Refinancing student loans can be the right strategy to pay off student debt sooner but you’ll want to ask these questions first. Before refinancing you want to have a clear understanding of the reason for doing so.
Millions of people have student debt and the national total is more than 1.6 trillion dollars. Student loan refinancing involves taking on a new loan and paying off your existing student loans. You can refinance federal, private, or both loan types together. Refinancing involves using a private lender and going through an approval process using your credit and income. This is different from federal student loan consolidation.
Refinancing: Federal and Private Loans
There are benefits associated with your federal loans that aren’t offered on private loans. These benefits include income-based repayment plans and loan forgiveness. Private loans issued by banks, credit unions, and other financing companies offer their own set of benefits. The most important considerations when thinking about refinancing student loans is the rate, terms, and financial hardship benefits.
When refinancing student loans, you have a growing list of lenders to choose from. You’ll want to do your homework to find the best student loan refinancing company. Fortunately, there are many services that let you check your rate without impacting your credit score. Two services we’ve reviewed are LendKey and Splash Financial.
Answer these Questions Before Refinancing Student Loans
If the question, “should I refinance my student loans?” continue to pop up in your mind, then continue to read below.
Why refinance my student loans?
There are many reasons to refinance your student loans and most do so to lower the monthly payments. This can be done by refinancing with a lower interest rate and better loan terms. Or you may simply want to refinance to manage payments from multiple monthly payments to one single payment.
What type of loans do you have?
As mentioned earlier, know the difference between federal and private loans. You don’t have to refinance them all together. In fact, you can consolidate federal loans and refinance private loans. Or after doing the math, it makes sense to refinance them together. A crucial question is understanding your loans in the first place and the benefits that come along with them.
What are your current monthly payments and total debt?
You need to know how much your monthly payments are and the total amount owed. This will help you determine if a new single monthly payment is indeed better. Refinancing can lower your interest rate but it can also shorten the term for repayment. This can result in a much higher monthly payment than you can afford.
What are the terms of your existing loans?
What are the terms associated with your loans? List the interest rates, monthly payments, and loan repayment period. Don’t know your rates or terms? You can access your federal loan information on NSDLS and find the servicers for private lenders through your credit report.
What is your employment situation?
Refinancing involves a review of your credit history, meeting credit score requirements, and income. The approvals vary with each lender but they mostly stick to the basics of underwriting. You’ll want to have a stable job, good income, and low debt-to-income. If you’re unemployed, you may find it difficult to refinance. In these situations, you want to ask about financial hardship benefits with your existing loan servicers.
What is your credit score?
Your credit score is used for approval so very good to excellent credit may be necessary. In some instances, you can add a cosigner to increase your chances. The alternative is to wait until you’ve improved your credit before proceeding with a refinance. Review your credit report to ensure accuracy and use a free credit score app to check your score and learn how to improve them.
Do you have a cosigner?
Refinancing high-interest rate student can save you thousands. You may have a stable job and good income and credit but the lender still requires a cosigner. Think deeply about asking a family member or friend to cosign a loan. They’ll be on the hook if you decide to stop paying on them. Some private lenders offer a cosigner release agreement. It releases a cosigner from the loan without having to refinance or sign new terms.
Are you planning to apply for loan forgiveness?
Federal loans are eligible for loan forgiveness or cancellation under the Public Service Loan Forgiveness program or Teacher Loan Forgiveness program. If you are in public service, you have additional benefits that you may lose after refinancing.
If refinancing is a definite path for you, then consider the additional questions to ask yourself before refinancing student loans. They are:
What are your private lender options?
Shop around for the best rates and terms with a reputable student loan refinancing company. You have options form banks, credit unions, and financing companies to choose from. There are distinct differences so you want to do the work of understanding the terms and benefits before signing.
A good way to see what’s available for you is to use a student loan refinancing marketplace such as LendKey or Splash Financial. LendKey works with local banks and credit unions to refinance your loans. With Splash Financial, they connect you with traditional financial institutions as well as alternative financing options like SoFi.
What are the loan terms of the new loan?
With student loan refinancing companies, many offer pre-approvals and rate checks without impacting your credit score. You’ll be able to better calculate your savings, read terms, and assess benefits from lenders who will most likely approve your loan. Once you’ve selected a lender, take the time to review interest rates (is it fixed or variable?), repayment amount, loan terms, any fees or prepayment penalties, Check your rate from these top marketplaces.
What additional benefits are offered?
Do your research and ask your reps about the benefits associated with your refinanced loans. Ask about financial hardship assistance (because things happen), in-school deferment if you decided to go back, forbearance, unemployment protection, and interest rate caps.
What is the support like?
Finally, understand the type of support you’ll receive and if your loan will get sold to a different servicer. Many private lenders do no service their own loans. This means you’ll refinance with bank A but you’ll send payments to Servicer 1. This is quite standard and you see this with federal loans. The federal government issues student loans and you pay one of the contracted federal loan servicers for all the customer inquiries and hand payments.
Should you refinance your student loans?
If you’re eligible for student loan refinancing, you could save hundreds, if not thousands of dollars, over the life of your student loan. Ask the questions before refinancing student loans. Want to learn more? Read how you can save thousands on student loan refinancing?