Student Loan Refinancing: Reducing Debt and Managing Payments

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Repaying the cost of college can be overwhelming, especially when it seems like you aren’t making any progress toward paying down your student loans. High monthly payments often make it difficult to achieve other financial objectives, like saving for a home. If these scenarios sound familiar, explore student loan refinancing to potentially lower your payment, save money on interest, and manage your finances more effectively.

What Is Student Loan Refinancing?

Student loan refinancing is similar to refinancing any other loan. It’s the process of taking out a new loan to pay off one or more existing student loans. You can use a refinance loan to combine multiple federal and/or private loans into a single loan, a process called consolidation. 

Student loan refinancing changes the loan terms, which could give you a more affordable monthly payment with a lower interest rate or a longer loan term. You could also shorten the term of your loan, increasing your monthly payment but decreasing the total amount of interest you pay.

Let’s look at an example. If you have 10 years left on a student loan with a $50,000 balance at 8%, your payment is about $606. Reducing your interest rate to 6% lowers your payment to $543. If you also extend your loan term to 20 years, it lowers your payment to $344 a month.

How Does Student Loan Refinancing Work?

Most student refinance loans come from private lenders. While each lender has its own application process, they typically gather information about your education, employment, income, assets and credit score to make a decision about whether to approve you for the refinance loan. 

If you receive approval, the lender will provide a new loan agreement that describes the refinance loan terms. It will document your interest rate, fees, loan conditions and other key information. Review the loan agreement carefully before you decide to move forward. You can potentially save even more on your student loan by comparing refinance quotes from more than one lender. 

When you decide to move forward with student loan refinancing, the lender pays off your existing student loans. Then, you begin making payments on the new loan according to the loan agreement terms.

Related: 6 Tips For Paying Off Student Loan Debt

Benefits of Student Loan Refinancing

Refinancing your student loan can benefit you by:

  • Lowering your interest rate, possibly saving you thousands over the life of the loan
  • Simplifying your finances by combining several loans into one monthly payment
  • Changing your loan term to fit your needs, whether you want to reduce your total interest or lower your monthly payment
  • Making your loan payment more affordable helps improve your finances and your credit score

If a parent or family member cosigned on your student loan, refinancing can remove their financial responsibility. You can also replace a fixed-rate loan with a variable-rate loan or vice versa.

What Else Should You Consider When Refinancing Student Loans?

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If you have federal student loans, you lose some benefits if you refinance. Private refinance loans may not have advantages like forbearance and deferment options, loan forgiveness programs, and income-based repayment.

Most lenders require you to show proof of stable income and have above-average credit to refinance your student loan. You may need to address financial challenges by building up your credit score or getting a job with a steady salary if you aren’t eligible to refinance. 

Refinancing your student loan doesn’t automatically save you money. Calculate the cost of the new loan, including interest and fees, to make sure it won’t actually cost you more in the long run. If you select a variable-rate refinance loan, it’s important to understand how and when your interest rate will change since your payment could go up when this happens.

How Can You Find the Right Student Loan for Your Needs?

First, set a clear objective for your refinance, whether you want to repay your student loan faster, lower your interest rate or pay less each month. You should also check your credit score to know what to expect before applying. Many lenders require a score of at least 620 for approval. The higher your credit score, the better your interest rate and the more money you can save.

Look at offers from several lenders to compare terms, rates and fees and make an informed decision. You can often apply for prequalification to see available loans without impacting your credit score.

While stable fixed rates may be higher than variable rates, they stay the same for the entire loan term. Variable rates start lower but adjust after a few years, depending on the loan agreement. 

When you find a loan offer you like, read the fine print carefully. Make sure you understand the terms and conditions, such as prepayment penalties and other fees.

Stay the Course With Student Loan Refinancing

Student loan refinancing can be a strategic tool for managing your educational debt. By securing a lower interest rate or more favorable terms, you can achieve significant financial savings and potentially ease the burden of student loans. Thorough research, careful consideration, and a complete understanding of your financial goals will guide you in choosing the right student to refinance loan.

You might also be interested in: Student Credit Cards: Building Credit Responsibly

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