Many millennials believe student loan repayment to be the number one financial hardship they face today. With federal student loan rates being as high as 6.3% (2021) and the cost of living steadily rising, people are in need of a more affordable way to make payments. Refinancing your student loans might just be it!
You can potentially save tens of thousands of dollars throughout the life of your loan by refinancing. There are three main benefits to refinancing student loans:
- You can get a lower monthly payment, freeing up cash for other expenses.
- You can pay off your loan faster, saving you money in interest.
- A lower monthly payment decreases your debt-to-income ratio, which can make it easier to qualify for a mortgage.
When considering if refinancing is the right move for you consider these 4 must known facts.
1) Refinancing your federal student loans converts them to conventional loans.
When applying for student loans, especially government backed loans, lenders are more likely to waive specific qualifications to get you approved. Once you refinance a loan, those rules no longer apply. Lenders will no longer waive requirements like a steady income, decent credit, and debt-to-income ratios. So, if you wish to refinance make sure you can qualify for a traditional loan first.
2) Once refinanced your loans no longer qualify for any federal loan forgiveness or repayment assistance.
One of the benefits of federal backed student loans is they offer protection for the borrower. In the unfortunate event that you become severely ill, lose a job, or go through a financial hardship, depending on the situation you can be provided with assistance or even forgiveness of those loans. Also, some career fields like public education offer student loan forgiveness programs to people who work in those sectors. Once you refinance your student loans you will no longer qualify for those programs.
3) Federal and Private student loans can be refinanced.
If refinancing is the option for you, do not limit yourself to refinancing only federal student loans. Private loans, parent plus loans, and many other types of loans are all eligible to be refinanced. The typical private student loan annual percentage rate is between 7 to 12 percent; with these rates being higher than federal student aid, refinancing private loans can be a great option. Also, co-signers and parents can refinance loans they are a part of as well.
4) The interest rates of your refinance depend on the market and loan agreement.
One great thing about refinancing loans is that it allows you to have an overall lower interest rate or consolidate all your loans under one standard interest rate. Something that must be considered is whether you are in the position to refinance your loans for a lower interest rate or to consolidate all your student debt with one lender. Depending on the market at the time, your debt amount, credit score, and debt-to-income ratio lenders may not provide you with the most competitive rate possible. If that is the case, refinancing with a specific lender might not be worth the cost and responsibility in the long run.
Whether you decide to refinance your student debt, stick to the conventional repayment option, or find a different alternative to repay the debt, do yourself justice and look at all your options from an educated perspective. If you are looking for a more affordable way to pay back your student loans, refinancing could help lower your interest rates and monthly payments on them.
Everyone’s situation is different and refinancing might not be the best option for your situation. Consider the facts above and speak with a financial advisor on next steps to make the best decision for you.