No wonder so many college graduates want to refinance student loans. In 2011–12, 39% of students who earned a bachelor’s degree had borrowed over $24,300 of college debt. 17% borrowed more than $40,000 for school, and 3% owed over $70,000. Steep monthly payments, high interest rates, and a debt burden disproportionate to the borrower’s income are just a few of the problems graduates may face. In 2016, it was estimated that 44 million Americans held a collective student loan debt of $1.31 trillion in both government and private loans. But even though student loan debt is a fact of life for many college students, the burden is unfairly distributed. Women and people of color had higher average debt than white men. In 2012, the average student loan debt for black women who graduated with a bachelor’s degree was $29,051, compared to $18,934 for their white male counterparts. Fortunately, refinancing your student loans offers several potential benefits for cash-strapped grads. You could reduce the overall cost of paying back your debt, lower your monthly payments, and even spend less time paying off your loans.
Refinancing is when a borrower changes the terms of a previous credit agreement. Depending on how long you’ve been out of school, your annual income and credit history may have improved since you took out your first loans as a freshman. That could mean you qualify for better loan terms and a lower interest rate, which may offer cost-saving benefits. Refinancing is also a way to consolidate your student loans, which means combining several loans into one. If you have multiple student loans, consolidation can be a great way to simplify your finances.
Potential Benefits to Refinancing Your Loans Is refinancing your loans the right path for you? The answer is different for everyone and depends on the terms and conditions of your original loans, your current eligibility, and what you hope to achieve by refinancing. Here are some possible benefits to aim for:
- Save Money Based on How Far You’ve Come. If you’ve been out of school and working for a while, it’s possible your income and credit score are higher now than they were when you first borrowed your student loans. So, you may qualify for a lower interest rate that could save you money over the life of your loan.
- Take Advantage of an Improved Rate Environment. Loan interest rates can go up or down with the market. Refinancing may be a chance to take advantage of lower interest rates – especially if you borrowed your loans at a time when rates were particularly high.
- Change Your Payment Size or Repayment Period. Maybe you want to reduce your monthly payment in order to save for other financial goals. Or, maybe you’re hoping to shorten or extend your loan’s repayment period. Depending on your eligibility, refinancing may be a way to make your loan’s terms more manageable for your current lifestyle.
- Change the Type of Interest Rate on Your Loans. Generally, student loans come with either a fixed or variable interest rate. A fixed interest rate stays the same over the life of your loan, making it less risky than a variable rate. A variable rate changes with the market, so it may go up and down; however, it often starts out lower than fixed rates. Since there are pros and cons to both types of interest, refinancing could be a chance to change your variable rate to a fixed rate, or vice versa.
- Release Your Cosigner. If you’re like many college graduates, you needed a credit-worthy cosigner – like a parent or loved one – to help you qualify for your student loans. However, if you’ve established credit of your own since leaving school, you may no longer need a cosigner. Refinancing is often a way to release your cosigner from continuing to share responsibility for your debt.
- Consolidate Federal and Private Loans. Combining private and federal loans may be a way of simplifying your finances and making one monthly payment instead of several. However, this will require you to work with a private lender. Keep in mind that by refinancing a federal loan with a private lender, you may lose certain potential benefits that come with federal loans, like income-based repayment options.
Like applying to college, finding a refinancing loan provider is personal. The terms of your refinancing agreement may vary from lender to lender and will depend on factors specific to you – such as your credit score and debt-to-income ratio. Let’s look more closely at what could influence your eligibility:
- Employment: Lenders may require proof that you are employed and have a stable source of income. Some lenders may also require you to earn a minimum income – often between $24,000 and $50,000 per year – in order to qualify for refinancing.
- Credit History: Lenders typically use your credit to determine your interest rate, in addition to your eligibility for a refinancing loan. They may look for issues you’ve had in the past, like late payments. They’ll also look at your FICO credit score. While many lenders set a minimum credit score of 650 to 680, having a higher score may mean you can snag lower interest rates on your refinancing loan.
- DTI (Debt to Income) Ratio: DTI considers your debt as a proportion of your income. Having a low DTI may make you a stronger candidate for refinancing. To figure out your DTI, divide your total monthly debt payments by your total monthly gross income.
- Your College Degree: Lenders may look at whether or not you finished earning your degree, and even what you studied in college. Some lenders may opt not to refinance certain types of degrees or loans.
Many banks and financial institutions offer student loan refinancing to eligible borrowers. But how can you find the lender that’s perfect for you? Here are a few factors to consider when comparing student loan refinancing companies:
- All About Interest. Don’t just choose the refinancing option with the lowest interest rate. Rather, weigh the pros and cons of fixed and variable interest rates, and make sure you are choosing a refinancing agreement that fits your long-term goals. For example, variable rates often start lower than fixed rates. However, if you plan on paying your loan off over a longer period of time, you’ll face the risk of your variable rate increasing. Finally, be sure to look for interest rate “perks,” like an autopay deduction; many lenders offer a .25 APR discount to borrowers who sign up for automatic payments.
- The Amount You Borrowed. Some lenders have a minimum and maximum for how much you can refinance. Chances are, you’ll only run into issues if your student loan debt is very small or very large; however, it’s important to make sure your debt is the right size for the refinancing agreement you’re considering.
- Loan Period Options. Some student loan refinancing companies may have a minimum and maximum loan period. In other words, they might place restrictions on how much time you take to pay off your loan.
- Fees. Be aware of any potential costs associated with your refinancing loan, such as origination fees or late fees. Some lenders may offer more lenient policies than others.
- Financial Hardship Options. Hopefully, there never comes a time when you can’t afford to make your student loan payments. However, the loss of a job or another financial hardship may come when you least expect it. Look for refinance lenders that offer options like forbearance (“pausing” your payments during a period of hardship) or deferment (putting payments on hold while you serve in the military, go back to school, work in public service, etc.).
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