For many borrowers with student debt, now is a good time to refinance student loans.
Refinancing is the repayment of existing loans with a new loan. Since interest rates are currently near record lows, many borrowers may qualify for a competitive refinancing loan and possibly a lower interest rate.
But refinancing is not the right choice for everyone. There are certainly pros and cons to student loan refinancing, and this guide will explain four key factors to consider to help you decide. You may also want to use an online tool like Credible to compare student loan refinancing rates from multiple lenders at once to see if you can qualify for a new loan at a lower rate.
What is your current interest rate?
Whether you want to refinance undergraduate loans or refinance graduate school loans, you need to make sure it makes financial sense. If you can’t save on interest costs, refinancing can make your loan more expensive, and moving forward is probably not the best move.
Comparing your current interest rate to the rate at which you might qualify for a student loan refinancing loan is the best way to decide if you want to move forward. The good news is that credible data shows that refinancing rates for well-qualified borrowers have repeatedly hit record lows this year.
In fact, during the week of May 3, 2021, borrowers with a credit score of 720 or higher who selected a lender through the Credible Marketplace saw an average interest rate of 3.60% on a 10-year fixed-rate refinancing loan, while borrowers who chose a five-year loan saw average rates of 3.19%.
These low rates allow most borrowers to save significantly on private loans by refinancing. You can use an online tool like Credible to view a rate table that compares rates from multiple lenders at once to see if this is the case for you.
How stable are your finances?
If you have federal student loans, consider your financial situation to assess how likely you are to take advantage of the unique borrower benefits that federal loans provide.
You have more repayment options when dealing with unaffordable student loan payments with federal loans, including flexible deferment and forbearance policies, as well as means-tested payment options. You may also qualify for a student loan waiver program.
You must give up all of these benefits when you refinance. Making sure you understand the definitions of student loans and are aware of these benefits can help you decide if your financial situation could ever cause you to take advantage of them.
If your income is too high to take advantage of means-tested plans and you are confident that you will never need the other benefits, you may decide to refinance if you can lower your rate. However, for most people, refinancing federal loans isn’t the best move.
If you have private student loans, there is less to consider. You don’t give up the borrower benefits – you just exchange one private loan for another.
What is the reason for the refinancing?
It is important to outline your refinancing goals before proceeding with applying for a student loan refinancing loan. That way you can ensure that the new loan achieves your goals.
For many borrowers, the goal is to reduce the total cost of paying off your loan as much as possible. If that’s your goal, lowering your interest rate can help achieve it. Some borrowers are also focused on lowering their monthly payment. A longer repayment period can ensure this.
Of course, if you take the time to pay your loan, each monthly payment will be lower, but the total cost will increase because you pay more interest over time. That is why it pays to find the right loan term that is most suitable for you for personal finance.
You can use an online calculator for student loan refinancing to get an idea of what your new monthly payments could be and decide which refinancing loan is best for you.
What does my credit profile look like?
Refinance lenders take into account your credit score, income, other outstanding debt, and other financial references to assess the likelihood that you will be able to repay your loan. The stronger your credentials, the more likely you are to refinance at a competitive rate. On the other hand, if your income or credit score is low, you may not be able to refinance without a co-signer.
If you have solid credit, a good reason to refinance, and can lower your rate, it may be worth considering refinancing to facilitate student loan repayments.
When you are ready to refinance, use an online tool like Credible to get prequalified student loan refinancing rates and find the loan that suits you.
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