When it comes to student loans, often the two major options at our disposal are student loan consolidation and student loan refinancing. Consolidation generally involves combining all of one’s loans into one loan with one servicer thereby making it easier to keep track of your loans. The goal is most often purely organizational through simplifying your student loans. Refinancing, however, affords the borrower with the opportunity to rework their payment plan and even to lower their interest rates. So, when should you consider a refinancing your student loans? Well, here are a few questions to ask yourself before taking the refinancing plunge:
How much do you owe?
One thing about refinancing student loans is that there are a handful of requirements. Oftentimes, private lenders require refinancers to have a minimum outstanding student loan balance. So be sure to check with your potential lender about their requirements before you start making any plans. The usual minimum generally falls around $7,500 to $10,000.
What loan types & interest rates do you have?
Be sure to look up your federal loans so that you understand what type of loan you have and what your interest rates are. You should be in good standing with your loans if you want to refinance. This means you have been keeping up with your payments and have not gone into default.
As for interest rates, the higher the rate on your current loans, the more you could save by refinancing. Federal loans are a different animal in that although interest rates fluctuate from year to year, once you have yours, it is fixed to the loan. However, private lenders have variable rates that fluctuate with the market. Private lenders’ rates depend on the credit score of the borrower. Student loan borrowers paid anywhere from 3.4 percent to 13.99 percent in interest in December 2011, according to the Consumer Finance Protection Bureau.
Do you have a steady income?
You will have a better chance at improving your interest rate if you are a full-time employee somewhere. Employment signals to lenders that you are likely to pay on time. Some lenders even require refinancers to have graduated from specific schools or graduate programs.
What’s your credit score?
Your credit score plays a massive role in establishing whether you are eligible for loan refinancing. Your credit score takes into account your payment history on your bills, which loans and credit cards you have, and how much you owe on them, as well as a wealth of other factors. Try to keep your score around the 600 range if you want to be sure to qualify for refinancing.
There are also some considerations to take into account after you have decided that you will be refinancing your student loans:
Variable interest rates
You should become well-acquainted with how variable interest works, and especially how it is calculated. The good thing about variable rates is that they often start out lower than fixed rates, which, you guessed it, remain fixed. But variable rates, on the other hand, can go up based on the indices to which they are tied — something like the London Interbank Offered rate can affect the fluctuation, for instance. And changes in your interest rate will, of course, change the amount you must pay each month. Be sure to look into how often the variable rate is adjusted, and if there is any cap on how high the interest rate can go.
Your first payment
Be sure to learn all that you need about the rules of your loan once you decide to refinance. Here are a few things that you should know: What day are you expected to start your payments, how much you’ll owe each month, what your new interest rate will be, how long your repayment term is and how to pay more than the minimum each month if you decide to do so.
It is possible that your lender will offer something called an interest rate reduction if you choose to opt for automatic payments. You will have to fill out the required applications for discount. Be sure to ask what the parameters of the discount are. For example, are there situations in which you might lose the discount, like if you temporarily postpone payments, will that squash the interest-rate-reduction deal?
Eligibility for refinancing a student loan can potentially save you a lot of money in lowered interest rates, especially if you are paying a high interest rate on your current loan or loans. If your credit score qualifies, your rate can be decreased by a good margin and really make quite a difference in your monthly payments and your overall debt. But refinancing isn’t for everyone. So, don’t be shy, and ask all the questions that you may have before taking the plunge.
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