Should You Refinance Your Student Loans?

Do you find it hard to make your student loan payments? Do you feel like you’re drowning in debt and cant pay off your student loans? If so, student loan refinancing might be the answer you’re looking for! Refinancing student loans has gained popularity as a tool for students to better manage their finances. So here is all you need to know about student loan refinancing. Also, check out this blog to know everything about how to spot and avoid student loan scams.

What is student loan refinancing?

Student loan refinancing is an excellent way of combining your payments into a single loan with lower credit. You can pay off your federal and private student loans by taking out one sizable loan and benefit from just one monthly payment. Thus, if your student debt makes your life difficult and you're feeling overwhelmed, consider refinancing as a possible option. 

Pros and Cons of student loan refinancing 

Student loan refinancing can be the best option for you if you want to reduce your interest rate and reduce your monthly payments. Refinancing, however, isn’t always the best course of action. Here are some of the general pros and cons of student lone refinancing:

Pros

1. Possibly low-interest rate
2. Reduced overall payment
3. A single loan is easier to handle than multiple
4. May save money over the loan's term

Cons

1. Not everyone is eligible for refinancing 
2. You may need a high credit score
3. You may need to find a co-signer
4. Substitute for federal loans, and you lose any potential advantaged

What to keep in mind?

It's fantastic that you're thinking about refinancing your student loans! But remember that if you refinance your federal student loans, a private loan will take its place. This implies that you might no longer be eligible for some of the advantages and initiatives associated with federal student loans, including programmes for loan forgiveness and income-driven repayment plans. Therefore, do your homework on all of your possibilities and balance the pros and drawbacks of choosing which is best for you before making any judgements.

If you’re planning to check out the loan forgiveness plans, read this guide on federal student loan forgiveness and discharge. 

Eligibility Requirements for student loan refinancing

There is no minimum requirement for refinancing your student loans; rather, each institution has its own definition of an eligible borrower. Having said that, there are some requirements that play a big role in being eligible for refinancing your student loan:

1. Credit score: The main factor for approval of your student loan refinancing is your credit score. Your chances of being approved and getting a low-interest rate on the market increase with your credit score. Most lenders prefer to see a high credit score, preferably at least 650 and without any late payment in the credit history

2. Debit to income ratio: Lenders view you as riskier when your debt load increases. It shows your creditors that you are less likely to make payments in the event of an emergency. Keep your debt-to-income ratio under 50% before submitting a refinancing application.

3. Job: You'll need to show that you have a reliable source of salary and can comfortably make the payments. Many lenders have a $25,000 minimum income requirement.

4. Loans: There is a minimum sum you can refinance determined by the lenders. Finding a lender ready to refinance may be challenging if you've got less than five thousand dollars left on your loans.

5. Graduation status: While some lenders can allow you to refinance even if you don't graduate, the majority of lenders demand that you finish a programme in order to do so.

6. Cosigner: You could require a cosigner for your loan if you don't have a long credit history. Your options may be limited because some lenders don't let applicants submit cosigner applications.

When should you avoid refinancing student loans?

In the following cases, you may choose to avoid student loan refinancing and instead choose an option that fits your needs:

1. Your only student loans are federal.

Many advantages that private loans lack apply to federal loans, such as income-driven repayment (IDR) plans that reduce your monthly payments depending on a portion of your income. They also provide

2. Public Service Loan Forgiveness

Borrowers who work for charitable organisations, governmental organisations, or other qualifying businesses in the public service sector may be eligible for public service loan forgiveness (PSLF). Your remaining debt will be forgiven after 120 eligible payments.

3. Generous forbearance and deferment

You may temporarily stop your payments on your student loan balances without incurring any fees. Except for subsidised loans, which the government pays the interest on throughout times of deferment, both collect interest while payments are suspended. Your loan will still be seen as being in good standing if you choose deferment or forbearance, and federal loans often give you a long time to stop making payments than private loans do.

These choices are unavailable if you refinance federal loans. That's not a big deal, though it could be difficult to forecast whether you'll ever need to utilise them. Only if you are sure of the stability of your income during the loan's term and are ineligible for federal loan-specific forgiveness programmes can you consider refinancing federal debts.

4. You're not able to find a trustworthy co-signer

You may be able to obtain a new loan with someone else's assistance from some student debt refinancing lenders. Somebody who agrees to co-sign for your loan and attests to your creditworthiness is known as a cosigner; they often have a decent or exceptional credit score. Your cosigner will have to be responsible for the debt if you're not able to repay the loan. Your credit score will drastically decline, as well as your cosigners, if neither pays. You could not be eligible for student loan refinancing if you require a cosigner but are unable to find one or if you did find one but they have a low credit score. Instead, concentrate on raising your credit score to make yourself eligible for future independent refinancing. If using a cosigner is your sole option to qualify, be sure they are aware of the potential risk they are taking on.

5 .Your Expected Rates are too high

Many lenders will provide you with the option to prequalify when you do your research, allowing you to view your prospective interest rates and monthly payments in just a few minutes. Refinancing is probably not worthwhile if you wind up with an interest rate that is higher than the one you already have.

6. You have unpaid bills.

Lenders will notice if you've missed a few payments on your student loans and are encountering financial difficulties. Your credit score is primarily influenced by your payment history. As a result, lenders will be reluctant to provide you with a new loan if you can't pay back your present one because it would reflect negatively on your credit score.

Alternatives to refinancing to think about

There are a few options that may be helpful if you aren't eligible for student loan refinancing or you're seeking another path. Remember that even if you are not now qualified to refinance, you can take action to become qualified later on. Learn some tips on how you can manage your student loan in better way.

1. Get your loans up to date

Your first step should be to catch up on any loans that you are behind on. This not only raises your likelihood of being approved for refinancing, but it also improves your credit score and may enable you to eventually acquire a reduced interest rate.

2. Get an income-driven repayment plan 

Look into IDR programmes if you have federal student loans. You won't pay more than you can afford because these plans are based on the size of your household and your discretionary income. If you're having trouble making the minimum payments on time each month and are considering refinancing as a strategy for affordability, do this.

3. Make additional loan payments

Start making more frequent loan payments if you can, such as every two weeks rather than once a month. To make greater progress on your balance, you can also raise your minimum monthly payment. You can lower your total interest costs over time without actually refinancing loans by paying off your debt more quickly.

4. Consider consolidating your student loans.

Although they are comparable, private student loan refinancing and student loan consolidation are not quite the same. When you refinance, all federal student loans become private student loans as you take out a new loan to repay your old ones. By combining several federal loans into one, you can use consolidation to get an interest rate that is equal to the weighted average of your previous rates. You continue to receive all the helpful government perks for loan repayment because your federal loans are still federal. Federal student loans are the only loans eligible for consolidation, and no credit check is necessary. It's a good option if you have several federal loans and want to consolidate your payments into a single monthly payment, but it won't lower your interest rate.

5. Use a debt-paying strategy

If you have numerous student debts, think about using the debt avalanche or debt snowball strategies to pay them off. List all of your loans, including who is lending you the money, how much you owe, the amount you must pay each month, and the current interest rates. You'll start by paying off the loan with the highest interest rate using the debt avalanche strategy. Pay the bare minimum on all your other obligations, but allocate any additional funds to the loan with the highest interest rate. Put all of your funds towards the loan with the next-highest interest rate after it is paid off. You'll continue doing that until all of your loans are fully repaid.

6. Request Alternative Payment Plans.

You'll need to speak with your lender about what it can do for your particular case since some private lenders don't have deferment or forbearance programmes. Ask about hardship help if you recently lost your job or are otherwise not able to repay. There are alternatives for some lenders to reduce monthly payments, the interest rate, or both.

Best student loan refinancing companies

If you've made the decision to refinance your student loan, you can compare lenders using a loan marketplace like Credible, or you can look at Select's top recommendations. Choosing a lender that provides competitive interest rates, no application or transaction costs, and no prepayment penalties — as all of our picks do — will likely result in the greatest savings from refinancing. Also, check out this article to explore the best student loan providers.

1. Best overall: Earnest 
2. Best Rates: Splash Financial 
3. Refinancial Marketplace: Credible 
4. Best for no Fees: Discover 
5. Best benefits: SoFi
6. Best for students who didn't graduate: Citizen Bank
7. Best for large Balance: Laurel Road
8. Best for parent loan: ISL Lending

Should I refinance my federal student loan?

Refinancing federal student debt is not always the best option, even though it may result in a cheaper interest rate and monthly payment. When you refinance federal student loans, you can no longer participate in programmes like income-driven repayment or be eligible for student debt forgiveness. A straight consolidation loan might be preferable to refinance if you believe you might require these programmes.

By refinancing your student loans, you might be able to reduce your monthly payment and enhance your money management skills. It's crucial to think about your access to benefits and whether your loans are private or federal. Consider consolidating your federal loans separately and just refinancing your private student debt if you wish to be eligible for government programmes and benefits.

Struggling with managing you money? Here are 7 great hacks for money management as a student.