Student loan refinancing is the process of getting a new lender to pay off your existing loans through the issuance of a new loan that should essentially come at a lower interest rate. This practice helps to save you money in the long run.
Refinancing your loans depends on whether you will find a rate that will make a difference in your financial life. Therefore, it is not a practice for everyone, and not all student loans should be refinanced as it also comes with a set of cons that must be considered at all times.
In previous years, students would end up stuck with their student loans with a high interest without any chance of relief, but recently, there are plenty of lenders willing to help students out with their loans, and lessen the burden.
What Can You Refinance?
You can actually refinance both your federal as well as private student loans. When you do this, you pay off all the loans you have, and you are left with only one loan to service. The terms of the new loan are usually better than the existing loans.
Benefits Of Refinancing
You Get A Low-Interest Rate
This will essentially lead to major savings for you in terms of interest. It is actually one of the main reasons why people consider refinancing. It rewards you well. However, it is merit-based, and the more qualified you are for refinancing, the lower the interest rate.
This is a pretty big deal because low interest means paying a lower amount overall. You will also gain access to variable interest rates, which will either decrease or increase your repayment period as per the market options.
You Will Be Able To Consolidate Your Loans
With refinancing, all of your loans are paid off, so you are left with only one loan to service. This is called loan consolidation.
This helps students who might have ended up with more than one loan, such as several federal and private loans, and who pay too much in terms of loan repayments each month.
You Can Use A Cosigner To Get An Even Lower Rate
So, if you have applied for a refinancing loan and have not been successful, especially due to having a bad credit score, or you end up with high-interest rates, it is possible to find a cosigner who will co-sign the loan for you so that you can end up with even lower rates.
This is an excellent option, especially for students, as it allows them to pay extremely low-interest rates, even when they do not qualify for them.
Can It Really Save You Money? Should You Really Consider It?
It all depends on you. If you are paying very high-interest rates, and per your calculations, you can get a cheaper loan that will significantly reduce your financial burden, then you should go ahead and do it. But you must consider a few things.
When you refinance, you are essentially taking out a new loan. If you have private loans only, then that is not an issue, but if you have federal loans, you will end up giving up your federal loan protections, which include a very low-interest rate and IDR.
A Very Low-Interest Rate
Now, no matter how low the refinancing interest rate might be, it can never beat what a federal loan would offer. Most federal loans have meager rates, which is important for students to keep up with the payments each month.
An Income-Driven Repayment Plan – IDR
This is a payment option that is very smart with federal loans, and they help students who are struggling with their payments.
When you have long repayment terms, a monthly payment is usually a percentage of the discretionary income that you are allowed to dramatically use to reduce your minimum payment with an IDR plan.
We are trying to say that you must ensure that you consider both sides of the coin. With refinancing, you will end up losing the benefits associated with federal student loans. One of which is the ability to enjoy things such as deferment.
However, if you have a combination of both federal and private student loans, refinancing is a worthy option to consider.