Ideally, you’ll never need to refinance, but in reality, life happens. If you find yourself struggling to pay back federal or private student loans, refinancing may be an excellent option for you. Much like the research you did before applying for assistance in the beginning; there are several things you need to know before considering this solution.
Forget What You Previously Knew About Loans
Consider this a completely separate ordeal from your original student loan. Refinancing means you will be submitting a fresh application and entering another legally binding contract with its own set of terms and conditions. This means you need to ask more questions, do more research, and unfortunately, read even more fine print. Treat this as a completely new endeavor and you won’t feel the need to “auto-pilot” through it and miss something important.
Also Read: Student Loan Debt Causes Problems for Students and Parents
Qualifying Schools
Certain banks may choose not to lend to you if you have attended a private for-profit university, community college or certificate program. This is certainly not the golden rule of every financial lending institution, but be sure to ask if the school you were enrolled in disqualifies you as a potential refinancing candidate.
Debt to Income Ratio is Important
Banks typically require a credit score of 640 or higher. Depending on the total of an applicant’s debt, a bank may require they have no more than a 45% Debt-to-Income ratio, and earn an income of no less than $2,000 per month.
Financial institutions also have a maximum amount of debt they’re willing to consider refinancing. The magic number will depend on the bank and your education. You’ll want to be clear on your application about what type of degree program you are currently enrolled in or have completed, as well as any other type of certificate course you’ve taken. Be sure to ask about credit score requirements before you apply and sign!
You May Need a Co-Signer (Still)
If you strike out on your own due to a low credit score or monthly income, a cosigner may be required for you to be approved. Some banks offer what is referred to as a co-signer release, meaning an option to release any existing cosigners, which could be a huge relief to them if they’re planning on making other major purchases in the near future or in the event of economic hardship for you.
You Have the Ability to Bundle Federal and Private Loans Together
Some banks offer the option to refinance your federal and private loans together in one tidy package. The main benefit of bundling is a lower interest rate versus refinancing each loan separately, however; this may also mean missing out on alternative and flexible repayment plans that may be a better fit for your lifestyle and financial situation. If you’re considering consolidating both federal and private student loans, you should also do as much research as you can to see what is going to work best for you and your situation.
Interest Rates
Student loans either include variable or fixed interest rates. In general, a fixed interest rate is a much more predictable situation while variable interest rates can fluctuate over time depending on the state of the economic market. Interest rates over the past four years have been historically low thanks to the 2008 recession, but when the economy actually does improve those variable interest rates are going to slowly rise with it. Refinancing will give you the option to convert your fixed rate to a variable interest rate or vice versa.
After gathering all the data and running the numbers, decide which plan is right for you.
Term Options
In plain language “term options” mean the number of years you are expected to pay back the total balance of your loan. Five, ten, fifteen and twenty year repayment terms are the most common. You may accrue the least amount of interest repaying a 5 year loan versus 10, 15 or 20, but is this a realistic expectation for your lifestyle?
Repayment Conditions
You should memorize the repayment conditions of your new contract. Seriously. Refinancing is about finding a solution for a snag in your original plan. The last thing you’ll want to do is create an even bigger financial nightmare for yourself. Ask yourself the following questions:
- What day does my repayment start?
- What are my payments going to be each month?
- How should I send the bank my money?
- What fee am I going to owe for missing a payment?
- What will happen if I default?
Know the Bottom Line
Refinancing can be a great solution to saving money on interest if handled responsibly. On the other hand, it could turn into a total disaster for you every month. Failing to do your research and explore every option could cost you big time. I recommend using a student loan search engine tool, like Achieve Lending, to thoroughly shop and compare financing to help make a truly educated decision.
Allen Kors is the Founder and CEO of Achieve Lending, the first ever search engine for education loans. Designed to help both traditional and non-traditional students find the best student loans, Achieve Lending offers users a free online portal to search, find, and compare student loans, often in as little as 30 seconds.
Kors founded Achieve Lending at just 27 years old after six years of working in the finance industry. His resume boasts time spent at the world’s premier financial firms, with positions in investment banking, private equity, angel investing, and consulting. After leaving his job in angel investing to pursue entrepreneurship and form his own financial technology company, Kors now aims to build the ‘Kayak’ for education loans and empower Achieve Lending users by providing financial education on the loan process and terminology.
