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Merging your multiple student loans into one single monthly payment eases your debts and helps you settle them a bit faster.
Federal student loans have the option of being consolidated while still retaining the federal benefits that come with them.
Private student loans, on the other hand, can’t be consolidated as it they are issued by private lenders, not federal.
However, when you have numerous private student loans and you’re finding it hard to keep up with several monthly payments, there is a financial option that allows you to unify them into a single monthly payment and probably even get a lower interest rate and better loan terms. It is known as Student Loan Refinancing.
Refinancing allows a borrower to take out a new, private loan and use the borrowed funds to clear their existing debts.
To know if refinancing your private student loans is the best option for you, check out Student Loan Refinancing: Good or Bad Decision.
What is Student Loan Refinancing?
This has to do with taking out a new, private loan to pay off your current student loan. The new loan often comes with a lower interest rate and probably more favorable terms.
Similar to the loan consolidation process for federal loans, when you refinance, you combine your existing loans into one simple monthly payment on which you can fully concentrate.
More on Student Loan Refinancing
You can refinance both federal and private student loans by taking out a sufficient private loan to pay them off at once.
Refinancing automatically means you owe a new lender whose money you have used to pay off your old debts. After taking the new loan, you are required to make payments to your new lender until you’ve repaid the balance of your loan.
This can be a great option for borrowers with numerous student debts, as it helps them merge all the debts into one and probably gets them better loan terms.
Before they can agree to refinance your student loan, lenders usually prefer that you have a good credit score, a stable income, a degree, and a decent debt-to-income ratio.
This is to ensure that you’re capable of making payments after your loan has been refinanced.
To ensure that they can make enough interest, lenders often require a minimum refinancing amount, i.e. the amount you are yet to pay on the existing loan.
They will also ask you for detailed paperwork such as tax documents, bank statements, transcripts and IDs.
Difference Between Student Loan Refinancing and Student Debt Consolidation
Student loan refinancing differs from Student loan consolidation. A debt consolidation loan is an option offered by the federal government for borrowers to unify their federal loans into a single monthly payment.
This might end up altering your interest rate since the new interest rate will be a weighted average of the interest rates for each one of your existing loans. This might translate to a slightly higher interest over time.
Refinancing, on the other hand, is a finance option offered by private lenders to help borrowers merge their existing federal and private loans into a single monthly payment. You then get a lower interest rate and possibly new repayment terms.
Compared to debt consolidation, one of the downsides of refinancing is that once you’ve converted federal student loans into private debt, you will no longer be eligible for certain benefits that accompany federal loans, such as student loan forgiveness.
Good Sides of Student Loan Refinancing
1. There is a probability of getting lower interest rate on the new loan.
2. You could also get lower monthly payment.
3. Merging multiple loans into one makes it easier for the borrower to settle their multiple loans.
Bad Sides of Student Loan Refinancing
1. You need good credit to qualify for it.
2. You automatically lose certain benefits that come with federal loans when you refinance them.
3. Although refinancing your loans could get you lower interest rates, it could also end up increasing your interest rates.
4. You may need a co-signer to be able to refinance your loans.
When is Student Loan Refinancing a Good Decision?
You can consider refinancing your student loans if:
1. Your current student loans have high interest rates.
2. You can get a lower interest rate.
3. You need to settle multiple debts as soon as possible.
4. You have a stable source of income.
5. You can afford the monthly payments.
6. You can qualify for it.
When is Student Loan Refinancing a Bad Decision?
Refinancing your student loan may be a bad idea if:
1. You are almost done settling your debts.
2. You don’t want to lose the several benefits that come with federal loans.
3. You don’t have a stable source of income.
4. You can’t afford the monthly payments.
Requirements for Student Loan Refinancing
Although student loan refinance lenders’ requirements vary, below are some general ones:
1. A good credit: You need to have a minimum of 650 to qualify for a student loan refinance.
2. Sufficient income: You need to have a source of income that’s earning you enough money to afford your monthly payments.
3. A low debt-to-income ratio: This is the portion of your earnings that goes towards settling your bills and necessary expenses. The lower your DTI, the higher your chances of getting approved.
4. A degree from an eligible school: Most refinance lenders want you to have gotten a degree from a school authorized to receive federal aid dollars.
5. A co-signer: In cases where you don’t have a strong credit score, some lenders may consider you for loan refinancing if you can provide a co-signer who will be just as responsible for the loan as you are.
How to Refinance Your Student Loans
Below are the steps to take when considering student loan refinancing as an option for you.
Find out if refinancing is the best option
The first step is to find out not only if refinancing can help your current financial situation but if you even qualify for it. Take a good look at your credit and ensure that it is good enough to qualify for student loan refinancing without a cosigner. You typically need a minimum of 670.
Ensure that your credit score is in good shape if it is not. Also, consider the type of loans you currently have, the balance on the loans, the interest rates on them, and your monthly payment.
After concluding that refinancing your student loans is the best option, the next step is to make a list of potential lenders and research them checking:
1. If the new loan would have simple or compound interest.
2. If the lender offers any kind of incentives for refinancing your loan.
3. The lender’s reputation.
4. The lender’s history.
5. If you can be allowed to miss and make up a payment at a different date.
6. If the lender lets co-signers help boost your approval odds.
7. The kinds of payment plans available and their relevance to your finances.
8. Whether the interest rate on a refinanced loan will be fixed or variable.
After compiling a list of potential lenders and researching them using the above criteria, ensure to check with a number of them to find the one(s) that offer(s) the best rate(s).
To decide your eligibility status and interest rates, each lender uses factors such as your credit history, your preferred repayment term, and your chosen interest rate type, i.e. whether fixed or variable.
Your interest rate determines how expensive or inexpensive your monthly payments will be. Ensure to compare lender rates and fees online before going ahead with an application to refinance your loans.
If any of the lenders offer a prequalification tool, make use of it, as getting prequalified can help you know the rates and loan terms you might qualify for if you refinance your loans. This would let you know whether refinancing would ease your debt burden or worsen it.
Apply For A Loan
After comparing lenders and picking the right one for you, fill out an application for the loan. Before approving your loan application, the lender will probably run a hard credit inquiry to access your full credit report.
Some additional information will also be required, and you may need to provide some of the following documents and information:
1. Your Social Security number.
2. Proof of employment.
3. A driver’s license or government ID.
4. Proof of graduation. e.t.c
After applying, you might get a response the same day or the next business day, depending on the lender.
If your application gets approved, the last step of the application process is to peruse and sign your loan documents. Since you’ll probably have applied online, this step will also be completed online.
After receiving the needed funds, you will then begin repayment on your new loan. You should note however that, depending on the new lender, your old loans might not be immediately settled, so be sure to keep making any student loan payments that come due in the meantime so you don’t get fined for making late payments.
After your student loan refinances is complete and your debt has been settled, your old lender will probably send you a payoff letter. Be on the lookout for a notification from your new lender regarding the due date of your first bill.
Tips to Prevent Student Loan Scam
Student loan scams seek to exploit borrowers who wish to reduce their loan balance or monthly payments, repay their loans faster, or suspend payments.
There are many ways that scammers use to take advantage of borrowers desperate to get out of their student loan debt, and below are a few of them.
1. Payment of fees to fill out some forms: When applying for some of the benefits that accompany federal loans such as income-based repayment plans, deferment, or forbearance, you are not required to pay any charge to fill out the necessary forms.
Beware of scammers who would want to charge you for this service. Application forms are free at the official federal student aid website, StudentAid.gov.
2. Consolidation of private loans: You may have been told that you can consolidate your private student loans but the truth is such doesn’t exist. The only option when you want to merge your private student loans is to refinance them into one and get a lower interest rate. Although you might have to pay some fees for this service, never make such payments upfront.
3. Paying to get student loans forgiven, canceled or reduced: If a company promises to help you negotiate a student loan debt settlement or have your student loans discharged, it is probably a scam.
You may be asked to pay a huge amount of money so they can help you discharge your loan, don’t do it. Federal student loans can only be discharged under circumstances such as total and permanent disability, death, false certification, and so on.
4. Fake relief/forgiveness programs: Back in 2020, during the COVID-19 pandemic, the government provided some relief for federal student loan borrowers but it all ended in 2023 and students had to resume paying off their student debts. However, there are scammers out there who target borrowers with offers to completely erase or forgive their debts.
5. Asking for personal details: The Department of Education or a student loan servicer will never reach out to borrowers and request for personal details such as Social Security Number, account number, date of birth, FSA ID number and password, and so on.
Best Student Loan Refinance Companies
SoFi® Student Loan Refinancing.
Earnest Student Loan Refinancing.
Citizens™ Student Loan Refinancing.
Education Loan Finance (ELFI) Student Loan Refinancing.
Laurel Road Student Loan Refinancing.
PenFed Credit Union Student Loan Refinancing.
Refinancing your private student loans can help you get out of debt faster, and even help you pay less if you can get a loan with a lower interest rate.
You should however learn as much as you can about it so you can determine if Student Loan Refinancing for you is a Good or a Bad Decision?