The ordeal of having to deal with student loan debt plagues thousands of students across the globe, and managing this debt can become extremely frustrating and stressful, especially if you are not aware of student loan refinancing.
Student loan refinancing refers to the process of obtaining new interest rates, payment schedules, and terms of credit for an existing loan. This usually happens when the prevailing interest rates and terms of credit in the financial market change. You can typically refinance both your Federal and private student loans.
What to Consider before Opting for Student Loan Refinancing
While refinancing a student loan is a fantastic way to manage your debt, there are things to consider that are critical before you proceed to refinance your student loans.
Through refinancing, you are effectively changing the terms of your loan, which may include interest rates as well as payment schedules. Federal loans may be refinanced as well, but in doing so you may loose the various Federal protections you get through a Federal student loan. These protections include:
Income-Driven Repayment (IDR) Plans
The IDR Plan provided by the Federal government is to help individuals who are struggling to make their student loan payments. The Income-Driven Repayment Plan, as the name suggests, factors in your income and develops a repayment plan around that. The IDR is great to give you short term relief from your repayments but you can end up paying higher interest in the long-run as you will be repaying the principal amount for longer.
Loan Forgiveness
Student Debt is the US has reached an all-time high and currently stands between $902 billion and $1 trillion, the Federal student loan debt accounts for approximately $846 billion of this. The Federal Student Loan Forgiveness program has been designed to keep this amount in check. Under this program, certain eligible candidates will have their student loans waived off, but to be eligible for Federal Student Loan Forgiveness your loan needs to be of a particular category or you should be part of the Public Service Loan Forgiveness Program. Refinancing a Federal Student Loan will make your loan ineligible for this program.
Deferment and Forbearance
Forbearance
Forbearance refers to the option to delay your student loan payments on the off-chance that you are temporarily unable to make your monthly payment.
Your loans will continue to accrue interest when in forbearance. This means your balance will be higher when your loans re-enter repayment unless you make repayments to cover the interest on the loans. Ultimately, you ought to use this option only if you are temporarily unable to make repayments and are looking for a short-term solution
Deferment
A student loan deferment allows you to stop making payments on your loan or reduce the amount you pay for up to three years. The Interest on the subsidized deferred loans does not accrue during the deferment period as the government makes the interest payments. However, the interest on unsubsidized deferred loans and all the loans in forbearance, does accrue.
Refinancing may nullify your forbearance and deferment options.
Determining your Refinancing Eligibility
Since the student loan refinance companies are private lenders, there are multiple options for student loan refinancing. There are numerous companies you can choose from. However, it is crucial to determine whether or not your loan and you are eligible for refinancing.
Student loan refinancing companies are known to have stringent eligibility terms as compared to those that come with federal loans. Be sure to do your research on the requirements for each lender before you decide to apply.
Most lenders need you to maintain a good credit score. However, each lender is different. In addition to this, the majority of lenders also require proof of stable income and cash flow to refinance your loan.
If your credit score does not meet the requirement, or if you do not have an adequate source of income, you may need a cosigner to qualify for loan refinancing.
A cosigner is essentially a guarantee to the lender. If you happen to fall behind on your payments, the cosigner makes those payments. Having a cosigner increases your chances of getting a loan approved.
Lenders usually consider the following:
- Your Credit Score
- Your Annual Income (or potential annual income in the case of doctors)
- Savings and miscellaneous assets
- Your university and degree
The Best Companies for Student Loan Refinance
Here are some of the best student loan refinancing companies out there:
Earnest
Earnest is known to be one of the most flexible student loan refinancing companies on the market. Earnest offers the ability to choose any monthly payment and term between five and twenty years, thereby saving you more than just standard rates and terms.
In addition to this, they give you the option of changing your loan. You can choose to refinance your loan for free, change your payment dates, or even skip a payment once in a year and compensate for it.
Earnest does not have any fixed requirements for borrowers. They are no fees attached to their loans and provide you with unemployment protection to pause your monthly payments if you happen to lose your job. If you are looking for a good student loan refinance calculator, be sure to look up Earnest.
First Republic Bank
First Republic Bank offers one of the lowest fixed rate student loan choices on the market. It is as low as 1.95% APR. Do keep in mind that they have rigid requirements that include higher loan amounts, higher-income, and an excellent credit score.
In addition to this, you need to be in a location that has First Republic Bank’s services. As a potential applicant, you should be aware that First Republic does not offer deferment or forbearance periods.
These loans are private loans, which means that you lose access to the Federal programs you may qualify for.
LendKey
LendKey is a well-known student loan refinancing lender that combines the money from community banks and credit unions to provide borrowers with well-priced student loans. It offers borrowers loans between the amounts of $5,000 and $300,000. This depends on the degree the loan holder has.
LendKey bases its interest rates on your credit, and you can avail discounts for auto-pay. However, do keep in mind that LendKey does not allow refinancing for borrowers who have not graduated.
Should you Refinance A Student Loan?
Consider refinancing a student loan in the following scenarios:
- If you have student loans with high variable interest rates. Considering that interest rates are expected to rise in 2020, making loans with variable rates expensive to repay, refinancing to lock in a fixed rate is an excellent idea.
- Having private student loans. Refinancing private loans can prove to be useful seeing how you have nothing to lose. You are not eligible for Federal programs if you have private loans.
- If your credit score has improved. Refinancing your student loan makes sense when you have a strong financial foothold, as opposed to when you are just graduating.
Remember why people refinance loans. For lower interest rates and different repayment schedules. But you also lose Federal benefits if you refinance a Federal Student Loan.