Whether you owe over $100,000 in student loans or only a small fraction of that, paying off this debt can be a challenging process. Consumers should look for any assistance available to them when it comes to lessening the burden of their loans. Refinancing can be a critical piece of this puzzle. Here are key questions to ask before refinancing student loans.
What Does It Mean to Refinance Student Loans?
Refinancing is a term that many people have heard, but don’t necessarily know the definition of it. With anything in life, but especially financial decisions, it’s important to understand details before diving into anything. So, what is refinancing student loans?
The process of refinancing is overall straightforward. You’re selecting one of your loans that you would like to change in some way and taking out a new loan to entirely replace it. Even though this might sound like a strange or risky process to some who have never done it before, refinancing is widely considered a good financial practice.
Student loan refinancing, or refinancing any kind of loan, is generally seen as smart when you can improve your financial health in the process. There are two main feature of a loan that affect your ability to pay it off (as well as your flexibility in paying for other things): interest rates and repayment terms.
All things equal, you’ll always want a lower interest rate, as this means you’ll pay back less over the course of your loan. When a loan is spread out over decades, a few percentages points can lead to huge sums of money either staying in your pocket or going out the door. Those who are looking at a student loan refinance, however, need to be careful when selecting a new loan, as there can be massive long-term implications depending on whether you get a fixed or variable interest rate.
Some people will also want to refinance to get a shorter or longer repayment period on their loans. People who are struggling to make payments will likely want to spread out the loan over a longer timeframe, whereas some borrowers might want to condense their loan repayment, which will typically lower their interest rate and reduce overall interest payments. Refinancing a student loan can also allow you to add or remove a co-signer if this is important to you, or necessary to secure the refinance.
How Do You Get the Best Interest Rate on a Student Loan Refinance?
While variable rates can be attractive at first glance since they’re almost always lower than the fixed-rate offering, don’t get lured in too easily. Variable rates will change over time depending on market conditions. This means your rates can go up or down based on the Federal Funds Rate. When interest rates are low (such as right now), borrowers will want to lock in a fixed rate, as this will stay the same over time—regardless of market changes.
For those who want to find the lowest interest rate on their student loan refinance, Juno is a great option. Instead of lending themselves, Juno collects loan offers from a huge pool of lenders and then selects the best of these for their members. If you’re able to find someone who offers a better rate, they’ll even match it.
Will You Lose Benefits from Refinancing Student Loans?
Some federal student loans come with specific benefits for borrowers. For instance, federal student loans typically don’t accrue any interest until after graduation, only come with fixed rates, and offer some nifty benefits related to income-based repayment plans and loan forgiveness.
If you have a low-interest federal loan that offers these incentives, you might want to think twice before refinancing to a private loan. These things won’t carry over to the new loan, as you’re taking out a new on in order to pay off the old. For some, this might not be such a big deal assuming there’s substantial cost savings potential in refinancing. Many borrowers, however, will find holding onto their federal loans makes most sense.
Generally speaking, the people who will benefit most from a student loan refinance are those with private loans or federal Direct PLUS Loans. With both of these, you can often find much more appealing deals on the private student loan market—especially when rates are low like right now.
What Else Do You Need to Know Before Refinancing Student Loans?
It’s always smart to ask for additional clarification. That’s exactly the kind of thing they teach you in school. When it comes to refinancing student loans, credit history isa hidden obstacle for many borrowers.
Since all student loan refinances happen through the private market, you’ll need to share your credit score with lenders before getting approved. If you have poor credit, it’s going to severely limit your options on this front. Fortunately, you can still get a student loan with a co-signer even if you don’t have amazing credit.
There are many questions you should ask before refinancing student loans. Once you’ve collected the necessary information, pulling the trigger on a refinance can be a great financial decision.