There are plenty of options when it comes to refinancing a mortgage. Same goes for auto loans. But until fairly recently, refinancing student loan debt was more of an idea than a reality. While a few programs were created to help lower student loan interest rates, these options were limited and mostly geared toward new borrowers.
However, there’s now a sliver of good news for those individuals paying off massive student loan debts on high interest rates. Recently there’s been a surge of Banks and Credit Unions getting into the refinancing game and many of them are offering refinancing options that could give lots of graduates a needed a break on their interest rates.
Liz Westin recently published an article looking at some of the companies joining the student loan refinancing industry. In it, she highlights what motivates these programs and what options they afford to borrowers. Her intro sums up the article perfectly:
“Student loan borrowers who feel trapped by high-rate private loans finally have more options to refinance their debt, but not everyone will be able to find relief.”
So the answer to the question “Is it getting easier to refinance student loans?” is “Yes, for some.”
Whether you’re actively considering refinancing your student loans or simply curious about available options for student loan debt repayment, it’s essential to be informed in order to make the best financial decision for your circumstances. Here are some common questions you may have:
What does it mean to refinance your student loans?
When you choose to refinance your loan, the company you use to refinance “buys” your loan from your current lender. They then reset the terms of your old loan (ideally for the better) and your repayment with them begins. Essentially, you’ve created a new loan contract with a new lender even if the initial loan sum remains the same. Refinancing is a tempting opportunity for some because the new terms may offer a lowered or fixed interest rate and consequently lower interest payments.
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How is it different from consolidating?
There’s a lot of confusion around consolidating vs. refinancing and rightly so since the terms are similar in their objective: to offer monthly payments that are easier (and cheaper) for those in repayment. However, there is a slight difference. When you consolidate your loans, you’re compiling various loans into one new loan. For example, you might have three different loans with different interest rates, but your new consolidation loan would have just one interest rate. On the other hand, you can refinance your loans without consolidating them into one larger loan, which can be good or bad depending on the circumstances.
Federal student loan consolidation is also slightly different than private student loan consolidation:
- Consolidating your federal student loans means your lender will remain the same but you’ll get a new repayment plan based on a new interest rate.
- Consolidating your private student loans often means switching to a different lender. In that case, any protections offered by your previous lender are not carried over.
Who benefits from refinancing?
Most commonly, borrowers who have loans with high variable or fixed interest rates and have a higher than average credit score or a willing co-signer have the highest potential to benefit from refinancing. But because there are numerous factors that contribute to the terms of a refinanced loan, each situation should be evaluated individually.
The ideal candidate would:
- be looking to refinance private student loans (since federal loan holders typically have lower, fixed interest rates along with loan protections and forgiveness programs)
- have loans with variable interest rates that exceed the fixed rates offered by the refinancing service, bank, or credit union
- be in good financial standing with an above average credit score
- have intent to pay off their debt and a plan to do so
- have a positive debt-to-income ratio
- be at the at the relative beginning of a loan repayment (because some refinancing options extend the repayment period, you may end up paying more interest over time, even if the interest rates are low)
What are the available options?
Whereas before there were limited options when it came to refinancing your student loans, more banks and credit unions are jumping in to offer options to graduates. Some of these companies are extensions of a single bank or credit union while others represent a group of lenders or financial services. Because of this, it’s essential to put in the research and read the fine print before accepting any refinancing option. To learn more about the options popping up lately, revisit this Liz Westin article.
Other places to learn more about student loan refinancing and consolidation are the Consumer Protection Bureau and the Federal Student Aid website. Our Student Loan Debt Resource Center also has more information about student loan debt and repayment options.
Word of caution
Many of the refinancing terms are based around a borrower’s credit score or based on an assessment of financial circumstances. While this makes sense from a lender’s perspective, if you’ve already defaulted on your student loan or carry a low credit score then you may be at a serious disadvantage. Unfortunately, many of those who could use help via refinancing services are already in a tough financial situation and signing onto a loan without protections could have serious financial repercussions. Make sure to research the requirements and eligibility rules before agreeing to any agreement.
And remember, although refinancing may project an appealing alternative, institutions offering the service are no stranger to the lending game. Also remember, private student loan debt doesn’t carry many of the same protections as federal student loan debt. There is often strategy involved in offers and low interest rates. While lowered interest rates are preferred, student loan debt is a serious commitment and you should always plan and prepare to follow the terms you agree on with your lender or servicer.
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