Refinancing student loans can be a smart move for many borrowers. You may be able to shop around for a lower interest rate, pay less every month, or renegotiate other terms of your student loan. However, before refinancing your student loans, you should take several things into consideration.
What does it mean to refinance student loans?
When you refinance a student loan, you are taking out a new loan to repay your existing student loan(s). Your new loan will have completely new terms from your new lender.
Many choose to refinance student loans to lower their interest rate, which can lower your monthly payments. However, in some cases, refinancing to shorter repayment term could actually increase your monthly payment, but will help reduce how much interest you pay over time. Make sure you understand all the details around your interest rate and repayment term changes before deciding to refinance.
1. Are your student loans federal or private?
If you have federal student loans, you might want to carefully consider your options before refinancing with a private lender. as you will lose access to federal programs, such as income-driven repayment, federal forbearance, and any other benefits offered to federal borrowers. However, if you have one or multiple private loans, then refinancing could be a money-saving choice.
2. Does your interest rate seem intimidating?
Student loan refinancing could help you to secure a lower rate if the rate on your current loan is too high and making your monthly payments too difficult to manage within your budget. You could shop around until you find a refinancing option that better fits with your lifestyle and goals. When refinancing, you will have to make some choices on different interest rates, such as fixed interest rate or a variable interest rate. Work with your lender to find out what type of rate makes the most sense for your needs.
3. Is my credit score good enough to refinance student loans?
Credit history may be a key factor for some lenders to consider when deciding whether to approve or deny your refinancing application. Familiarizing yourself with your credit score and history can help you determine if you are eligible to refinance your student loans.
It may be easier for you to qualify for a loan refinance with favorable terms if you have good credit. A lender could offer you an even lower rate if you have excellent credit. Getting your credit in good shape before you apply for a refinance could be a wise move, as lenders may reserve the lowest rates for borrowers with the highest credit scores.
If you already know your credit information, you can shop around with more clarity, and if you don’t, you can use a free online tool to check your score.
Student Loans Refinancing: Pros and Cons
Once you decide if refinancing your student loans is the right choice, you may be able to easily apply online. The required documentation varies from lender to lender, but most note what documents they require.