3 Important Questions to Ask Before You Refinance Student Loans

The 2015 college graduating class earned a title that not many of them are all that proud of. They became the most indebted class ever. They will most likely hold that title until the class of 2016 reaches graduation. Total education debt for both federal and private education loans has reached $68 billion, or $30,867 per student.

This is a huge burdon for anyone just coming into the workforce. Not only do you need to pay the principal balance that you owe, but you also have interest on top of that. Luckily, there is a solution for the high monthly payments that you are going to be making for years to come.

Depending on several factors, you might be able to refinance your student loans to a lower interest loan. One of the most important factors that any lender is going to look at when you apply to refinance is what kind of borrower you have been in the past. Have you been making all of your current student loan payments on time? Next, they want to see a good credit score and a solid income. They need to make sure that you are going to be a good borrower. The last requirement that most lenders will need to see is that your current balance is high enough. Most lenders won't refinance an amount below $10,000.

Before you start the process to refinance your student loans, make sure you ask yourself these questions.

What Type of Loan Do You Have and What Is the Interest Rate?

Just because you have a high balance doesn't necessarily mean you are a good candidate to refinance your student loans. Make sure you understand the loans that you currently have and what their interest rates are.

According to the Consumer Finance Protection Bureau, private student loans in December 2011 ranged from 3.4 percent to 13.99 percent. If you are on the low end of that range, then you are probably in good shape and there is no need to refinance. However, if you are paying much higher than 3.4 percent, then it's definitely something to think about. To determine if you will save money by refinancing, calculate your student loan refinance.

Something else to consider is whether or not your loans have a fixed or variable rate. If you have a fixed rate loan, then your interest rate cannot change. However, if you have a variable rate loan, then your interest rate can and probably will change when the Federal Reserve raises interest rates.

Are You Prepared To Give Up the Benefits of Federal Loans?

Federal student loans offer a lot of different benefits. If you choose to refinance out of a federal loan and into something private, you would lose these benefits. One of the more popular benefits is the income driven repayment plan. This caps a borrowers monthly payment at 10 percent of their monthly discretionary income and also forgives the remaining balance on the loan after 20 years.

Another benefit that you might be giving up would be student loan deferment. If you were to suffer a financial hardship, then you would have the ability to temporarily defer your payments or lower your payments until you get back on your feet. This would also be relevant if you choose to go back to school.

What Are the Costs?

When you start the process of refinancing your student loans, you are going to have a lot of options to choose from. Make sure you do your research into all of them before you make a decision. Be sure to look at all the costs that might be associated with your new loan. Are they going to charge you an origination fee? This could be one or two percent of the loan value, which would increase your total debt. Would they charge a prepayment fee if you were to pay off your loan early? Federal loans do not charge a fee if you decide to pay off your loan early, however, this might not be true for a private loan.

Student loan debt is a major hardship for a lot of college graduates. If you are eligible to refinance your loans then it's definitely something you should look into. It's possible that you could substantially lower your monthly payments. Just make sure you do as much research as possible to make sure a refinance is best for your situation.

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