What is student loan refinance?
One way to lighten the load on your student debt is to refinance your loan through a private lender. Ideally, you’ll be able to get a lower interest rate, which will lower your monthly payment and reduce the amount of interest you’ll pay over the life of the loan. This can be a win-win when it comes to managing your debt.
But before you make any decisions, it’s important to understand the difference between refinancing and consolidating your student loan debt. Many people think they’re the same thing, but they’re not. While consolidation simplifies things by combining many smaller loans into one, refinancing replaces your old loan with a new one. Keep in mind, when you consolidate private student loans you are also refinancing them.
To find out if refinancing student loans is a good idea for you, let’s look at the pros and cons for a better understanding of refinancing.
Learn the advantages of refinancing student loans.
Lower your monthly payments
As mentioned before, the point of refinancing is to get a lower interest rate, which saves you money. Likewise, a lower monthly payment leaves you with more money to pay down debt. That helps you strike a balance between living your life and getting your debts paid off.
You can shop for a better interest rate
There’s a good chance you’ll be able to choose between a fixed interest rate or variable interest rate for your new loan. While a fixed rate will stay the same for the duration of the loan, a variable rate, which can change, may start out low, but it could increase down the road. That means your monthly payments would go up as well.
You pay one monthly bill
When you refinance multiple loans into one, you simplify the process. With only one payment, you may be more likely to pay it on time. That’s important for a healthy credit score.
You can combine federal and private student loans
While consolidation only applies to federal student loans, you can refinance both federal and private loans. Keep in mind that there’s some risk involved when you turn federal loans private through refinancing. You could lose some important benefits, such as the option to tie payments to your income, which could make them more affordable. You’d also give up any opportunities for loan forgiveness, which means the loan would be cancelled and you’d no longer have to pay some or all of it.
You can use a cosigner
When a parent or other responsible person cosigns your loan, it could improve your chances of getting the loan and getting a lower interest rate. Be sure your cosigner understands the risk, which includes repaying the debt if you can’t.
The disadvantages to consider before refinancing student loans.
You start the repayment process over again
When you refinance a loan, you’ll be restarting the payment process. Depending on your situation, that could cost you. When you extend your payments further out into the future it means you’ll be paying interest for a longer period of time, and that adds up.
You can’t refinance other debt with a student loan
When refinancing your student loans, it may seem like a good idea to combine other types of debt into your new loan. Although this would simplify things, you can’t combine your other debts with your student loan.
Additional fees could apply
While you’re shopping around for a lower interest rate, ask about application and processing fees. If you’re not careful, these additional fees can quickly add up and by keeping them low you can save money.
You need a good credit score
To qualify for a new loan and a better interest rate, you’ll need a strong credit score. The lender will also consider your income, which helps to determine if you can pay back the loan. If you make enough money and your credit score is high, you’ll probably qualify for a better interest rate.
Similar to student loan consolidation, there’s a lot to think about before you refinance. But if you have good credit and a steady job, it’s certainly worth considering. It could save you money in the long run.
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