If you have student loans, youâ€™ve likely heard about refinancing and its potential to save you money. And that potential is real â€“ for some people, refinancing has meant saving thousands of dollars. While refinancing may not be for everyone, it is a compelling option that anyone with student loan debt should at least consider.
When you refinance your student loans, you pay off your current loans with a new loan that usually has a lower interest rate. You will have all-new terms on this loan, including the rate and â€“ potentially â€“ the loanâ€™s duration. To refinance, youâ€™ll need a good credit score and a reliable income. Prior to giving you an offer, a lender will check your financials to ensure youâ€™re in good standing to repay the loan.
While youâ€™re researching potential lenders, be sure to ask about more than just rates, as some lenders may charge additional fees during the refinance process. The most common is the loan origination fee, which is usually added to the value of the loan to be paid back, with interest. Some lenders, like CommonBond, donâ€™t charge an origination fee, so ask for a list of all fees so that you can do a cost-benefit analysis before committing to a refinance.
The most common reason to refinance is to lock in a lower interest rate, but thatâ€™s not the only reason people go through the refinancing process. Below, weâ€™ll explore some of the most popular reasons and determine if student loan refinancing is right for you.
Reasons to Refinance Your Student Loans
1. Save money with a lower interest rate
If you have high-interest student loans and want to save money by lowering your interest rate, refinancing could be an excellent option for you. For example, letâ€™s say you have an $80,000 loan at a 7 percent fixed rate over ten years. If you could refinance to a 5 percent rate, you would save nearly $10,000 in interest during that ten-year period. Use a refinancing calculator like this one to explore your potential savings.
A lender will likely present you with both fixed- and variable-rate options. A fixed rate is locked in and will remain the same throughout the life of the loan, but a variable rate will change along with market rates. Variable rates generally start lower than fixed rates but have the potential to rise over time. CommonBond also offers a unique â€œhybridâ€ rate loan, where rates are fixed for five years and then switch to a variable rate for the next five years.
2. Lower your monthly payment or change your loanâ€™s duration
Through the refinancing process, you can also change the length of your loan. While a standard student loan repayment plan is ten years, your loan duration options will vary by lender, generally ranging from five to twenty years. Stretching out a loan will result in lowering your monthly payments.
This could be a great option for someone who wants the flexibility of a lower monthly payment and who plans to make the occasional lump sum payment towards their student loans. It is important to keep in mind that if you do extend the length of your loan, you might end up paying more in interest over the longer term, even with a lower rate. That said, all student loans should allow for pre-payment without penalty due to the Higher Education Opportunity Act of 2008, so youâ€™re never obligated to keep a loan to its full term.
3. Removing a cosigner
Most borrowers who are in a position to refinance their student loans are financially independent and no longer need a cosigner. If you have parents or other cosigners on your student loans and would like to remove them, some banks will allow this option as part of a refinance. Also, if you have better credit than your cosigner, this may be another opportunity to get a better interest rate.
4. To consolidate your loans
Are you managing a bunch of student loan payments to different banks and with different due dates? You could save yourself some organizational woes by refinancing those loans into one payment. This could save you a lot of hassle, and staying organized will help keep you from missing a payment.
It is important to understand that student loan refinancing is not technically the same as loan consolidation. With student loan refinancing, you are using a new loan (usually at a lower interest rate) to pay off old loans, providing similar effects to consolidating your loans. Federal loan consolidation, on the other hand, is a service that is provided, for free, by the government. Multiple loans are merged and the new interest rate is a weighted average of the previous rates, so you interest rate stays about the same. While refinancing is a method of consolidation, it can also have the added benefit of lowering your overall interest rate.
It should also be noted that a direct consolidation loan through the government only works with your federal loans, whereas some private lenders are now able to refinance (and therefore, consolidate) both public and private student loans.
Reasons You Might Want to Hold Off Refinancing
1. To take advantage of Public Service Loan Forgiveness (PSLF) or an income-driven repayment plan
If you have a public service or nonprofit job, you may qualify to have your federal student loans forgiven after ten years of work and by making 120 on-time payments. As mentioned earlier, the federal government also offers income-driven repayment plans which allow low-income borrowers to pay reduced monthly rates on their student loans (usually by extending the duration of the loan).
By refinancing, you would lose access to these federal student loan programs. If you do take advantage of loan forgiveness, though, keep in mind that youâ€™ll have to pay ordinary income taxes on any loans that are forgiven.
2. You face job or financial instability
First, youâ€™ll get the best refinancing rate if youâ€™re in a stable financial situation with good income and credit. If you donâ€™t qualify yet, keep working to get your finances in shape and try again in a year.
Second, federal loans offer protections in the event of unforeseen difficulties such as unemployment or illness. This is called forbearance. If you are concerned about your job security and ability to pay your loans in the event of job loss, youâ€™ll want to check to be certain that a forbearance option is offered by the bank youâ€™re considering refinancing with. Some private lenders, such as CommonBond, offer borrower protections including forbearance.
Every Personâ€™s Situation is Different
As with so many things money-related, everyoneâ€™s situation is different and it is up to you to analyze your personal finances and determine your biggest priorities with your loans. Is your goal to pay as little in interest as possible? Or have the lowest monthly payment possible? If you have good credit and income, wonâ€™t use student loan forgiveness or an income-based repayment plan, think youâ€™re paying too much in interest, or want lower monthly payments, refinancing could be a great option for you. If you want to take advantage of the governmentâ€™s loan forgiveness or income-based repayment programs, or do not yet have the financials to qualify you for a lower interest rate, it might be better to hold off.
If you are still unsure, just remember that it doesnâ€™t hurt your credit score to shop around and know whatâ€™s out there. It should always be free to speak with a lender about your rates and the services they provide. When you inquire about rates and whether you qualify, you may also want to ask about borrower protections such as forbearance, costs of refinancing such as origination fees, and the transition process.
When you consider the process of refinancing, think of it as a chance to choose a lender that you actually want to work with, instead of the ones that were assigned to you or chosen for you when you first took out your loans. If youâ€™ve had less-than-stellar experiences with your lenders, know that there are several companies â€“ many of which may not have existed when you attended school â€“ that have disrupted the student lending industry by providing a better product and top-notch customer service. CommonBond is one of these lenders, offering low rates, protections for borrowers, and a Care Team thatâ€™s available to answer any questions you might have.
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