Student loan refinancing offers several benefits. When you refinance, you exchange your old high-interest student loans for a new loan with all new terms. You could get lower interest rates, lower monthly payments, or different terms depending on what your goals are.
The key to enjoying the benefits of student loan refinance advice is to go about it the right way. The student loan refinance advice will help you get the maximum benefits from refinancing.
Know the Right Time to Refinance Student Loans
The interest rate on your refinanced loan depends primarily on your credit score. The better your credit score, the lower the interest rate you can expect to pay on your refinanced loan. This is because a good score indicates that you are a responsible borrower. To lenders this means they are more likely to get their money back on time without having to enforce collections.
Whether or not you have a stable monthly income also plays a role in lowering the rate of interest on the refinanced loan.
Generally, the earlier you refinance student loans, the more you’ll save by way of lower interest rates. However, you must keep in mind that the goal of refinancing is to get a lower rate on the new loan. With that in mind, the right time to refinance student loans is as soon as you have good credit and a stable income. Both of these together will help you get the lowest rate that will save you the most money.
Know Which Student Loans to Refinance
Consolidating multiple student loans and refinancing allows you to simply repayment. Instead of keeping track of multiple payments and due dates every month, you only keep track of one payment and one due date. But that does not mean you should just consolidate and refinance ALL your student loans. To maximize your savings on the refinanced loan, you must be selective about which loans to refinance.
Start by looking at your loans with the highest rates of interest. Calculate whether you’d save more by refinancing these high-interest loans or by focusing on repaying these loans first. In some cases, you may save more by accelerating repayment of the highest-rate loans instead of refinancing. Take the time to calculate before you opt to refinance your student loans.
Be Careful About Losing Your Federal Student Loan Benefits
When you refinance your federal student loans with a private lender, they will get converted into a private loan. This means you will lose all of the benefits associated with the federal student loan including postponement options, flexible repayments and loan forgiveness. The last one is especially important. If you are working towards qualifying for loan forgiveness, you will lose that benefit when you refinance.
Refinancing More Than Once Could Help You Save Even More
As we said earlier, the rate on your refinanced loan is highly dependent on your credit rating and your monthly income. As you continue to earn a steady income and build your credit history, you may qualify for an even lower rate of interest. It may then make sense to look into refinancing your student loans the second or even the third time. However, keep in mind that each hard credit check does take a hit on your credit score.
Another factor that plays a role in refinancing a student loan more than once is the dropping market interest rates. It’s a good idea to keep working towards building your credit score while also keeping an eye on market conditions. When the time is right, look into your refinancing options again. Of course, it’s only worth refinancing multiple times if you get a lower rate of interest on the new loan.
Be Strategic About Choosing Your New Loan Terms
When you refinance your student loans you will be able to choose different repayment terms. The terms you choose will have a significant impact on the total cost of the loan. Speak to the lender and explore all your options before making any decision.
Shorter repayment term vs longer repayment term:
With shorter repayment term you will pay off your loan much faster but you will have to make higher monthly payments. Longer repayment terms lower your monthly payments but you will end up paying more over the life of the loan.
Fixed rate vs variable rate:
With a fixed rate loan, the interest rate stays the same until you finish paying off the loan. This is a better option if you’ve opted for a longer repayment term. With a variable rate, the interest rate fluctuates depending on market conditions. Over the short term, you could benefit hugely from falling market rates. A variable rate is riskier over the long term and is not advisable if you choose a longer repayment term.
When NOT to Refinance Student Loans
Knowing when not to refinance student loans is just as important. In general, you should not choose to refinance under these circumstances:
Market conditions are strong
In stronger market conditions, interest rates tend to be high. Considering the goal is to score a lower rate of interest, this is definitely not the right time. It’s better to refinance when rates are pushed down.
You are pursuing student loan forgiveness
Refinancing federal student loans converts them into private loans. This makes them ineligible for any federal loan forgiveness program, including Teacher Loan Forgiveness and Public Service Loan Forgiveness.
You’ve defaulted on student debt recently
A default on your credit report is a red flag for lenders who will not give you the benefit of lower interest rates. It can take as long as 7 years to wipe your default record from your credit report.
Student Loan Refinance Advice
In general, refinancing student loans is a good option but don’t go into this without first weighing the pros and cons. Everyone’s circumstances are different. Depending on your short and long term financial goals, refinancing may or may not be the best option for you. It’s a good idea to first speak to your financial advisor before you decide to refinance federal student loans.