It is no big secret that going to college in this day and age can cost a lot of money. Most college students are left with an overwhelming amount of student loan debt after they graduate. Currently, more than 43 million Americans have at least some debt from student loans. Additionally, the amount of student loan debt these people are facing has increased by more than 84% since the recession. The amount of student loan debt in America is currently more than 1.23 trillion dollars.
The overwhelming amount of student loan debt is a national crisis and because of this many refinancing companies have emerged in order to help student loan borrowers get a bit of relief. Since almost every household in the United States is affected by student loan debt in some way.
These refinancing companies are private lenders and offer student loan borrowers a solution to lower the interest rates on their loans and to make the payments required more manageable. Student loan refinancing is available to anyone with a student loan, but there are some people that will benefit from these options more than others.
Student loan refinancing offers borrowers the ability to refinance their high interest rate student loan debts into a loan that offers a lower interest rate. In some situations this can save the student borrower thousands of dollars in interest. These savings can then go towards making extra payments, which can help them get out of debt at a faster pace. In addition, student loan borrowers may be able to select a longer repayment term as a way to lower their monthly payments if necessary.
Should you Refinance your Student Loans?
If you currently have student loans and are thinking about refinancing, there are several questions that you need to ask yourself before you proceed. There are several benefits of keeping a federal student loan instead of refinancing with a private company.
One of the benefits of federal student loans are the special protections that are in place for these loans. Loan forgiveness programs are available for those who work in certain industries. In addition, there are income repayment plans available for federal student loans. When refinancing with a private company the loan payment will be based on the terms of the loan and there are no programs available to change the amount of the payment based on your income.
Federal student loan income contingent repayment plans can be beneficial for some borrowers for several reasons. First, these income repayment plans are based on how much money you are currently making. If you are just graduating from college your income is going to be lower than what it will be a few years into your career. You can choose an income based repayment plan that is offered in order to have a payment that fits into your budget. When considering a student loan refinance it is important to analyze your situation in order to determine whether refinancing your student loans make sense.
How Much Money Can you Save?
Refinancing your student loans can provide you with a lower interest rate on your loans, which can save you money. Many student loan refinancing companies will provide you with a prospective interest rate before you fill out the entire application. Typically, the company will use a soft credit check to obtain this rate, which will not affect your current credit score. Checking your interest rates will help you shop for the best one. You can use this information to calculate how much money you can save without hurting your current credit score. Make sure that you run the different interest rates through a refinancing calculator in order to determine how much money that you can save through your refinancing options.
People who have Grad PLUS loans and Parent PLUS loans are typically going to save the most money through a refinancing option. The reason for this is because these loans typically have a fairly high interest rate, anywhere from 6 percent to 9 percent, based on the year the loan was obtained.
There are calculators available that can help you determine exactly how much money you will be able to save by refinancing your student loans at a lower interest rate. It is important to also remember to consider the amount of time it will take you to repay the loan currently and with the new refinanced option.
Will You Be Using a Federal Loan Repayment Option?
As mentioned above, one thing to consider when you are thinking about refinancing your student loans is whether or not you are planning to use one of the federal repayment plans that is available. There are several repayment plans offered by the federal government that are based on income. These plans help make repayment of the loans more manageable for student borrowers. These payment plans include an income contingent plan, an income based repayment plan, and a pay as you earn program. Some of the plans are only available to certain borrowers who are eligible while the others are available for most student loan borrowers.
There are pros and cons to each of these plans. The benefit of an income based plan is that if you need the lowest possible payment because of an economic hardship, loss of job, or any other reason, it is available. One problem with this repayment plan is that you will pay more in interest on the loan and you may be hit with a large tax bill once the loan is forgiven.
Additionally, people who work in certain areas such as for the federal government, or as a doctor, teacher, or lawyer, may be eligible to have their student loans forgiven after making payments for a set amount of time. If you opt to refinance your loans you will not be able to use any of these loan forgiveness programs or repayment plans that are available. It is very important to consider whether or not you are eligible for a loan forgiveness program because these programs can be extremely beneficial and are often the best and most affordable way to pay off your student loans quickly and without much impact on your future.
For those who are not working in one of the areas where they would be eligible for a loan forgiveness program, keeping a federal student loan may still be the best option. Whether or not refinancing is a better idea depends directly on your current financial situation and your job situation.
If you currently have a steady job that you are comfortable with and you know that you will be able to make a recurring payment each month on your loans over the course of the term, refinancing your student loans may be a good way to maximize your savings.
How Does Student Loan Refinancing Work?
The first step for refinancing your student loan is to find a lender to refinance with. You may be able to stay with your current lending company, depending on who your current lender is and whether or not you want to stay with them. However, there are many companies out there that offer student loan refinancing for both federal and private loans. It is a good idea to consider several different companies for your student loan refinance in order to ensure you get the best possible rates for your loan.
Once you find a refinancing company you will be asked to go through an application process. This process can be time consuming as you will need to gather proof of your identity, proof of income, and verification from the loan and statements. You will also need to provide permission for running a credit check.
In order to get approved for a loan by a private company your credit score must be decent and you must show a history of paying all of your bills on time. The companies will look closely at your credit report to determine whether or not you will be eligible for refinancing. Your current credit score and report are going to play a large part in determining whether or not refinancing your student loans is going to be the best option.
The best time to consider refinancing your student loan will be when you have a consistent income. This is because it shows that you will not be a risk for missing loan payments. Many people who are right out of college are typically best served by keeping their federal student loans because of the repayment options that are available. Once you have entered a career and have an income that is consistent and there is little to no concern about losing your job, refinancing your loans may be the best choice.
Qualifying for Student Loan Refinancing
When refinancing a federal student loan into a private loan it is important to take your time and proceed cautiously.
Switching from a federal loan to a private one will make the most sense for borrowers who have a high credit score and are working in a position that has a high income and low unemployment rates.
Everyone who is approved for a federal loan receives the same interest rate. A person’s income or credit standing does not change the interest rate of a federal student loan. The federal student loan lending program does not reward borrowers who are better quality with a lower interest rate. This is in contrast to private student lenders who do.
A high income borrower is often less at risk when they are refinancing their loans from a federal to private one. These borrowers are less likely to need a more flexible repayment program that comes with the federal lending program.
With this being said, borrowers who may have lower credit scores can still find private lenders who are willing to refinance their loans. Typically, a credit union will have lower standards in regards to loan refinancing.
Finding the Lowest Interest Rates
When searching for student loan refinancing options finding the lowest interest rate will be important. Most lending sites will allow you to check your interest rate before you go through with the entire application. It is important to remember that when using these rates for comparison reasons that they may not be the actual interest rate that you end up with once you complete the loan application.
These interest rates are provided with just a soft credit check and do not provide the lending companies with enough information to give an exact rate. In addition, if you research different rates from different companies one day and then wait a week or longer before completing an application, the information on your credit report may change, which in turn can cause a change in the interest rate you receive for your refinanced loan.
Deciding whether or not you should refinance your student loans is a huge decision. For many individuals who have private student loans, refinancing can be extremely helpful. However, the loan forgiveness options combined th the different repayment options that are provided by the federal government, deciding to refinance a federal student loan can be more difficult.
So, where does that leave you in your decision? If you are a recent graduate, are currently underemployed, or if you are thinking about changing jobs soon, keeping your current federal loans is typically the best choice because of the number of repayment options that are available until your income becomes more stable.
For those who are in a more secure employment and financial situation, have a good credit score, and want to get rid of your student loan debt as fast as you can, refinancing your student loans may be a viable option, depending on the types of rates that you can get and how much you currently owe.
Overall, refinancing your student loans is something that you will have to decide on based on your current situation.