Have you wondered whether to refinance your student loan?
I know the feeling..
As of now, there are about $1.3 trillion in student’s debts that are outstanding. 60% of the loans constitute the federal students loans. 40% of the amount owed constitute the private loans.
Both the federal and the private student’s loan lenders on top of the loan charges an interest. This interest acts as the cost of borrowing and a way to reduce the risk to the lender. The borrowers have little to no control over the interest rates charged on the loans. They are forced to comply and stick to the interest rates.
The federal student’s loan interest rates are set up by the Congress and on the other hand, the private students’ loans interest rates are set up in terms of the underlying contractual loan. Therefore, under these tight conditions, the student is left with no option but to refinance their loans in order to lower their rates. This is done through a private lender.
Student loan refinancing becomes a wiser financial move that will help you achieve freedom. Freedom from the debt and keep you from paying too much in interest. That is one of the major objectives of student loan refinancing.
What Is Refinancing?
This is when you take out a new loan under new terms, but with a lower interest rate and use that to pay off your original loans. This becomes a faster and a much convenient way to pay off your debts.
However, you have to understand that part of the refinancing will include consolidation of your loans. This will apply if and only if you are refinancing more than one loan.
Pros Of Student Loan Refinancing
Lower Monthly Payments
One of the primary advantages of the student loan refinancing is that you will be able to pay lower monthly payments.
This is made possible by two factors:
First, the refinance can secure you a better interest rate. This will, in turn, make sure that your monthly payments are lower.
More to that, you will end up saving your money on the life of the loan. With the refinancing option, most of the graduates are able to secure better interest rates because their credit scores have been improving. Practically, since the inception of the loan, your credit score will be improving.
By extension of the duration of the loan, you can save more money.
Flexibility In The Repayment Terms
Refinancing means that your terms of payments are more flexible than ever before.
When you refinance a loan, you chose how long you want your loan. This will include specification if you want your loan to have a fixed rate or a variable one. For a student loan, choosing a variable rate could do you a significant damage and thus, it is very risky.
The rates could fluctuate at any instant
However, the rates could even go down. There are some lenders like Earnest allows the borrowers to switch between a variable rate and fixed rate.
Lower Interest Rates
If you ask around, most of the people who take the refinancing option do so to enjoy a lower rate of interest. A loan interest rate could do magic and therefore, you need to be so vigilant when it comes to these rates.
A$50,000 student loan with an interest rate of about 7.5% will require a monthly contribution of not less than $600. The period being 10 years. However, take a look at a different scenario, having a 2.5% interest rate.
This means that you could pay off the loan in 10 years with a monthly payment of $470. Therefore, if you do your calculation well, this would mean that you’d save not less than $15,000.
If you happen to have more than one student loans, you can simplify them into one loan. This becomes easy to manage and pay off.
Refinancing will re-consolidate your loans into one single loan.
Many of the private lenders even offers a discounted APR if you are to enroll in automatic payment withdrawal. With this, you can be able to save small amounts of money each month and to add to that, you will never forget to make payments.
Releasing Cosigner On The Loan
This is another advantage with the refinancing the student loans. You might be eligible to refinance the loan on your own. By dropping a consigner, say your parent, this releases any extra tension in your relationship.
However, this may be a positive move but it also comes with tons of risks. Once the consigner gets released from the loan, they may experience an added advantage. For example, higher credit score and even access to new credit lines.
Cons Of Student Loan Refinancing
Before may be settling on the idea of having to refinance your loans, there are some things that you need to be aware of this process. On the surface, it may seem like a good option but here are some of the disadvantages of the refinancing process.
Let’s dive in:
Pay More In Interest
Over time, you will realize that you may be incurring more in interest.
If you consolidate and extend the loan term, it would mean that you’d be paying more in interest. What most people are not realizing is that the longer you wait to pay for the loan, the more interest you end up paying.
More to that, student loan refinancing ends up blocking more opportunities for you. For example, if you are having a student loan for 25 years, this could hinder you from buying a new home.
Lose Access To Federal Benefits
By refinancing your loans, this would mean that you’ve given your consumer rights.
Refinancing a federal loan into a private loan means that you lose important protections and privileges. In addition to that, this would mean that you’d forever lose your unique federal student loans program such as the income driven repayment.
You May End Up Losing The Grace Period
Normally, soonest the new lender approves the refinance, the repayment process begins right away. With the many loans that you may be having, you could delay the payments.
However, if your current loan carries a grace period, you should wait until the period is over to start the refinancing option. As it is the case, most people are unaware of this and therefore, they will end up losing the grace period.
Why Should You Consider The Student Refinancing Option?
Just because you have multiple loans doesn’t mean that you are eligible for a student loan refinancing.
In most cases, not every borrower is a good candidate for the loan refinancing. You may be having trouble making your payments or you are in unstable job condition. Then refinancing may not be a good option for you. Nonetheless, you may also be in a situation where loan forgiveness is possible, still, refinancing may not be your option.
Student loans are a huge obligation and a millennial task and therefore, you must take the necessary steps to make sure that you have them paid in the right manner.
Whatever method that you choose make sure that it is the best. If you chose to side with the refinancing option, make sure that you understand perfectly clear what is at stake.