May 25, 2022
Categories: Credit & Debit, Education & Security, Financial Planning, Loans, Youth Accounts
By Dawn Kellogg
When you refinance a student loan, you (as the borrower) take out a new loan to pay off your existing loan to take advantage of a lower interest rate or more beneficial repayment plan to save money.
If you or your child has student loan debt, you either have a federal loan, or a private loan. It’s estimated that 90% of student loan debt held is for federal loans.
Some people can save thousands when refinancing, but before you do so, you should ask yourself these two questions:
Should I refinance my federal student loans?
Although it may mean that you can get a lower interest rate, you should do your homework when it comes to refinancing your federal loans into private loans. Federal loans already have lower interest rates and more regulation than private ones. Once a federal loan becomes private (which it does when you refinance), most of the protections, including potential loan forgiveness, loan discharge, and income-based repayment plans, are no longer valid. Also, those loans can never revert to being federal loans again.
But, if you have a high-interest loan and you qualify for a lower interest rate, refinancing can save you money. At the end of the day, if you have a steady income and can keep up with the monthly payments, refinancing can make good sense. If you like the income-based repayment options available on a federal loan, want the opportunity for public service loan forgiveness, or you are benefiting from COVID-related forbearance protections, refinancing might not be the best answer for you.
If you think that refinancing your federal student loan is the best choice for you, Mark Kantrowitz, author of How to Appeal for More College Financial Aid advises waiting until November’s midterm elections to refinance. “If student loan forgiveness passes, it will be prior to the midterms, so refinancing now will negate forgiveness eligibility.”
Should I refinance private student loans?
This is simpler because your loans are already private. Shop around – if you find a lender with better rates and terms, refinancing could make sense and save you thousands of dollars over the life of the loan. If you have a private loan, Kantrowitz advocates for refinancing to a fixed-rate loan before interest rates rise.
Before you refinance, you should take into consideration the following:
Credit Score
To qualify for a lower interest rate then your current loan, you need a good credit score. A FICO score of at least 670 is considered “good.” If you’re currently having problems making payments, lenders might be wary of signing you up for a new one. If your credit is poor, talk to your lender about adjusting your payment plan and continue working on improving your credit.
Your income
Your income level shows lenders that you earn enough money to repay your loans and keep up your payments. Lenders will look at your income, the income of your co-signer (if applicable) and your DTI (total monthly debt payments divided by your total gross monthly income). A DTI ratio represents the debt you have compared to the amount of money you earn. A high DTI may be a red flag to lenders.
Competitive rates and terms
Compare lenders to make sure that you are getting the best rates and terms. Consider monthly loan repayments, total repayment terms, and interest rates. Choose a plan that works for you and offers the highest monthly payment you can afford. Longer repayment terms mean lower monthly payments, but more interest over the life of the loan. Avoid repayment terms of more than 10 years.
Prequalification
Many lenders may offer the option to prequalify, allowing you to see what potential interest rates and monthly payments will look like. Based on the change from your current loan terms, you can decide if refinancing makes sense for you. However, prequalification does not guarantee loan approval or specific rates.
Consider a co-signer
Refinancing lenders may give you the option of adding a co-signer – or conversely, to release one. If you don’t have longstanding credit history, you may need someone with good credit to co-sign your loan. Co-signers are taking on the responsibility of your loan too, and they will be required to make payments if you are unable to do so. Keep in mind that your repayment history will impact their credit score. Conversely, to release a current co-signer, you can refinance a student loan in your name alone. Make sure you meet the credit and payment criteria.
The Summit Federal Credit Union offers its members a broad scope of private student lending solutions, focused on innovative solutions, personalized service, and financial education. Click here for more information.
For a limited time, The Summit is offering a $250 cash bonus offer for those choosing to refinance their student loans through the credit union. This is a limited time offer so apply soon.