Student Loan Refinancing Buying Guide
What is Student Loan Refinancing?
Student loan refinancing involves replacing your current student loans—either federal, private, or a combination of both—with a new, single loan from a private lender. The new loan will typically have different terms, including a potentially lower interest rate, depending on various factors like your credit score and income.
When to Consider Refinancing
- Interest Rate Drop: If rates have dropped significantly since you first took out your loans.
- Improved Credit Score: A better credit score can qualify you for a lower rate.
- Stable Income: A stable and significant income can make you a more attractive borrower.
- Variable to Fixed Rate: If you want to switch from a variable rate to a fixed rate.
Pros and Cons
Pros
- Lower interest rates
- Single monthly payment
- Customizable loan terms
Cons
- Loss of federal benefits (e.g., Public Service Loan Forgiveness)
- Credit impact due to loan application
- Limited deferment and forbearance options
Eligibility Criteria
- Credit Score: Usually, a minimum of 650 is needed.
- Income: A stable income source is generally required.
- Loan Type: Federal and private loans can usually be refinanced.
- Educational Status: Many lenders require a completed degree.
How to Shop for Refinancing
- Interest Rate: Both fixed and variable rates should be compared.
- Lender Reputation: Check customer reviews and ratings.
- Loan Term: Options often range from 5 to 20 years.
- Fees: Look for lenders who do not charge origination or prepayment fees.
Key Features to Look For
- Rate Discounts: Some lenders offer rate discounts for autopay.
- Cosigner Release: Option to remove a cosigner after meeting specific conditions.
- Flexible Repayment: Look for options like forbearance or graduated repayment.
Steps to Refinance
- Pre-Qualification: Check rates without affecting your credit score.
- Application: Submit necessary documentation for a credit check.
- Loan Selection: Choose the loan terms that best suit your needs.
- Approval and Disbursement: Upon approval, the new lender pays off your old loans.
- New Payments: Begin making monthly payments to the new lender.
Pitfalls to Avoid
- Ignoring Federal Benefits: Refinancing federal loans means giving up specific benefits.
- Long Loan Terms: A longer loan term can result in more interest paid over time.
- Variable Rates: While they start lower, they can increase over time.
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