you find convenient. When it is for the short term, you pay a lower amount monthly but with a higher interest; and when it is for the long term, you pay a lesser amount monthly with a low-interest rate. Student loan refinancing is way different from student loan consolidation.

    Student loan refinancing is only possible through private lenders, and the ultimate goal is to spend less money on interest or extend the payoff duration. While student loan consolidation is only available for federal loans, student refinancing is available for both private and federal loans with the possibility of the interest rate and terms being subject to change.

    Student loan consolidation combines all the federal loans of a student into one through what is called a Direct Consolidation Loan to ease payment. Many students find it easy to manage one loan than to have many to manage. The students as a result of this are open to many other benefits such as certain income-driven repayment plans and forgiveness programs they may not have qualified for normally.

    Should you refinance your student loans?

    Is refinancing really a good thing? Why should you refinance? These are critical questions that need to be answered before deciding if to refinance your student loans. So ask yourself,

    Are you willing to let go of the protection federal student loans provide?

    Federal student loans provide a lot of protection that one may have to consider before giving it up and they include:

    • Federal student loan forgiveness programs.
    • Deferment or forbearance under federal rules.
    • Alternative repayment plans.

    What interest rate can you get?

    A lower interest rate allows you to save a lot of money as it helps reduce your monthly payment and the interest you will be charged throughout the repayment duration, hence, you take a look at your current interest rate as this gives you the chance to go for a lower interest rate and get the best deal.

    How much can you pay monthly?

    Knowing your payoff amount can give you an immediate insight into how much you are to pay monthly. A longer student loan term is the best option for you if you have a low income, a high living cost, a high loan payoff amount, or a combination of any of these since it will result in lower monthly payments while a shorter loan term will be the best option for you if you would want to pay your debts faster.

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    Factors to consider

    Your student loan payoff amount 

    The loan payoff amount is the sum payment you would need to make to pay off your student loans in full. Knowing the amount is important because you want to know if it’s something you can manage or not since the balance of your new loan will be the aggregate of all the student loans combined through refinancing. It is not just enough to search for interest rates, you must also take note of the loan payoff amounts.

    Your main goal for refinancing your student loan

    When considering refinancing your student loan, one of the first things to know is your main goal for refinancing. Do you seek lower interest rates? Or do you seek to extend the payoff duration of your loan? 

    When you refinance your student loan, you get to reduce monthly payments and pay off your debts faster. However, you should be certain that you can keep up with payment, both now and in the future before giving up the protections you have, especially from federal loans. Your goal should be aligned with your financial plans and projections.

    Your financial stability

    When refinancing with a private lender, the federal student loans are paid off and replaced with a new private student loan. This action is irreversible and will mean losing access to all the benefits the federal student loans provide, and refinancing may not be a good option for you if your financial situation is uncertain, your monthly income varies, and you struggle with payments.

    Your credit score

    It will be much easier for your application to be approved if you have a very good credit score. And for most lenders, the minimum credit score is set between 650 to 680. Your score also determines the rate you are given as most lenders reserve the lowest rate for borrowers with very good credit scores or history, mostly within the range of mid-700s and above. Once you know your credit score, you can know the interest rate and terms that apply to you.

    Your eligibility – If you meet the lenders’ requirements

    Annual earnings near the national median household income of $ 70,784 give a better chance of qualifying for refinancing. Anyone who earns above that stands a greater chance of being qualified. 

    Lenders want to be certain about the source of income of anyone who wants to refinance as it assures them that such a person can afford the monthly payments and completely pay off their student loan. They need the assurance that the borrowers have a steady source of income.

    This involves disclosing how much they earn and how much they owe relative to their pay. Such information is vital to the lender’s business operations and can be assessed using the debt-to-income ratio (DTI). This is the proportion of the monthly income that goes toward minimum payment on existing debt.

    If the refinance lender offers a flexible repayment option 

    You may want to think very carefully before deciding on the lender you want to refinance with. Do they have a flexible repayment plan? For instance, what happens when you lose your job? Will the lender be considerate? Will they allow a pause till you get a job and can continue to pay?

    You want to know if the lender has policies that allow you to adjust your payment plan if you ever find yourself in any financial crisis and also if they are willing to work with you whenever you are struggling to pay.

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    When should you refinance? 

    You can know when to refinance through the following:

    When you have a steady income

    Most lenders want to be certain that you can afford the monthly payments and eventually pay off your student loan before they approve your application. Therefore, knowing when to refinance is knowing that you have a steady source of income. They also consider your DTI and the lower it is, the better for you. This is because a low DTI indicates that you make more than you owe and as a result, can pay off your loan without difficulty.

    When you have a good credit score

    Having a good credit score of 650 and above can place you in very good position to refinance — The higher your score, the better your chances of getting low rates. 

    When the rates are low

    It is very important to understand the current interest rate before you go ahead to refinance. The best time to refinance is when the market rates are low because when ‚Äčthere are changes by the Federal Reserve due to the economic climate, private lenders can follow suit.

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    How to refinance your student loans

    The following steps are to be taken in refinancing your student loan

    Check your credit

    If you have got your credit score and it meets the requirements of the lender, you can now proceed to the next step.

    Shop for the best rate

    In refinancing, shopping for rates should be something you do whenever you are trying to get the best offer. A higher rate would increase your monthly payment while a lower rate will reduce your monthly payment.

    Choose a loan offer that suits you

    This implies that you choose the offer that applies to your current situation. If it is to make your payment faster, you can opt for the short-term duration as this would reduce the rate and increase the monthly payment. In this case, you pay less and save more. If what you need is ease of payment, you can go for the long-term duration that allows you to pay a lesser monthly amount but with an increased rate — still within what you can afford.

    Fill out an official loan application

    When you have got the lender of your choice and the offer that is most suitable for you, you must fill out an official loan application before your loan can be approved. Based on this application, the lender may run a hard credit inquiry to access your full credit report. If applied with a cosigner, you will need to provide their information as well. Below are some of the copies of documents and information that may be needed during the official loan application:

    • Statements of loan payoff from existing student loan lenders or servicers
    • Social Security Number
    • Proof of employment
    • Proof of graduation
    • Driver’s license or Government ID

    Sign your loan documents

    The next step will be to sign your documents as soon as your loan is approved, after which you can begin to make payments.

    Is refinancing your student loans worth it?

    Student loans have significant effect on everyone saddled with its burden. From the financial strain to psychological stress, its toll on people cannot be overlooked. That’s why it’s important to find the best way to pay them off and weigh their pros and cons.

    Check your credit

    If you have got your credit score and it meets the requirements of the lender, you can now proceed to the next step.

    Shop for the best rate

    In refinancing, shopping for rates should be something you do whenever you are trying to get the best offer. A higher rate would increase your monthly payment while a lower rate will reduce your monthly payment.

    Choose a loan offer that suits you

    This implies that you choose the offer that applies to your current situation. If it is to make your payment faster, you can opt for the short-term duration as this would reduce the rate and increase the monthly payment. In this case, you pay less and save more. If what you need is ease of payment, you can go for the long-term duration that allows you to pay a lesser monthly amount but with an increased rate — still within what you can afford.

    Fill out an official loan application

    When you have got the lender of your choice and the offer that is most suitable for you, you must fill out an official loan application before your loan can be approved. Based on this application, the lender may run a hard credit inquiry to access your full credit report. If applied with a cosigner, you will need to provide their information as well. Below are some of the copies of documents and information that may be needed during the official loan application:

    • Statements of loan payoff from existing student loan lenders or servicers
    • Social Security Number
    • Proof of employment
    • Proof of graduation
    • Driver’s license or Government ID

    Sign your loan documents

    The next step will be to sign your documents as soon as your loan is approved, after which you can begin to make payments.

    Is Student Loan Refinancing worth it?

    Student loan refinancing have significant effect on everyone saddled with its burden. From the financial strain to psychological stress, its toll on people cannot be overlooked. That’s why it’s important to find the best way to pay them off and weigh their pros and cons.

    Turn Your Debts to Wealth

    Whether student loans or mortgages, debts prevent us from a living a life free of financial anxiety and worries. But what if we told you that your current debts could become a means to becoming financially independent? With the right money mindset and habits, you can utilise your insurance policy to own your debts and generate wealth.