Americans collectively owe over $1.7 trillion in student loan debt, so it’s no surprise that many borrowers feel trapped by high student loan balances, interest rates, and overwhelming monthly payments. Refinancing your student loan can save you money on interest charges. Whether you’re dealing with federal student loans or private student loans, consider refinancing if your credit score qualifies for a lower interest rate.
Refinancing student loans is not the right move for everyone. For example, loans for people with bad credit may be limited. Also, should you go for a variable-rate loan or a fixed one? Whichever you choose, a student loan repayment plan can mean the difference between years of financial strain and a fast path to a loan-free life.
If you are unsure if refinancing your student loan is the best move for you, you should talk with a specialist from ClearOne to assess your possibilities and financial situation.
What Is Student Loan Refinancing?
Student loan refinancing means replacing your existing student loan with a new one, usually with a different interest rate and terms.
Whether your current student loans are from a federal or private lender, you may be able to better manage student loan repayment. Specifically, if you have a good credit score, steady income, and no missed payments, you may be eligible to refinance your student loans.
When refinancing a federal student loan, you may need to consider the benefits you would be giving up when you refinance as a private loan. Compare terms, products, services, and benefits to make sure that you get the best student loan deal. These federal loan benefits may be more valuable to you than anything a private loan offers, depending on your financial situation, lines of credit, or other perks related to federal loans.
If you are having trouble making payments on your federal student loan, income-driven repayment plans may also be available to help.
When Should you Consider Student loan Refinancing?
When is the time to think about refinancing your student debt? If you are struggling to make your monthly payments due to high interest rates, then refinancing might be a good option. Use a student loan refinance calculator to compare your current loan terms with potential new terms.
Benefit from low interest rates
If you currently have high-interest private loans, refinancing could lead to favorable interest rates and thousands of dollars in savings over the life of your loan.
Better credit score
If your credit score has improved since you first took out your loans, you could qualify for loan repayment assistance and better rates now. A high credit score increases the likelihood of securing a lower interest rate on your new student loan, which can help save you money over the life of the loan.
Refinance your loans to shorter-term
You could also save money in the long run by refinancing to a shorter-term loan. You may need to budget your money with this option because your monthly payment could increase, albeit for good reason. Since you are taking less time to pay back your loan, you will likely need to pay back more principal each month. However, you will most likely spend less on interest than you would on a longer loan.
If you have other debt, a shorter-term loan may not be helpful. The higher monthly payment could take away funds that could help lower any other debt you have. However, this debt could also be consolidated with the student loan, giving you just one monthly payment to manage.
You have a stable income
A stable income and a good debt-to-income ratio make you a strong candidate for refinancing, as lenders will view you as a lower-risk borrower.
Favorable market conditions
Certain market conditions can make refinancing advantageous. When interest rates drop significantly below what you are currently paying, refinancing allows you to lock in these lower rates.
Remove a cosigner
If you can provide a steady income yourself, then you no longer need a co-signer. You can release a parent or other cosigner from their loan obligation and assume full responsibility for the debt through refinancing.
When You Shouldn't Refinance Your Student Loan
Refinancing is not always the best solution. You should only refinance your student loan when and if it saves you money on your monthly student loan payments and over the life of the loan.
You have a federal student loan
The most important consideration applies to federal student loans. Refinancing federal loans means converting them to private loans. According to Federal Student Aid, federal student loan interest rates are “generally” lower than a private loan. If you can’t get a lower interest rate, however, you may not save money when you refinance.
Refinancing a federal loan with a private loan means you lose valuable federal benefits. These benefits include access to income-driven repayment plans, making your monthly payments more manageable based on your income. You will also lose eligibility for Public Service Loan Forgiveness, federal deferment and forbearance options, and various federal loan discharge programs.
You are struggling financially
If you are struggling financially, keeping your federal loans gives you more flexibility and protection than private loans usually offer.
You can qualify for loan forgiveness
If you are close to qualifying for loan forgiveness through a federal program, refinancing would reset your progress and eliminate your eligibility.
You have a low credit score
If your credit score is less than stellar, you may not qualify for better rates than you currently have, making refinancing less profitable. Normally, student loan lenders reserve the best rates for borrowers with excellent credit scores, so it may be worth improving your credit before refinancing.
How to Refinance Your Student Loans
If your financial circumstances can support a student loan refinance, you should check for the most favorable loan.
1. Check Your Credit
Check your credit report. Take time to correct any errors, as these could affect your interest rate offers. If your credit score isn't where you'd like it to be, don’t rush things. First, improve your credit score before you apply for refinancing. Many lenders that offer student loan refinancing keep the best rates for borrowers with strong credit, so taking steps to improve your credit can strongly impact the terms you're offered.
2. Research Lenders
Μany lenders require a strong credit history to qualify for the best terms. Look beyond interest rates alone, and consider additional factors such as each lender's repayment terms, customer service reputation, hardship programs, and borrower protections. There is more to a loan than just the interest rate.
Explore your options with the help of a reputable loan refinance company to find the best deal tailored to your financial situation.
3. Get Rate Quotes
Many lenders offer free quotes and prequalification tools that won't affect your credit score. When you compare offers, look at the Annual Percentage Rate (APR), not just the interest rate, as this gives you a more complete picture of the loan's cost. Consider both fixed and variable loan refinancing rates. Variable interest rates may start lower but can increase over time.
4. Gather Required Documents
To streamline the application process, collect all necessary documentation in advance, such as recent pay stubs or tax returns, statements for all loans you want to refinance, proof of graduation, government-issued identification, and proof of residence.
5. Submit Your Application
The last step is to fill in the application. Be thorough and accurate with all information provided. Continue making regular payments on your existing loans until you receive confirmation that the refinancing is complete and your old loans have been paid off.
Refinancing Your Federal or Personal Student Loan
The purpose of a student loan refinance is for the new monthly payment to fit comfortably within your budget, otherwise it makes no financial sense. You can only make an informed decision when you fully understand the terms and costs involved, so calculate the total cost you'll pay over the life of the loan, not just the monthly payment. Remember that while longer loan terms result in lower-interest monthly payments, you will pay more in interest over time. Also, consider the trade-offs between variable and fixed interest rates: variable rates often start lower but carry the risk of increasing over time.
The cost of living is another important factor in deciding whether to refinance. Before making big decisions, review your savings or checking accounts to assess your financial flexibility.
Finally, remember that market conditions change, so reassess your refinancing options periodically to ensure that you are still getting the best possible terms.
While ClearOne Advantage cannot include student loan debt on our debt settlement plans, we can help with any unsecured debt that may be hindering your ability to pay off your student loans.
If you are experiencing difficulty keeping up with credit card debt, medical bills, or unsecured loans, contact one of our Certified Debt Specialists at 866-481-1597 to discuss your best debt relief options and get a free savings estimate today .
