Refinancing is when a lender gets you a new loan with a lower interest rate by paying off the existing loans of the borrower. By doing so the borrower can potentially save money from the very first payment.
Everyone wants to save money and make their debt more manageable, but refinancing is not for everyone. Taking the decision on refinancing is different for each borrower and depends on his/her individual decision.
Refinancing your student loans is not the right answer all the time but it is a smart strategy to go ahead with it. If your objective is to lower student rates, reduce a monthly payment or even revise the terms of your debt then it is aligned to what refinancing can do for you.
Refinancing can be done for federal student loans and private student loans, you will lose some benefits and you will potentially gain some other benefits. At the end of the day taking up refinancing is a money move that should be evaluated from all angles and perspectives. It should be noted that for certain situations refinancing will not make any sense and that’s okay.
Table of contents
- When to refinance
- Refinance multiple times
- Qualification for refinancing
- Cosigners and refinancing
- Save money with refinancing
- Comparison of refinancing lenders
When do I refinance my student loans?
As discussed earlier taking a decision on going ahead for refinancing depends on the individual situation. Here are some circumstances where a borrower can consider refinancing his student loans -
1) If the current rates on student loans are high. If you currently have variable rates in 2020 the interest rates are expected to get higher because of the recession speculation. Before you fall prey to these high rates it is advised to get locked in a low fixed rate by refinancing.
2) All your loans are private loans. If you only have private loans then you do not have to worry about losing federal benefits like student loan forgiveness options and income-driven repayment plans. Getting refinanced can help you manage your debt better.
3) When you have built a good credit score. Not all graduates have a good credit score right out of college so if you wait for a while and build a good credit score by making on-time payments then you can apply for refinancing. On doing this you don’t have to spend time looking for a co-signer.
4) If you are planning to save money even when in debt. If you can get a lower rate by refinancing then you should definitely go ahead because you can save money from the interest payments to be made each month and can use this saved money on the principal amount to get out of debt faster.
How soon should I refinance my student loans?
As discussed earlier it is advisable to first build a good credit score and get a high income. But the time someone manages to land a high paying job or build a good credit score can take a while.
How soon you decide to go to refinancing depends on your intent to refinance. If it is to shorten the repayment term it is advisable to do it as early as possible so you can get out of debt quicker. If you are finding the monthly payments to be made as too high and out of your budget you can opt to refinance your loans and get a longer repayment plan so the payments to be made will be more manageable.
Refinancing while still in school - If you have managed to build a good credit and payment record while still in school then you will be able to apply for refinancing. It is also advised to try and land a job either full time or half time which can cover more than just your bills. Some lenders like Earnest and Suntrust will let you refinance while still in school.
Refinancing during grace period - While refinancing it is advised to look out for lenders who will honor the remainder of your grace period. Your grace period is usually for six months after you graduate so you won’t have to make any payments until the end of your grace period.
Refinancing without a degree - Most lenders require that you must have a degree. But given the situation that you didn’t graduate and you still have student loans to repay then you should consider refinancing with a lender who hasn’t kept having a degree as mandatory for refinancing. One such lender is Citizen Bank which allows borrowers to refinance without a degree.
Can I refinance more than once?
There is no limit on the number of times you can refinance your student loans. So technically you can refinance a number times until you get a rate or term which is best suited for you.
Consider the case where you refinanced a while ago and now your credit score has improved and you got a raise in your income. Now if you decide to refinance you might land a lower interest rate Since refinancing does not have an origination or application fee you won’t be charged each time you want to refinance.
Do I qualify for refinancing?
In order to qualify for refinancing you will have to meet the lender's requirements. The requirements vary from lender to lender but here are some general requirements which if met should increase your chances of qualifying for refinancing -
1) Excellent credit score - Most lenders will require a credit score ranging from 650 upwards. Most of the applicants for refinancing have FICO scores in the 700’s.
2) Low debt to income ratio - Most lenders will require a debt to income maintained at below 50%. Most applicants who get approved for refinancing have a debt to income ratio below 20%. In order to maintain a low debt to income ratio, you need to minimize your monthly expenses.
3) The school must be eligible - if a borrower has attended a school that is authorized to receive federal aid dollars he/she has a higher chance to get approved for refinancing.
Co-signers to enhance your refinancing application
Don’t meet the income and credit requirements mentioned above? Not everyone can land a high-paying job right after college so meeting the income requirements is hard. First and foremost contact your lender and try and find out why your application was rejected.
If the reason for rejection was because of your credit score and income requirements then it is advisable to build your credit score and strengthen your application by getting a co-signer. It is important to choose a co-signer with a good credit history. Then whole motive of getting a co-signer on board is to further strengthen your application.
It is important to check for co-signer release provisions by the lender. If you fail to make on-time payments during your repayment journey then you will affect even the co-signers credit score so it is advised to release the co-signer from the burden of debt once the borrower starts to repay his/her loans.
How stable are my financial conditions for refinancing?
Refinancing your loans and your financial conditions are solely dependant on the type of loans you are dealing with.
If you currently have federal loans and are struggling to make payments then you should try to consolidate your loans instead of jumping to refinance your loans. Consolidation will not help you save much money but it can help manage your loans better.
Given the situation that you have consolidated your loans but now you have decided that refinancing is the best option for you. A private lender will not mind the fact that you have consolidated your loans.
The Department of Education does not provide refinancing services, the federal loans which are refinanced lose their eligibility for benefits offered by the government like loan forgiveness and income-driven repayment.
If you have private student loans then you wouldn’t have to worry about losing any government loan benefits. As mentioned before if you’ve already refinanced and have noticed that your credit has improved recently you can go ahead and refinance your loans again until you get a rate that can help you save a good amount.
You can’t consolidate private loans because that option is limited to federal loan types only. So refinancing is the only go-to option in case you want to work on getting better terms during your repayment journey.
If your student loans consist of a mix of federal and private loans you can combine them together and refinance them into a new loan with a single payment to be made each month.
Consider carefully what you could lose when refinancing like the loan benefits associated with your federal loans but don’t forget what you gain by refinancing. Single payments to be made each month makes your debt much more manageable and a lower interest rate can help you save money.
How much can I expect to save with refinancing?
You can save a good amount of money by refinancing and getting a lower interest rate. The sooner you refinance the more you can save based on the repayment term. When you refinance your student loan you aim to get one or both of the following -
- Qualifying for lower monthly payments so you can get more cap space
- Reduce the term of loan to help you get out of debt faster
Once you reduce the monthly payments to be made you lower your debt to income ratio as the expenses to be met each month are reduced. This can help you qualify for a mortgage.
Confusion between refinancing a mortgage and student loan
Most borrowers tend to get confused between the benefits of refinancing of student loans with refinancing a mortgage. It should be noted that refinancing a student loan does not cost of money. Generally, there are no origination, application, prepayment fees but there may be few exceptions based on the type of lender you decide to go for. Hence it is advised to check the terms of the loan agreement to see certain costs you could potential incur in the future like late fees and much more.
Factors for comparison between lenders
It is always said to compare the available lenders before deciding on a particular lender to refinance. Based on the rate offered you can decide as better the rate the more one can potentially save with refinancing. Apart from the rates offered other factors would be flexibility in the payments to be made and the forbearance options one can expect.
Always be aware of the options out there which can help you in your repayment journey and pick the one that suits you best.