Feel like you've been barely keeping up with your student loans? You're definitely not the only one. More than 40 million Americans are currently burdened by debt from college. That doesn't mean you have to be stuck in this situation forever. There are a lot of options to choose from as you decide how to tackle your debt problem once and for all. One of those options is student loan refinancing, which could save you thousands of dollars over the life of your loans. Why Refinance? There are a few reasons why you might consider student loan refinancing:
Consolidate your debt:
Refinancing can simplify the repayment process a ton if you have several loans from different lenders, all with different payment due dates and rates. When you refinance student loans, you take out a new loan with a private lender and use it to pay off one or more existing student loans (you can decide which loans you want to refinance). This new loan has one monthly payment and one interest rate.
Lower your interest rate:
With today's low interest rates, student loan refinancing is a smart idea. It can help you get a lower interest rate and save money on interest charges. Depending on how much debt you have, you could end up saving tens of thousands of dollars.
Change the terms of your loan:
Need to lengthen your repayment period? Think your student loan servicer's customer service is terrible? Refinancing gives you more control over your student debt repayment, allowing you to change your terms and even loan servicer for a better experience.
5 Signs You Need to Refinance Your Student Loans
Based on the benefits outlined above, here are some key indicators that refinancing your student loans could be a smart move.
1. You have higher student loan rates
The chance to save on student loan interest is one of the best reasons to refinance your student loans. The highest rates on federal student loans can be upwards of 7-8%. If you have student loans with rates in this range, a refinance can help you lock in a lower interest rate. A lower interest rate goes a long way to help you pay down student debts faster. With interest accruing at a slower rate, more of the dollars you pay toward your debt will move you closer to zero instead of being eaten up by interest. How much can you save by refinancing? A student loan refinance calculator lets you compare the interest savings of refinancing your loan.
2. You want to set your repayment terms
You should explore how different loans terms, such as the length of your student loans, can affect monthly payments. Interested in lowering your monthly payments? If you refinance your loan, you can choose a longer repayment period to pay off your remaining student loan balance. It's an effective way to lower your monthly payments and free up cash flow (but not the best way to save money over time). Maybe you're more interested in getting rid of your student debt quickly. A shorter repayment period usually comes with some of the best interest rates, too. However you want to modify the terms of your student loan, refinancing gives you more control over how you'll be repaying your student debts in 2017 and beyond.
3. Your credit has improved
A big part of the refinancing equation is your creditworthiness. Many graduates leave school with less-than-perfect or even no credit. But with a couple years of earning steady paychecks and consistently paying off debt, their credit will be much-improved. The higher your credit score, the better the interest rates you can qualify for. If you originally took out loans at a higher rate, your improved credit could get you access to today's lower rates through refinancing. Keep in mind that lenders will have different credit requirements and underwriting processes. Shop around and compare rates to find the best deal.
4. Your income has grown
In addition to looking at your credit score and history, lenders also consider your income. Student loan refinancing companies want to make sure you can comfortably afford your new monthly student loan payments. The higher and more steady your income, the more likely it is you'll be approved for refinancing. When lenders look at your income, they want to see your cashflow, how much money you have coming in and going out each month. They often compare your income to how much debt you already have – your debt-to-income ratio. If you've had a pay increase or worked on paying down or avoiding debt, your debt-to-income ratio will be more favorable.
5. You hate your loan servicer
If you took out federal student loans to pay for school, you didn't get to choose your student loan servicer. It might be serviced by the federal government through FedLoan Servicing, or transferred to another servicer the Department of Education works with. Even though you didn't pick your servicer, you still you have to work with them any time you have a question or issue with your student loans. This often means you get the runaround on your student loans or are “helped” by customer support reps who seem to have no real solutions to offer. If you refinance your loans, you can choose a new servicer. The best lenders to refinance student loans often have great customer service and reviews. They also provide repayment help options, such as the ability to skip payments or enter forbearance during a financial hardship.
Consider Student Loan Refinancing Carefully
Refinancing your student loans gives you more control over your debt and helps you save money on interest. But it's not the best move in every situation. When deciding whether to refinance your student loans, you want to consider some of the trade-offs. For instance, if you refinance federal student loans with a private lender, you'll lose some potentially important benefits. Federal student loans are eligible for income-driven repayment plans and forgiveness programs, such as Public Service Loan Forgiveness. When you refinance, you lose these options. So be totally confident in your ability to repay your loans before refinancing. Additionally, refinancing can sometimes cost more than sticking it out with an existing loan. If you refinance student loans into a longer repayment period, this can increase your costs over the life of the loan. Some lenders also charge origination fees or have other costs associated with refinancing. Overall, if you have good credit, stable income, but are dealing with high-interest loans, you have a good chance of saving money by refinancing. Explore your options and make the decision to take control of your student debt, regardless of what path you ultimately choose.
ORIGINAL POST: 03/22/2017; UPDATED 03/15/18
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