While some student loans come with a low interest rate and monthly payment, there may be options during the life of the loan to refinance for a better rate. By examining the type of loan you have and its terms and thinking through your long-term financial goals, you can make a good decision about whether there's an optimal time to refinance.
Here are three factors to consider when refinancing student loans:
Regardless of whether you have a private or government student loan, keeping an eye on the interest rates could be beneficial. When the market rate drops below your loan's rate, you may could significantly lower your student loan payment through refinancing.
In recent years, more and more banks, credit unions, and other private lenders have stepped into the student loan refinancing market, and the options can be overwhelming. Borrowers can determine what's best by looking at the terms of their loan. Private loans and loans issued by the federal government can have vastly different restrictions and rules for refinancing.
- Private loans can be eligible for extremely low interest rates, and borrowers should apply with as many lenders as they can to get the best rate. The inquiries will not affect the borrowers' credit rating, as all student loan inquiries within a two-week window are treated as a single inquiry.
- Borrowers with private student loans need to take a few things into account before applying for refinancing. Lenders will require a high credit rating, for example, and if you've missed payments or have a lot of other debt, you may not be approved.
- Borrowers may want to look into federal programs that offer a number of repayment plans that could lower monthly payments and a loan forgiveness plan when certain conditions are met.
- Borrowers should be aware that refinancing a federal loan through a private lender could mean forfeiting access to many federal repayment plans and other benefits attached to the student loan.
Refinancing essentially is applying for a new loan with better terms that will repay your old loan. Changes in your employment and financial situation since graduation could mean refinancing would work in your favor.
For example, if you have a steady job with a good income and have improved your credit rating by paying bills on time and reducing your debt, its time to re-assess your risk. Your new financial situation could qualify you for a better rate and terms on your loan.
The Length of Your Loan
The amount of interest you've paid off on your loan is a key factor in figuring out if you should refinance. If you've been paying off the loan for several years and are now only paying on principal, you don't want to refinance and begin paying interest again unless you have found an amazing refinance deal. Otherwise, your money may be best spent directly toward the principal.
Student loans have become a mainstay of American life, with more than $1.3 trillion in student loans outstanding. Borrowers who are in a good financial situation may find a number of interesting options for repaying their students loans and lowering their monthly payments. Before signing any refinancing agreements, however, borrowers should be aware of the long-term cost of the loan and any fees associated with refinancing that could eat into savings or monthly cash flow.