How Can I Refinance My Student Loans?
The continued decline in interest rates has allowed student loans to join mortgages and automobile loans in the market for refinancing.
The Fed’s actions opened the door to student loans borrowers who could refinance their loans for as little as 2% in some places. That would be good news, especially for the 34-and-under age group who owe nearly half of the $1.4 trillion in student loan debt.
For many of them, this may be their first attempt at refinancing so knowing the steps to take and the questions to ask will help save money on interest rates and possibly pay off the loan sooner.
First steps to refinancing student loans
To refinance your student loans, call the lender and ask them to walk you through their loan application process. Lenders will assess your financial portfolio and background; If they like what they see, they will extend the offer. The higher your income and credit score, the better shot you have at locking in a lower rate.
Don’t confuse student loan refinancing with student loans consolidation.
Refinancing is the term we use when talking about private student loans. Consolidation refers to federal student loans. If you want to secure a lower interest rate, you need to refinance your loan. You can still do this with federal student loans; However, you will lose your eligibility for federal loan forgiveness programs and repayment plans.
This is why refinancing may not be for everyone. You should be confident in your job security and your ability to maintain a high income before breaking your federal loan lifeline. Even if you’re refinancing a private student loans, there are usually fees to factor into your decision-making process.
The point is: Don’t let the benefits of refinancing overshadow the drawbacks.
We can help you weigh the pros and cons of student loans refinancing, so when it comes time to sign the contract, you’ll know exactly what you’re getting into.
How to Refinance Your Student Loans
Refinancing student loans is a very straightforward process. Here are the steps you need to take to complete it:
- Do your research on refinancing interest rates: Look at average rates and qualifications at different lenders. Make sure you visit all three major lending sources: banks, credit unions, and online lenders.
- Evaluate loan terms and choose your lender: Choose the lender whose terms best match your needs and goals.
- Prepare your documents and fill the application: Prepare your documents and apply.
- Don’t stop paying your student loans: Don’t ditch your old lender before hearing back from your new lender. Keep track of your payments to avoid late penalties and fees.
Be patient and don’t rush into a bad deal because you’re eager to sign a new one. The difference in some interest points can be thousands of dollars over the life of the loan.
Here’s an example to show how much refinancing can save you.
Suppose you have a $30,000 loan with an interest rate of 6%. After 10 years of paying $333.06 per month, you will have accrued over $9,967.38 in interest alone.
This time let’s say you have the same $30,000 loan but with a 4.5% interest rate instead. After 10 years of paying $310.92 per month, you will have paid 7,309.83.
By finding a lender to lower your interest by 1.5%, you save $2,358 over 10 years. You can also save more money by paying more than the monthly requirement.
Now that you know what you stand to gain (or lose), let’s dive a little deeper into the steps involved in student loans refinancing.
Do your research on refinancing interest rates
Rates will vary depending on where you go. Student loans refinance lenders will use your income and credit portfolio to gauge your risk as a borrower; The lower the risk, the lower the rate.
There is no way to be sure what you will be offered in advance as standards vary by lender. Some place a premium on high income while others salivate over a good credit score. Research the average interest rates for your credit bracket so you can minimize the risk of being shorthanded by a lender. Know your value (or what the lender perceives as your value) before negotiating terms and conditions.
Evaluate the loan terms and choose your lender
This is where you weigh the pros and cons of all lender terms and conditions.
Some things to ask yourself when evaluating loan terms:
- Will you go with a fixed rate or a variable rate?
- How much time do you want to spend paying off the loan? 10 years? 20?
- What are the credit score requirements?
- Can you put up collateral (car, house) to secure the loan and possibly improve the interest rate?
- Are there any prepayment penalties?
- Are there any origination fees?
Many lenders will charge you an origination fee, often expressed as a percentage of the loan. They range between 1%-10%, so they can be either slight or significant.
A 10% origination fee on a $30,000 loan is $3,000. It is itself a “small” loan. Make sure your new loan fees don’t eat into the savings you get from paying off your old loan.
Choose the terms based on how you want the repayment process to proceed. Keep in mind that shorter repayment periods mean larger payments and vice versa.
Related: Paying Back Best Student Loans 2022
Prepare your documents and fill the application
Gather everything you need to complete your application. This step is simple so it can easily be skipped. Just remember, if you come to the phone prepared with the proper paperwork, you’ll save both yourself and your lender a lot of time (which equals money) and stress.
Here are some things you want to keep in mind when applying to refinance your student loans:
- Social Security Number or equivalent
- Driver’s license, government-issued ID or passport
- Verification of income ie pay stubs, tax returns etc.
- Student loans statements
Don’t stop paying your student loans
Don’t stop making those payments even if you’ve been pre-approved for your new loan. You don’t want your new lender to see that you’ve missed a payment, especially in those critical moments as they decide whether or not to finance your new loan. This is not to mention the late fees you may accrue. No matter how you look at it, it’s a good idea to stay on top of your payments.
Student loans repayment process
When you refinance your student loans, you take out a brand new loan with a new lender. For the rest of the loan, you will pay your new lender. Your old lender will no longer be a factor once all the paperwork is gone through.
However, some borrowers worry about paying more to their old lender before their new agreement is approved. You’ll have to pay when your due date arrives, but if you’re approved for a new loan, any payments you made while you’re waiting for approval will be refunded.
So, don’t worry about paying extra; Just make sure you pay on time.
Can refinancing help me pay off my debt faster?
Refinancing can help you pay off your debt faster in several ways. There is a way to reduce the length of the loan. For example, you can refinance a 60-month loan into a 45-month loan, which can get you debt-free 15 months earlier than scheduled.
Another way to pay off debt faster is to refinance at a lower interest rate and increase your monthly payments at the same time. That way, you’ll pay less in interest each month, while paying less in total over the life of the loan.
Refinancing at a lower interest rate can get you out of debt faster if you continue to make the same payments as you were making, or more. In other words, it will take you longer to get out of debt if you lower your monthly payments. The only reason to reduce your monthly payments is if you are struggling to make ends meet.
If you want to get yourself out of debt as soon as possible, you need to make the highest monthly payments you can afford without overstretching your resources or exhausting your cash flow.