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This year, the average student loan debt in the US amounts to about $37,172 with an average student loan payment of $393 a month.
Lots of college students worry about how to pay off these loans. But this isn’t something to be completely off about since there are so many other people who go through the same experience.
It’s fine to think you wouldn’t want to pay more than you have to. One way to face this dilemma is by considering refinancing your student loans.
By doing so, it could help you save quite a bit of money. It could even make it easier for you to pay; therefore you could pay off the loan faster than intended. Although this process shouldn’t be taken lightly. There’s a lot to know and consider if you really want to get the best end results.
When You Should Not Refinance Student Loans
While a lot of people can surely benefit from refinancing their student loans, it doesn’t necessarily mean it’s the right thing for everyone. It sounds great to know you could save money, but refinancing is a decision that should be carefully made and given proper thought. You should know if the timing is right. Generally, you shouldn’t refinance when:
You want to qualify for or already have federal student loans and Private Student Loan Forgiveness (PSLF).
For someone who believes their income could drop sometime in the future, a federal loan and an income-based repayment plan is ideal. Federal loans also offer federal forgiveness programs that could help you pay off your student loan debt (if applicable). By refinancing, you will be paying off the old loans with a new loan which will take away the opportunity of having a federal repayment.
You have a very low credit score or recently declared bankruptcy.
Like how other loans work, good credit plays a big role. This is a major part of what a lender looks at before they accept a borrower’s request. With a bad credit score, your chances of getting approved are less likely. One way to go around this situation is by finding a co-signer. Although, this can be difficult since they will be in part responsible for the loan. Some lenders take into consideration how often and regularly you pay your debts as well. The same standards apply if you’ve once declared bankruptcy. Often, lenders require that a period of time (usually 3 to 7 years) must have passed after the said bankruptcy.
You’ll take much longer to pay off your debt.
When you refinance, you’ll be reduced to a lower monthly payment. It could mean a longer loan term as well as paying more interest. If you had completed five years of a 10-year long loan term and refinance to a new 10-year loan, you’ll be required to pay more interest because you’ll be repaying loans for 15 years instead of 10, if you only pay the minimum.
Refinancing Student Loans is a Good Thing
As mentioned, refinancing is a good idea for students who want to save more or on a budget. Typically, this is because it reduces the financial burden. When you refinance, it means that the new lender will be paying off the old loan as well as lowering your interest rate. Just from getting a lower interest, you could save up much more money in the long run.
Refinancing doesn’t always lower the monthly payments themselves. If you intend to pay off your debt within a shorter period of time, it would only cause an increase in these payments. Although because refinancing allows you to get a lower rate, while you don’t exactly pay less than you initially did, it puts more towards your principal and saves you money.
For example: if a $30,000 student loan with an 8% interest rate will have you pay $364 monthly over the next 10 years, refinancing to a 10-year loan at 5% interest will save you over $5,000 and approximately around $40 to $50 a month. This much is enough to cover other expenses like phone and electricity bills.
The impact refinancing makes is mostly seen at the end. Putting together the amount of money you were able to keep rather than dragging yourself around just to pay off the debt makes you realize what a big difference it has made. While it’s not the most ideal for everybody if refinancing to a lower interest rate can free up more money per month as well as save a decent amount by the end of the loan.
Things to Know Before Refinancing
If you ever consider refinancing, the few things you need to check on are:
Your credit.
Make sure you have a good credit score. An ideal score would be between 700 to 740 or more. As long as your score doesn’t go lower than 620, you’re most likely qualified for a refinancing loan.
If you don’t know your credit score, check it for free with Credit Sesame right here in 5 minutes or less.
Your debt-to-income ratio.
A DTI of 30% is considered a good ratio. The lower it is, the better. Lenders see this as an important factor because it helps them determine how regularly a borrower can pay them back.
Your job stability.
If you plan on switching jobs or quitting due to other circumstances, it wouldn’t be the best to apply for another loan. Having a stable job is important not only for refinancing but when you apply for different loans as well. You should at least have a steady flow of income to rely on; otherwise making payments would be much harder especially when you have no other source of income.
Cost of refinancing
Luckily for those interested in refinancing a student loan, the cost is typically $0. Minus a bit of your time, but worth it once you add up your savings.
Where to refinance.
Knowing who to refinance with is important as well. You have to make background checks on lenders before finally settling with the one you desire to work with. Other than finding a lender that caters to your needs, you should make sure they are credible and have a good reputation.
Here is a list of the Top 5 student loan refinance companies
To sum it up, refinancing is definitely a good thing for the people who need it. It can save you money each month and over the course of the loan. Just make sure you are aware of your credit history and paying your bills on time. For some people, they may want to refinance but don’t meet the criteria, such as having a low DTI or unstable job. These things can be improved over time and allow you to consider refinancing.
Happy Savings, Denis
