Refinancing student loans, is it possible?

While they might help you save money and get lower interest rates, it all depends a lot on your current financial state. This means that you’ll have to research a lot before taking any finite decision. Keep reading to understand whether this is a realistic decision and its main pros and cons. 

Refinancing student loans is realistic for you? 

Refinancing student loans means trading your current loan for a completely new one with, possibly, lower interest rates and better payment conditions. This happens by trading federal loan plans for private ones with financial firms or other types of lenders. Sounds like a great deal, right? 

Well, not exactly if you aren’t able to weigh your options. Right now, interest rates for refinancing these types of loans are pretty low. This is leading some people to make rather rash decisions that aren’t adequate in the long term. 

refinancing student loans
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There are many options to get loans refined and each one of them has its own advantages. The main tip you’ll get here is: do your research, compare, compare and compare to make sure you’re getting the best possible deal. 

How does refinancing student loans work? 

When you apply for refinancing student loans you’re basically looking for a reviewed interest rate. Let’s say you have US$50.000 in loans with 9% interest (which is quite high, by the way). A private lender might offer to get your loan with lower rates, let’s say 5%, which will ultimately end up saving you quite a lot. 

But it isn’t an automatic process! Companies that specialize in refinancing have to evaluate if a person is eligible for this program. The first factor that influences the refinancing deal is your credit score. Generally, people with scores above 600 will have an easier time and better options. Really low scores tend to not be eligible. 

Does refinancing student loans hurt your credit? 

Refinancing student loans means taking out a new loan. Considering what normal loans do, it would mean a hard check on your credit report and other problems that would usually drag your score down. However, this isn’t the case!

When you’re still in the researching phase lenders will really check your score, but it involves just a soft check. Meaning that it won’t actually affect your numbers at all. Only after you make a final decision and follow up on the refinancing process will it generate a hard check. Rest easy, though, since the impact is usually of about five points or even less than that.

A common mistake that some people make when applying for a refinancing is stopping their payments before the process is over. Remember that nothing guarantees your approval. So if you stop paying your lenders will report this data to bureaus, which could significantly impact your score. 

When is student loans refinancing a good option?

You can find student loans refinancing from many sources, typically banks, online lenders and credit unions. There are downsides and good sides, as we’ll see in the next topics, but the most important question is: when should you get one?

Ultimately, what is good for your finances will be good for your credit score in the long run. So if you have solid financial health, a stable income and good credit score, go for it! After all, you’ll save some money in interest rates. 

Just be mindful of the payment conditions you currently have. Sometimes a student already paid half of your 10 year loan and decides to refinance. While this will help save a bit in interest, it will make the payment period much longer. 

Pros of refinancing student loans

Refinancing student loans can really help you as long as you’re in the financial position we mentioned before. If you’re looking for a way to save money and achieve better financial health, this could be a good idea. Check out the main pros for refinancing below. 

1. Alter your payment plan

As soon as you decide to refinance, a private lending company will “buy” your loan and offer you new conditions. That means you get a chance to change your payment plan, starting by the time period to end your payments, such as five, ten or twenty years. 

The longer you decide to take to pay, the smaller your monthly installments will be. A second choice is to choose a shorter payment plan, which means you’ll be rid of debt much sooner. There is no right choice here, it depends on what you can afford right now. 

Remember what we said before: the best option is the one that fits into your finances. 

2. Group new payments together

You might’ve taken out multiple student loans over your life, don’t worry, that’s completely normal. The only problem is that having many payments hinders your financial planning. There is a higher chance you’ll forget a due date more easily since everything is scattered along the month. 

By refinancing you get a chance to turn everything into a single monthly payment. This simplifies your routine and means you only have one lender to worry about. This can be combined with lower interest rates if you go through a private loan company. 

There is a possibility of getting a federal loan consolidation program. But this won’t bring most of the other benefits on this list. 

3. Applying with a co-signer

The tip to get a beneficial interest rate for your loan is having a good credit score and long history. Which might be a problem for a student who just got into college or even about to start his professional life. The solution is looking for a co-signer who has all of those characteristics, such as a parent or relative. 

By refinancing you can use this co-signer to get better payment conditions. If you had one to begin with, but would like to go on your own, this is also possible only when you refinance. Otherwise, it won’t be possible to get this third party individual off your loan deal. 

4. Lower monthly payments

By choosing a longer repayment term you have a great advantage: the monthly installments get lower because they’ll be divided in more time. A lot of people with student loans decided to get longer terms during the pandemic when their jobs were unstable or overall income dropped. 

Just remember that this also means you’ll keep this student loan for more years than previously expected. 

5. Increase your savings

Sometimes you can even save money and increase savings! If you’re refinancing mostly to get more competitive interest rates it will mean you have lower monthly installments and more available income to save. 

This money can go into investments, a high yield savings account or just personal investments you’ve been wanting to make. Otherwise, it’s a good way to plan your finances better and start saving in the future. 

6. Pay everything off faster

It’s important to know that you can’t both get lower installments and pay your loan faster at the same time. You must choose one or the other according to your financial prospects. 

People who choose a shorter payment term will be able to get rid of their student debt faster. Which is a great idea for anyone looking to start new investments in their life without having to worry about their student loans. 

Cons of refinancing student loans

All the benefits we showed so far don’t mean that refinancing student loans is a good choice for everyone. There are a few important cons you must consider, as you’ll see in the following topics. 

1. Refinancing student loans isn’t always possible

There are two main factors that might not allow you to get a student loan refinance: 

  • Bad credit score; 
  • Low debt-to-income ratio. 

Lenders want to make sure that the chances of getting payment is as high as possible. Which is why refinancing is rarely available for people that have bad credit and don’t earn much more than they owe. Getting a score between 600 and 700 makes it much more likely to get an approval. 

2. Interest rates may not get lower

Interest rates tend to be lower when you refinance, but that isn’t a universal rule. There are plenty of situations when you don’t actually get this type of advantage. That means you must compare your choices: if the interest rates aren’t much different from the original, what are you getting in return? Is it lower monthly payments spread over more years? 

3. Losing federal repayment protections

Federal loans give access to a few benefits, such as income driven payment plans that allow you to get better interest rates or longer terms. There is also a possibility to get federal loan forgiveness over the years, but since that isn’t certainty you shouldn’t rely on just that to finish your payments. 

Since the 2020 pandemic, federal loans have used some protection programs for people who have suddenly lost their income. As soon as you change to private providers, all of these benefits are gone. 

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