Most reasons to refinance your student loans are valid. It allows you to lower your interest rate, which will in turn reduce the monthly payments you have to make. Refinancing can also allow you to negotiate newer and more favorable terms for your student loans. So, it does make sense to go ahead and refinance your student loan.
However, when dealing with money, it is always prudent to think through carefully so that you are certain that refinancing is the correct option for you. As with any other payment option, there are pros and cons to refinancing too.
Asking yourself these few questions will have you make an informed decision about whether or not refinancing your student loans is the right option for you.
Why am I refinancing my student loans? What is my goal here?
Give some thought to what exactly you are expecting by choosing this particular path. Are you looking to reduce your interest rate or monthly payments, or are you hoping to clear your student loans faster? Once you can answer this question, it will help make the right decision and allow you to choose the best refinancing plan.
What are the interest rates my lenders are giving me?
This question comes into play when you are looking for a lower interest rate or reduced monthly payments. The first thing you need to do is to establish the existing interest rates.
When you are looking to refinance student loans, it makes better financial sense to look for a refinancing option that gives you a lower interest rate than the one you currently have. Even a small drop in interest rates can result in substantial savings at the end of the loan period. Conversely, even a slightly higher interest rate can increase the total amount you have to pay considerably.
There are student loan lenders that offer rates as low as 2% when college graduates want to refinance student loans. However, do read the fine print before signing on the dotted lines.
What can I afford to pay each month on my student loans?
You will start repaying your student loans after you graduate from college and start working. When you decide to refinance your student loans, the amount you can afford to pay each month will depend on your income. The higher your income, the more you will be able to pay towards your student loans.
According to the federal guidelines, affordable monthly payments should not be more than 10 % of your discretionary income. Subtract your total monthly living expenses from your total income will give you your discretionary income. 10 % of this amount is the income-driven minimum you should be paying towards your student loans.
If you are struggling to make monthly payments, then refinancing is an option. However, you must make sure you opt for a refinance plan that lowers your monthly payments so that you are not short of cash.
Is it possible to consolidate private and federal student loans while refinancing?
While all lenders do not give you the option to combine federal and private student loans when refinancing, there are a few that let you do it. Opting to bundle both types of loans together can not only save you money in the long-run, but it will also help you secure a lower interest rate for the combined loan amount.
Before you decide to refinance your student loans, first ask your lender institution if it is possible to consolidate your federal and private student loans. Depending on the reply you get, you can then can make a decision whether you want to go with that lender or look elsewhere.
What is the pay-off amount for each student loan that I have?
If you are looking to get a lower interest rate on your student loans, you should also figure out the pay off amount, which is the amount you need to pay to clear your student loan in full. You will see that the amount is higher than your actual student loan as it takes into account the interest rate on that amount.
Once you know the pay-off amount for each loan, add it up. This will give you the total pay-off amount. If the total sum is high, you will be better off selecting an extended repayment plan so that the monthly payments are not difficult to make.
On the other hand, if your total pay off amount is low, you can opt for a shorter loan term so that you save money on interest while making higher payments each month. Of course, make sure you can afford the higher monthly payments.
Why does my credit score matter when I want to refinance my student loans?
When refinancing student loans, your credit score is very important as lenders will take the score into account to offer you the interest rate and terms of repayment.
Once you start repaying your student loans promptly each month, it will improve your credit score, and this will help you get lower interest rate and favorable repayment terms from lenders in case you want to refinance the loans. That is why credit score is of utmost importance and you should not neglect it. You can check with the credit bureaus for your credit score, or there are sites such as Mint and Credit Sesame that allow you to check your credit score online.
Do I need a cosigner if I want to refinance my student loans?
You will need a cosigner if your credit score is low. For lenders, cosigners act as payment protection. It reassures them that they will get their money back even if you renege on your payment obligation.
Many times, a parent or family member ends up as a cosigner when you first take out the student loans. Refinancing can help you release a cosigner if you have a high income and a proper, full-time job.
Check out College Raptor’s guide to refinance and student loan consolidation!