Given the recent news that student loan debt in the U.S. has topped $1.5 trillion, it's little wonder that so many people are looking for new solutions. One of the most popular tactics for managing debt is student loan refinancing. Refinancing your student loans is a great way to take control over the repayment process and ultimately make it more comfortable for you.
When you refinance your student loans, you take out a new loan that covers the balances of your existing loans, but at terms that are more favorable for your current situation. After that, the private lender with whom you refinance will pay off your outstanding balances and you'll only be responsible for a paying back the new lender, in the form of a single monthly payment.
Done properly, refinancing can be an incredible tool for saving money and getting out of debt quicker. Like any other tool, though, it's important to know exactly how use it in order to get the most out of it. Here's what you should know about refinancing.
1. Determine What You Want from Refinancing
When you refinance your student loans, you'll also be consolidating them—replacing all of your outstanding loans with a single monthly payment to a single entity. That's a consistent fact, no matter the terms of your refinance. Beyond that, though, there are many options regarding what you can get out of refinancing, so before you start, it's important to decide exactly what you're after.
Most people want to lower their interest rates, which will help them pay less over the course of their loan periods. Still, there are others who may want to change the terms of their loans even further—if you're making more money now than you were when you took out your loans, you might be able to shorten the length of your loans and pay them back faster. Refinancing also gives you the opportunity to release a cosigner, if you've got your own strong credit history.
2. It Pays to Boost Your Credit Score Before You Refinance
Again, one of the top reasons to refinance your loans is to get a better interest rate. Not only will your monthly payment be less complicated once it's all going to the same place, but hopefully, it will be smaller, too. That said, the most reliable way to lower your interest rate is to boost your credit score. A high rating is one factor lenders take into account when determining your interest rate.
To boost your credit score, pay all your bills and debts on time for a significant amount of time. If you don't have a credit card, it may be a good idea to open one up and demonstrate full, on-time payments for several months. Raising your credit can take months or even years, but it will be worth it to get the best possible interest rate.
3. Finding the Right Lender Makes a Huge Difference
All student lenders offer competing interest rates, but there's a lot more to finding the right partner than just running numbers. The refinancing process can be complicated, so it's important to work with a lender whom you trust, and on whom you can count to answer any question you have at every step of the way.
Federal loans are typically thought of as having better borrower protections than private loans, but that doesn't have to be true. As you do your research, make sure to look for lenders that offers allowances for financial hardship, such as forbearance or similar programs. It's impossible to predict what will happen in the future, so it's crucial to select a lender who will safeguard you no matter what.
4. Figure Out Which Loan Terms Are Best for You
Once you've chosen a lender, you have to figure out what kind of loan is best for your situation. The length of your loan will have a major impact on how you pay it back, so you get to select how long you want the term to run. Private student loans typically come in 5-, 10-, or 15-year terms. With shorter terms, you'll pay less in interest overall, but with longer terms, you'll have smaller monthly payments.
You'll also be able to choose how your interest rate is determined. Fixed-rate loans offer an interest rate that remains the same throughout the course of the loan, while interest rates on variable-rate loans fluctuate based on the federal government's actions. Additionally, CommonBond offers a hybrid-rate loan that starts off with a fixed interest rate, but switches to a variable rate after five years.
It's important to choose the terms of your loan very carefully. Make your decision based not only on your income and monthly expenses, but also on how you expect those things to look in the years to come.
5. For Maximum Success, Create a Budget that Incorporates Your Monthly Payment
Ideally, when you refinance your student loans, your monthly payment will become smaller. Nevertheless, it's still a consistent expense that needs to be factored into all of your financial plans.
It pays to keep to a budget while paying back your loans; that way, you won't find yourself unexpectedly short of funds in a given month, either for your loans or in another area. Additionally, there are many handy ways to save some extra money in your everyday life that can also go toward your loans—remember, CommonBond has no penalties for early repayment.
By making a budget and sticking to it, you'll be taking charge of your finances. That's an accomplishment that will last long after you've finished paying off your loans.