The Ultimate Guide to Refinancing Student Loans
Six months after graduating from college, your private and federal student loans will enter repayment status when you will begin needing to make monthly payments. You might soon realize that your student loan payments are too expensive. Refinancing student loans is an option to help manage your monthly payments.
What is Student Loan Refinancing?
An original student loan is an initial loan you apply for each semester as a college student so you can attend classes.
A refinanced student loan is a completely new loan when you “bundle” your existing student loans as the new refinancing lender pays off the original loans and assigns you a new interest rate and repayment terms allowing you to get a lower monthly payment.
Refinancing student loans might seem complex, but, it is really simple. You can still deduct student loan interest paid and potentially save money in interest charges. Plus, you can repay them ahead of schedule and not got penalized. All you need to get started is at least $5,000 in outstanding loans.
How Refinancing Student Loans Saves You Money
When you go about student loan refinancing correctly, it is possible to save hundreds of dollars in interest charges. Student loan refinancing can also mean the difference between improving your credit score and defaulting on your loans.
New Repayment Period
The key benefit often associated with refinanced student loans is lower monthly payments through an extended repayment period. Your current student loans probably allow you 10 years to repay the entire balance. For example, a 2017 college graduate has until 2027 to repay the balance.
Refinancing lenders allow you to have a repayment term ranging from 5 years to 20 years. Choosing a longer repayment period will lower your monthly payment, dropping your monthly payments from $500 to $300 per month. Of course, taking the entire 15 or 20 years to repay the balance will mean you pay more in interest than sticking with the original 10-year repayment period.
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But, paying more in total interest can be the better alternative than missing a student loan payment and damaging your credit score in the process.
Lower Interest Rate
By refinancing student loans to get a shorter repayment period (i.e. 5 years) you will have a higher monthly payment, but, you will pay less in interest overall and you also have the opportunity to get a lower interest rate. A smaller interest rate isn’t guaranteed, but, it is a good possibility with good credit and a short repayment period.
This is because lenders assign lower interest rates to shorter repayment periods. And, it’s also possible to qualify for a lower interest rate once you have established your own credit score if you did not use a cosigner with excellent credit for your original private loans.
For example, you can get a 5-year variable rate loan with an interest rate as low as 2.21%. Compared to your current potential interest rate of 6-8%, this can save you several hundred dollars per year!
Using a student loan refinancing calculator will help you see how much you can save by refinancing.
What Types of Student Loans can be Refinanced?
Both private and federal student loans can be refinanced, but, there are some small nuances.
Student Loan Refinancing is when you use a private lender to bundle your student loans. Historically, most lenders only allowed you to combine your private loans, but, most now let you combine your federal loans as well. If you privately refinance your federal loans, you forfeit the income-based repayment and loan forgiveness benefits because it is converted to a private loan type.
A Consolidated Student Loan is a “refinanced” federal student loan through the U.S. Department of Education. This option only accepts federal student loans and is different than privately refinancing student loans. With a federal consolidation loan, your interest rate is the weighted average of your existing rates making it impossible. The primary benefit of consolidated federal loans is that you retain the income-based repayment and loan forgiveness options that private student loans do not have.
If you do not plan on using the federal student loan repayment benefits, it can be beneficial to refinance your federal and private loans together. Otherwise, you should only refinance your private loans.
How To Refinance Student Loans
Refinancing your student loans with LendEdu or Student Loan Hero is probably the best place to start as they will quickly compare the current interest rates of the various refinancing lenders for free! Both companies allow you to help you find the best loan that meets your repayment length and see what your new monthly payment is if you just refinance your private loans or combine them with your federal student loans.
Step #1: Choose a Lender with No Fees
When choosing a refinancing lender, there are three key factors to look for:
- No application fee
- No origination fee
- No prepayment penalty
All the lenders that LendEdu or Student Loan Hero use, do not charge any of these fees. As one of the primary reasons you might be considering refinancing student loans is to save money, these additional fees can make it more expensive than keeping your existing student loans.
Step #2: Choose a Variable or Fixed Interest Rate
With private student loan refinancing, you also have the opportunity to choose a fixed interest rate that will remain the same for the life of the loan, or a variable rate that can fluctuate as key lending rates rise or fall.
Variable rates are often the better option for shorter repayment terms because they charge lower interest rates and if interest rates rise, you still have the opportunity to repay the balance before the interest charges are higher than what you would have paid with a fixed interest rate.
A fixed interest rate is better if you plan on taking at least 10 years to repay your loan. This is because if the variable rate goes above the original fixed rate and stays above it, you could easily pay thousands of dollars more in interest over the entire life of the loan.
Step #3: Choose a New Repayment Term
Your repayment term will often determine your new interest rate. Your cheapest option is going with a 5-year variable rate loan. The most expensive option is usually a 20-year fixed rate loan.
Choose the repayment term that fits within your budget then choose the best interest rate for that term.
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