Refinancing

Refinancing can be incredibly beneficial for many, but not all, borrowers. In this article, we'll break down the process so that you can make an informed decision on if this is the best option for your individual situation. First, it's important to know what Refinancing is. In the simplest terms, you are trading your current loan in for a new one. Keep in mind that oftentimes, refinancing involves consolidation(This is when all of your loans are paid off at once, and you are provided with one large loan in exchange.) 

Advantages 

There are a few potential advantages to refinancing your student debt and knowing what they are will allow you to make the best choice.

  1. It's possible that you will decrease your interest rate(which will in turn decrease your total repayment amount -- you can read more about this here.). For example, if you have $30,000 in debt at 7% interest, and you're able to refinance that same debt to a new loan with 5% interest, you’ll save more than $6,000 over the lifetime of the loan.
  2. There is the possibility of lowering your monthly payment. Since the total amount to repay is going down, in most cases, you’ll have to pay less each month, which can be a big help if you're struggling with other financial obligations, or even allow you to start saving up. One of the ways this happens is by extending the repayment timeline. For example, instead of a 10-year loan, you'll have 20 years to pay it off. (Of course, you can always pay back the loan faster if you want to as well and save even more over the life of the loan.)

There are a couple of other minor benefits as well:

  1. Simplifies your payments. If you have multiple loans through multiple different providers, it can be a pain to stay on top of all your payments each month. Refinancing consolidates everything into one loan through one provider. So as long as you make that one payment each month, you're all set.
  2. Releases a cosigner. Sometimes when you refinance, the new loan allows you to drop any cosigner(s) you had on the original loans. This can be helpful if, for example, your loans are a drag on your cosigner's credit.

Drawbacks 

As with almost any financial change, there are things to be considered, especially since refinancing to get the best interest rates often means consolidating both your private and your federal loans.

  1. Federal loans (the ones given to you by the government) come with a few options, and you will lose those options when you refinance, with no possibility of reversing the decision. 
  2. By refinancing, you’ll lose the benefit of having these other options as well: forbearance and deferment, income-driven repayment, and public service loan forgiveness. Luckily, many lenders do offer some flexibility that is similar to deferment; for example, 6 months of “job loss protection” that allows you to delay payments in this event this happens. Please note that not all lenders offer this, so you’ll have to evaluate each of them on a case-by-case basis.
  3. Refinancing will likely lower your credit score for a while since the old loans will close and this results in shortening your credit history. However, this effect will only be temporary and it can be considered insignificant compared to the other advantages and drawbacks we covered.

Requirements

Lenders all vary in how they calculate your risk(this is referred to as underwriting or learning more about you in order to assess your risk.). While there are differences in what new interest rate they offer you, many have the same two requirements:

  1. Good credit. You’ll often need a credit score of at least 660 or 680 to qualify.
  2. Reliable income. You’ll need to prove that you're employed (or self-employed) with a steady paycheck.

They’ll also look at other factors, including how much other debt you may have. Working with the lenders is your best option to learn about the individual requirements.

Possible Next Steps

The great news is that it's often a quick and drawback-free process to check what your new interest rate could be. We suggest that you check out each potential providers' website, give some personal info, and see a quote. These quotes aren’t set in stone, however, since you still need to go through the underwriting process to get an official quote. This will include, among other things, a credit check (that temporarily lowers your credit score a bit).

When choosing between lenders, look at all the factors you’d want to know about in any lender. In addition to the interest rate and other repayment terms:

- What kinds of benefits or options do they provide? 
- How have other borrowers rated them?
- What is their customer service like?

Something worth noting is that currently, you can get a lower interest rate if you choose a variable rate(meaning interest rate can change over time since it's tied to the federal interest rate); but, a fixed rate (one that doesn’t change) could be the safer bet in the long term if the federal bank raises the interest rate (which is always a possibility).

Once you’ve gone through and refinanced your loans, remember to set up auto-pay. This is beneficial for two reasons, It will guarantee that you never forget to make a payment and most lenders offer a bonus of 0.25% less interest if you use auto-pay.

Summary

  • Refinancing means trading in your old loan, often consolidating all of your old loans into one new one.
  • The main reason to refinance is to obtain a lower interest rate (which lowers the total repayment amount); this will also lower the monthly payment and can provide other benefits such as more convenient repaying (all in one place), and potentially dropping a cosigner.
  • The drawback of refinancing is that if you give up federal (government) loans, so you’ll never be able to take advantage of the options they provide, including forms of deferment and forgiveness.
  • In order to qualify for most lenders, you’ll need a good credit score (at least 660-680), and a reliable income.
  • You can compare refinancing options, then go through the underwriting (risk assessment) process to obtain a quote. Once you're refinanced, remember to set up auto-pay.

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