Student loans are some of the best financial tools for students to fund their education. They are great if you don’t have the money to pay for college but still want to earn a degree. Student loans are usually less expensive than other forms of loans.
However, life is not always that smooth, and some people find themselves with too much debt. They owe too much money on student loans, and they do not know what to do. The longer you will take to pay for this debt, the more money you will spend on interest.
This is where student loan refinancing comes into play. It helps you lower your interest rates and pay off student loans faster. This article will explain how this tool works, the pros and cons of refinancing, why it may be a good solution for you, and where to find companies offering this service.
What are student loans?
Before getting into the student loan refinance details, you should know these financial tools. Student loans are a form of borrowing money to cover the expenses related to studying. They are usually offered through banks, private lenders, or the government to help students with their bills.
Student loans are helpful in many cases, but they may also become a problem if you do not know how to handle them. If you borrow a lot of money for college and fail to find a job after this, this can be a significant financial problem. That is why some people decide on student loan refinancing.
There are basically two types of student loans
1. Federal student loans:
The government offers federal student loans. So you can expect to find the lowest interest rates for this type of loan. There are fewer requirements for federal loans, and the borrowers don’t need to prove their creditworthiness. Students must meet certain academic points to meet the requirements.
2. Private student loans:
As their name suggests, private loans are offered by private lenders. These loans usually have higher interest rates, and you must prove your creditworthiness to get approved. The repayment terms are more strict with private loans.
What is student loan refinancing?
Now that we have a clear idea of what student loans are, it’s time to talk about refinancing. By refinancing, you basically change the terms of your current student loan. You apply for a better interest rate, and the company you borrowed money from agrees on this new deal. The companies offering a student loan refinance deal usually have lower rates than those keeping your previous loan.
Why should you consider refinancing student loans?
Here are some of the main reasons why should you refinance your student loans:
1. Lower interest rates:
The main advantage of refinancing is getting a lower rate than your previous one. Usually, once the loan is refinanced, it will be offered at a lower interest rate, and you can save thousands of dollars. You will start saving money when the new contract is signed, and the new interest rate kicks in.
2. Lower monthly payments:
Of course, lower interest rates mean that your monthly payment will be smaller as well. You may even get a different type of loan, which provides lower monthly repayments than what you currently have. This is why it’s essential to read all the offers thoroughly before choosing one.
3. You don’t have to pay for multiple loans:
Yes, student loan refinancing can help you get rid of multiple loans and consolidate them into a new one. This means that your accounts can be closed, and you won’t have to worry about paying for multiple debts at a time.
4. You can pay off your student loan faster:
Another benefit of refinancing is that the repayment terms may change in a way that will allow you to pay back your loan faster. This can be extremely helpful if you know that you will only need the loan for a short period and then manage to pay it back.
5. You can re-arrange your repayment term:
This is one of the main advantages because it allows you to change the loan terms. You can do everything from lengthening or shortening them, changing your monthly payment amount, adding another loan to it, etc. This will depend on your particular situation and your needs.
What are the disadvantages of refinancing student loans?
Even though there are many benefits to refinancing your student loan, you should consider that this may not be the best solution for everyone. There are certain disadvantages which you should know about before making any decisions:
1. Not everyone can qualify:
Not everyone can qualify for student loan refinancing. Before applying, you should read carefully about the requirements, and if you have a poor credit score or a low income, this option may not be available.
2. You lose federal repayment plans:
When you refinance a federal student loan, it means that all of your rights as a borrower are done for good. This means that you won’t benefit from federal repayment plans that can help a lot during a hardship, for instance. You will have to abide by the rules of your new lender, and there isn’t much flexibility here.
3. You might get locked into a fixed repayment plan:
Once you have refinanced your student loan, it’s very likely that you will get locked with a fixed repayment plan and fixed interest rate. This means that you won’t be able to switch from one type of repayment to another during the life of your loan. For example, federal student loans allow borrowers to modify their repayment terms and make them more flexible if they are in a difficult financial situation. This option might not be available when you refinance your loans with a private lender.
How do I refinance my student loans?
Now that we know about the main benefits and disadvantages of refinancing student loans, we can take a closer look at how to refinance your loan.
1. Decide whether you should or shouldn’t refinance your student loan:
Before you apply and refinance your student loans, make sure that this is the best decision for you. You should know whether or not refinancing under a private lender will be beneficial for your situation ahead of time. Once you come up with a definite answer, it’s time to start applying. Also, you have to remember, if you refinance federal loans, your terms can get terminated.
2. Find the best lenders:
When you look for a private lender, make sure that you choose one which suits your needs and offers competitive interest rates and fees. You can get this information from online reviews or even by speaking directly with the loan specialists at different companies before deciding.
3. Choose the repayment rates and terms:
After finding a lender who is willing to refinance your loans, you will have to make a few crucial decisions. This includes the type of repayment plan and the monthly payment amount. There is a wide range of available options depending on your needs and budget.
4. Apply for student loan refinancing:
Once you compare different offers and find one that fits your situation, it’s time to apply for refinancing. When you fill out the application form, make sure that all details are correct and accurate. Otherwise, this may affect your credit score or even lower it if there are any mistakes on your file.
5. Start repaying with the new terms and plan:
Once you get approved for student loan refinancing, it’s time to start repaying your loans with the new terms and repayment plan. Ensure that you stay on top of your monthly payments and if you get any reminders about late fees, act immediately to avoid these.
Best student loan refinances companies:
Here are some of the best companies you can choose from when refinancing your federal or private student loans:
1. MPOWER Financing
5. Discover Student Loans
When you refinance your student loans, it’s very important to have a clear idea about the benefits and disadvantages of this type of financing. Make sure that before making any decision, you research different lenders and see what they have to offer in terms of rates, fees, repayment plans, and so on. Good luck!