By Adam Hardy, Yahoo! Money
In an ideal scenario, refinancing your student loans can help you secure a lower interest rate, reduce your monthly loan payments or both. However, refinancing isn’t a smart move — nor is it always possible — for every borrower. And there are several downsides to refinancing federal student loans that you should be aware of.
Still, if you refinance your student loan under the right conditions, it could save you thousands of dollars over the life of your loan.
Read on for a step-by-step guide to refinancing your student loans, FAQs and everything else you should know before refinancing.
1. Decide if refinancing is right for you
Throughout the pandemic, student loan refinancing rates have been near historic lows. As a result, refinancing has received a lot of attention. But that isn’t reason enough to do it.
Your personal situation is what matters most. Here are some general scenarios where refinancing makes sense:
- Your personal finances have improved since you took out your current loan(s). If your credit score, job situation and debt-to-income ratio is much better than when you first took out the loan, it may make sense to refinance. This also applies to the financial situation of your co-signer, if you have one.
- You have private student loans. Only private lenders will refinance your student loans. Unfortunately, the federal government will not. You can still refinance a federal loan, but know that it then becomes a private loan and you lose all of your federal borrower protections (more on that below). On the other hand, if your current loan is a private loan, essentially all you’re doing when you refinance is trading a private loan for a (hopefully better) private loan.
- The new loan fits your needs. Ideally, your new loan will have a lower interest rate and/or monthly payment. In some cases, you might want a shorter loan length with a higher monthly payment to knock out your student debt faster. You may also be willing to lengthen the term of your loan for lower monthly payments. Whatever the case, if the new loan terms aren’t helping you, there’s no reason to refinance.
- You’re OK with giving up federal borrower protections and programs. When you refinance a federal student loan, it becomes a private loan. Thus, you lose all eligibility for federal forbearance, forgiveness, income-based repayment and financial-hardship programs. Unfortunately, once you refinance your federal student loan into a private one, you can’t revert it.
Also weigh these pros and cons before refinancing your student loans.
Pros
- You can take advantage of market fluctuations to lower the interest rate on your loans.
- You can choose the length of your repayment term (usually between five and 20 years).
- New rates or term length can lower or raise your monthly payments.
- If your old loan had a co-signer, you’ll have the option to remove that person
Cons
- You won’t be eligible for any repayment perks tied to federal positions, like military or volunteer service (if your previous loans were from the federal government).
- You won’t be eligible for federal student loan forbearance or forgiveness plans (if your previous loans were from the federal government).
- Private lenders usually don’t offer income-based repayment options.
- If you switch your federal loans into private loans, that’s irreversible.
Thinking about your long-term goals with refinancing will prepare you to better evaluate different lenders’ loan repayment options. Are you trying to pay off your student loan debt as quickly as possible or reduce your monthly payments? Or is consolidation (i.e. lumping all your private and/or federal loans into one monthly payment) your primary goal?
Once you have your goal, you can think more about the terms to look for.
2. Check your credit score
Just because you’ve decided refinancing makes sense for the type of student loans you have doesn’t mean you’ll actually get the better loan terms you want. Most lenders have strict requirements for who they’ll let into their club, though it’s easier to get approved today than it was when refinancing first came on the scene.
For starters, you’ll generally need a credit score between 650 to 680 — but that’s only to meet basic eligibility requirements. To receive the best student loan refinance rates, you should have a FICO score of about 750 or above.
To make sure you’re in that ballpark, do a credit check before proceeding. And to avoid any surprises when you’re finalizing the terms of your new loan, try early on to get your FICO score, which is essentially a brand-name version of your credit score. Many lenders look at your FICO score — or they set outright FICO score requirements — when determining their loan rates.
If you get your credit score from a bank, credit-card provider or personal-finance app, double check to see if it’s your FICO score. If not, you can purchase the most accurate and up-to-date versions of your FICO score directly from FICO at myFICO.com. Alternatively, you can access a version of your FICO score for free from the credit bureau Experian.
If your score comes back lower than you anticipated, then your next step should be pulling your credit report to find out what’s affecting your score.
As a reminder, you shouldn’t pay for your credit report in almost all cases. You can access your credit reports for free through AnnualCreditReport.com. Until April 22, 2022, each of the three major credit bureaus are providing free weekly credit reports — also available on the site.
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