Should I Refinance My Student Loans?
16 AUGUST 2023
As a student, you need all the help you can get when it comes to financial issues. If you have a student loan, you’ll understand how beneficial it is not to have to worry about your tuition on top of everything else. After studies, reality hits. How will you pay your loan back? Here’s where refinancing comes in. But firstly, what is refinancing? Let’s break it down.
What does refinancing a loan mean?
Refinancing happens when an existing loan term or credit agreement is revised and replaced with a new agreement. Interest rates, payment schedule, and other terms in the previous agreement are looked at and adapted according to your new application. Once refinancing is approved, you’ll get a new contract that replaces the old one. This will then mean new terms, a new interest rate, and even a new lender if need be.
So, how is refinancing different from debt consolidation? Debt consolidation combines multiple loans into one new one, giving you one loan payment instead of multiple. Refinancing replaces one loan agreement with a new one with lower interest rates, so you pay a lower monthly payment towards one loan only.
What factors do lenders consider for refinancing?
Your credit score
Credit score ratings are the biggest factor in determining if you’re approved for refinancing. Having a good credit score (670 to 739) is crucial to your creditworthiness in the lender’s assessment.
Make sure that you are receiving enough monthly income to be able to repay your new loan installments. This will also show lenders that you would not fall behind with payments.
Your DTI is how much debt you have on your name in comparison to how much money you have coming in. If this ratio is high, lenders could assume that you can’t afford to repay your loans. A lower DTI shows lenders that you can make payments on time.
Total student balance
A few lenders have a maximum loan balance that they’re willing to refinance. Be sure that your loan amount falls under this.
Lenders could require you to have a certain degree, like a bachelor’s degree. If you didn’t graduate, some lenders might not approve your refinancing as well.
Having a co-signer
If your credit history is not in an optimal space, you might need to consider having a co-signer on your new loan. Be sure to check if your lender offers this condition before you apply to intend to co-sign.
When should I refinance student loans?
Refinancing student loans are always a good idea if you know that your finances are in a stable position and that you could be approved for lower interest rates. When should you consider refinancing?
- When you have a regular income: You might not be able to refinance right after you graduate, depending on the job that you have. Once you’ve landed a job that pays well, have started saving and built your credit, refinancing is possible.
- If your loans have high-interest rates: Refinancing sooner and later is important to help you save on interest in the long run.
- Your loans are expensive: Expensive loans mean large monthly payments. Refinancing will allow you to pay smaller payments with a lower interest rate.
Once you’ve assessed your situation and have determined that refinancing is a solution, make sure that your credit score is between 670 to 739 and that your DTI is low. You can refinance your loans as many times as you’d like or as often as you need to. As long as your finances have improved and your credit score is excellent.
The Pros and Cons of Refinancing
- A payment plan that is better suited to your current financial status, including a new loan term. Shorter would mean larger monthly payments and a longer-term means lower payments.
- A lower rate of interest to help save you money. Apply for refinancing when interest rates are low to lock the rate and reducing the monthly payment amount.
- Lower monthly payments will help you avoid missing payments, and keep your good credit score.
- Lower risk of defaulting your loan which won’t jeopardize your future chances of applying for another loan.
- Pay off your student debt faster as you’re putting more towards the principal amount instead of the interest.
- Your eligibility for refinancing is not always guaranteed. You need a good credit score and a low DTI.
- Refinancing can increase the length of time that you need to pay off your loan.
- Extending the loan period could lead to a higher cost of borrowing. This means that lower monthly payments over a longer period of time could result in your loan costing you more over time. With refinancing, it’s more important to consider a lower interest rate than a lower monthly payment.
Refinancing is not always the best solution for every student. It depends on your financial situation and your goals for the future. Assess where you are now and where you aspire to be and plan for those goals. Make sure to consider payment protection plans as well, so that if something were to keep you from being able to make payments, you have a plan in place. Revisit this article whenever you need guidance on deciding to refinance or not, and you’ll be on the fast track to financial success.