What is student loan refinancing and how does it work?
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Refinancing a student loan involves reworking and replacing your loan terms with new terms. This may involve changing the loan manager. There are several things to consider before deciding to refinance your loans.
Can I refinance my student loan?
Yes, you can refinance federal and private student loans. However, you can only refinance a federal loan with a private lender, so the federal loan becomes a private loan. Once you refinance a federal loan, you cannot get it back into the federal program.
Depending on the private lender you choose to go with, you will need to meet certain eligibility requirements which may include a certain credit score, income, and school enrollment status. If you cannot qualify on your own, you may need to hire a co-signer. A co-signer is someone who agrees to pay off a loan if you don’t.
How to refinance a student loan
You must understand the terms of your current loan before considering refinancing. This way, you will be able to effectively compare your rates and the length of your tenure with other options from competing lenders. Research different companies and verify your custom terms with each lender.
You will be filling out applications with the companies you are interested in and will likely need to hand over documents proving your financial status and identity. You may be familiar with this process from your first loan application.
Once your preferred lender gives you their final offer, you will need to formally agree to the terms and sign a binding document promising to repay the loan. Then your new lender will pay off your existing lender and your new term will begin.
Learn more about how to refinance a student loan here.
Should I refinance my student loan?
You may want to refinance your student loan to lower your interest rate or lower your monthly payments. Some private companies also offer signup bonuses to entice you to take out loans with them. Refinancing can also allow you to consolidate payments from multiple providers into one monthly payment, making it easier to keep track of your financial responsibilities.
However, be careful before choosing to refinance your student loan. You will lose many borrower protections if you refinance a federal loan to a private loan. For example, you will not be eligible for the Civil Service Loan Forgiveness, which cancels the debts of graduates working in the public sector after at least 10 years of service and qualifying payments. You’ll also miss the income-driven repayment plans and COVID-19 loan forgiveness.
If you refinance from a shorter term to a longer term with the same balance, your monthly payments will be lower, but you could end up paying more total interest in the long term.
For a more in-depth explanation of the pros and cons of refinancing student loans, read our article here.
What Happens When I Refinance My Student Loan?
You will have a new loan service when you refinance your student loan, unless you choose to refinance a private loan with the same private lender. This new provider will have a different portal for payments, distinctive customer service and potentially unique benefits.
Depending on what you negotiated when refinancing your loan, you will also have new loan terms. This could include a different interest rate or a different repayment term, or possibly lower charges. You can also switch from a fixed rate loan to a variable rate loan, or vice versa. Make sure you understand how your new loan works so you can get your financial obligations under control.
Understanding what student loan refinancing is will help you make the most informed decision possible about whether the process is right for you.