What Is Student Loan Refinancing?

Apr 29, 2022

3

min read

S

tudent loans are the financial baggage students have to carry until they pay them off. It takes time to get rid of that baggage totally, but we can lighten the weight of the baggage through refinancing.

Student loan refinancing replaces heavy baggage with a comparatively lighter one. It helps to ease the financial debt and helps to pay off the loan faster.

What Is Student Loan Refinancing?

Student Loan Refinancing means borrowing a new loan to pay off the existing student loan. Generally, student loan refinancing is done when the interest rates are comparatively low, and the new loan offers much better loan terms.

For instance, you have a private loan of $50,000 at a 10% interest rate and have 20 years remaining term. Thus, you have to pay a monthly repayment of $482.51.

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Now, suppose the interest rate has dropped significantly, and the prevailing interest rate for the loan is 6 %. After refinancing the loan to the new loan interest, you will have to pay $358.22 monthly, and you can save $29,829 on interest.

Thus, the primary purpose of student loan refinancing is to get better loan terms and save up the interest money.

How Does Student Loan Refinancing Work?

After you decide to refinance your student loan, you can look for the lenders which provide the best deal. It is crucial to know that student loan refinancing is only available through private lenders.

If you plan to refinance the federal student loan, you are aware that you might lose the benefits such as loan forgiveness and deferred payment.

You can apply for the refinance loan, and the lender will offer you a rate quote. The lenders provide a pre-qualification form to get the details about you. You can get several rate quotes from different lenders, compare them and select the best quote.

After you have accepted the best quote, the lender will run a credit check before approving your loan. Once your loan is approved, the lender will pay off your existing loan, and you have to make payments for the new loan.

However, the lender might also reject your loan application if you have a bad credit score and low income.

If you are still a student with no credit profile, you need to look for a co-signer. Co-signer can be parents, spouses, or siblings who take full responsibility for paying back the loan if the borrower fails to pay back.

When To Refinance Your Student Loan?

You should refinance your student loans in the following situation:

If the new loan has a lower interest rate.
If the new loan has a lower monthly payment.
If the new loan has a shorter loan term
If you want to release your co-signer.
Your credit score has improved.
Your finances have improved.

When Not To Refinance Your Student Loan?

You shouldn't refinance your student loan in the following situation:

If you have a federal student loan, refinancing a federal loan may lose its benefits.
If you recently filed bankruptcy, you might not get favorable loan terms from the lender.
If you are halfway through paying your student loan, this will add more time to your loan term.
If you have a bad credit score and unstable income,

Student Loan Refinancing VS Debt Consolidation Student Loan.

While these terms may seem similar, there is a slight difference between student loan refinancing and debt consolidation student loans.

Student loan consolidation combines several student loans into one loan, whereas student loan refinancing is more than just consolidation.

In student debt consolidation, the primary purpose is convenience. There is no significant change in loan terms, whereas student refinancing is more about saving money on interest or extending the loan term.

Also, refinancing can be done from private lenders only. If you refinance the federal loans, you might lose the benefits such as loan forgiveness, safety nets, loan deferment, etc.

Conclusion

Student refinancing is applying for a new loan with better loan terms. It helps to save the interest money and helps to pay off the loan faster. You can easily refinance your private loans, but if you have a federal student loan, refinancing them may lose its key benefits.

It's advisable to refinance the student loan earlier as possible. You can refinance after your credit scores and your finances have improved, as it helps you get a new loan at a low-interest rate. However, if you are half away through the loan repayment, it is not advisable to refinance the loan since it will only add up to the loan term.