Having trouble paying debts? Refinancing student loans could help.
Nowadays, people defer payments for nearly everything they want and need. From student loan debts to mortgages, folks borrow funds just to afford most products and services.
Unfortunately, millions of people are starting to buckle under all these debt burdens.
The recent economic downturns caused massive job layoffs and business closures never seen before. Consequently, they can’t keep up with student loan payments and other debts.
Thankfully, debt reduction strategies could help them regain control of their finances. For example, refinancing student loans could ease repayment after college.
Table of Contents
Student loan refinances your current repayment terms and conditions with new ones.
It could reduce a person’s monthly payments by minimizing the interest rate. You may have an easier time repaying your student loan debts.
What’s more, you have several refinance options to choose from. These depend on multiple factors, including your credit rating and financial situation.
Refinancing student loans entails huge consequences, so ponder on this method carefully. Read further to learn about available options and the corresponding pros and cons.
You should consider several factors when selecting refi options.
Understand your current financial situation, then search for suitable refinancing options. People handle their money differently, so lenders provide a wide variety of choices.
Refinancing is also more preferable if you have private student loans. Federal counterparts could be refinanced too, but you might forfeit their exclusive benefits.
Additionally, acquire a copy of your credit report for your credit score. It will heavily affect your new loan terms from refinancing student loans.
Repayment Plans (based on income, federal forgiveness plans, etc.)
If you reliably earn medium-to-high income, refinancing could reduce your monthly payments.
On the other hand, other options could be more suitable, especially for federal student loans. You may struggle to pay the fixed amount every month, and you’ll lose federal benefits.
Understand your finances thoroughly and look for every available option.
Before refinancing student loans, you should learn the available repayment options.
There are two types of federal repayment plans: basic and income-based. Basic plans have a repayment period of 10-25 years, and they often have a set monthly payment.
On the other hand, your repayment plan could adjust to your income. Income-based repayment plans require a percentage of your income so that it will shrink or expand accordingly.
If you refinance federal student loans, you’ll miss out on your flexible repayment plan. Consequently, you might not be able to pay every month in case your income dips.
Federal vs. Private
Refinancing student loans also means relinquishing the corresponding federal benefits.
You’ll forfeit access to public service loan forgiveness (PSLF) and student loan deferment. Also, you may miss out on recent federal aid, like the ones during the COVID-19 pandemic.
If you’re working for a government or nonprofit agency, you probably have access to PSLF. After 120 eligible payments, the remaining amount you owe will be forgiven.
Meanwhile, you could request for temporary deferment of your student loan payments. In response to the pandemic, the government launched COVID-19 forbearance options.
Bad Or Good Credit (how it affects your refinancing application status)
Similar to regular loan applications, your credit plays a huge role in refinancing student loans.
Banks and credit unions determine loan amounts and terms using credit scores. These are based on several factors that gauge how a borrower handles personal loans and other debts.
If a borrower has good credit, lenders will probably receive their repayments on time. As a result, they prefer people with high credit scores.
The same concept applies when refinancing student loans. Bad credit means unfavorable refi terms and conditions. Worse, lenders will reject your application.
Things You Want Before You Consider To Refinance
Of course, you should check your current student loans first.
Check the existing conditions such as the repayment period and the interest rate. Next, search for every possible refi option available.
Then, contrast your existing terms with the new ones from refinancing. Make sure you also consider the current economy in your decision.
For example, most people want fixed interest rates for consistent monthly payments. However, a variable rate loan might charge lower interest depending on current situations.
Consider your credit score before refinancing student loans. Also, see if you’re reliably earning enough income for the new monthly payments.
As we’ve discussed, an individual’s loan rates and terms depend on their credit rating.
Refinancing means requesting a new loan that will replace your current one. In turn, lenders will have to check if you’re trustworthy enough based on your credit rating.
They’re unlikely to replace your current student loan if you have bad credit. You may want to check alternative ways of handling student debt.
Your debt-to-income ratio is another factor to keep in mind when refinancing student loans.
DTI is a number that compares your unpaid balances with your income. Low DTI means you’re probably able to repay your debts with your current earnings.
Lenders also check this rating before approving student loan refinance applications. In response, you should check your debt-to-income ratio before refinancing.
Lower your DTI by reducing other debts and increasing your income. You could use employ debt reduction strategies before refinancing student loans.
For example, you could consolidate loans to deal with other debts easier. If you’re overwhelmed with too many debts, consolidation could simplify repayment by lumping them into one.
In contrast, you could use a do-it-yourself debt reduction strategy. Create and follow a budget plan to efficiently allocate your money for necessities and debts.
Where to Refinance
Private lenders refinance federal student loans and private counterparts.
Your preferred bank or nearby alternatives could be offering refi options. Expand your choices by searching online for other lenders.
Inquire about their refinance options and see which ones match your needs. If possible, improve your credit and income before refinancing student loans.
Student loan refinance could help your financial goals.
It may reduce some of your debts so that you could save money. In turn, the extra funds could help in paying rent, groceries, or utilities.
Please note that you have other ways to facilitate student debt repayment. For instance, student loan consolidation could ease repayment while improving your credit score too.
Refinancing student loans only helps with one type of debt. You may need other debt reduction strategies for the rest of your debts.
Studying lets, you achieve your career goals. Refinancing may help your financial ones.