Should I refinance my student loans with a private lender?
Refinancing student loans is similar in many ways to refinancing other loan options like mortgages or auto loans. There are two primary reasons you might consider refinancing a student loan.
You may want to refinance to get a lower interest rate.
Let’s discuss a real life example. Let’s say you have 6 student loans at interest rates ranging from 6% to 8% and 10 years left to pay them off.
If interest rates on student loans overall have dropped below 6% and/or you have a better credit score than when you received the loans, you may qualify for a lower interest rate. That means you’ll pay less over the life of the loan if you match the term to the 10 years remaining on your loans now.
You may want to refinance to decrease your monthly payment by lengthening the term of the loan.
Even if you don’t get a better interest rate, but you extend the term of your refinanced loan from 10 years to 20 years (or even longer) your monthly payments will be lower.
This does mean that you’ll pay more over the life of the loan in total since you’re paying the same interest rate (or higher) for longer. It’s important to weight that tradeoff when deciding whether to refinance or not.
You can also get a lower interest rate AND lengthen the term of the loan.
Doing this will reduce the savings from a lower rate by increasing the number of interest payments, but can get you a much lower monthly payment.
What costs will I incur if I refinance?
You apply for a new loan for the amount remaining on your existing loan(s) so that you can pay off the current debt all at once. The expectation is that your new loan will have some advantages over the loan(s) you have now. Make sure that you account for the cost of refinancing when figuring out if it’s the right decision. Lenders differ, but you could be charged:
- application fees
- origination fees or
- repayment penalties if you decide to pay more than the minimum in a month.
What do lenders look for when I refinance?
When considering refinancing, lenders will most commonly look for:
- good credit score
- full-time employment
- low debt-to-income ratio
- good standing on all existing loans
- your education history
- a co-signer if you don’t have a high credit score
What else should I be cautious of?
Refinancing may release co-signers on your original loans from their responsibility for those debts.
You will lose protections and alternate payment plan options on federal loans. These protections include interest free deferment periods, income based repayment plans, and loan forgiveness programs.
You can refinance some or all of your loans. If some of your loans have low interest rates already you may not want to include those.
There is rarely a grace period with loan refinancing. If you’re currently in a grace period, refinancing would mean your payments start immediately.
If you would like a second set of eyes to see if refinancing your student loans make sense for your unique situation, chat with a BrightDime coach today!