Important factors to consider
Refinancing your student loans can help you pay your debt faster and reduce monthly payments, among other benefits. In this article, we outline the process of refinancing and some factors to consider.
Federal Versus Private Student Loans
Both types of loans have advantages and disadvantages depending on your situation. Federal loans are issued by U.S. Department of Education to help students with financial needs. You often do not need a credit score, but interest rates are currently higher than private loans. Federal student loan repayments are currently on pause until January 31, 2022.
Federal student loans can either be subsidized or unsubsidized. When the loan is subsidized, the federal government pays the interest on the loan while the student is in college or while the loan is in deferment. But if the loan is unsubsidized, interest begins accruing as soon as the loan is taken out. Undergraduate borrowers typically get financing at a rate of 3.73% but only can borrow a limited amount, often not enough to cover college attendance. As for graduates and professionals, the interest rate is typically 5.28%. The interest rate for federal loans remains constant for the entire term of the loan.
The federal government also issues parent PLUS Loans. The interest rate for parent loans is 6.28%, which is constant for the entire term.
Private student loans may have more options than federal programs and lower interest rates. You can decide whether to choose between a variable-rate or fixed-rate option. Private lenders also provide flexible repayments and alternatives such as adding a cosigner for your loan.
According to statistics, millennials, ages 23-38, have the third-highest average student loan debt. Generation Xers, who are between 39 and 54, have the highest debt and baby boomers, between 55-73, have the second highest debt amounts.
Private Loans: Fixed Versus Variable Rate
If you are considering refinancing, it is essential to understand the difference between fixed and variable interest rates. A fixed interest rate stays the same throughout the life of the loan, while a variable rate goes up and down over time, which could result in lower payments. But since it is unpredictable, it can also dramatically increase the total cost of the loan.
Should I Refinance My Student Loans?
You may be able to refinance your student loans again if you qualify. But you ought to consider how it will affect your repayments in the future.
You can refinance when the interest rate drops or when your credit score improves. You can pay your old debt and may be able to get more affordable financing that you can repay comfortably with your income.
However, you could lose some benefits if you are trying to refinance a federal loan. You could lose access to income-driven plans, loan forgiveness and discharge options, among other benefits.
Refinancing Parent PLUS Loans
Parents can choose a parent PLUS Loan when filling the FASFA form. As with other federal programs, the parent must meet minimum credit requirements. Parent PLUS financing can cover up to the entire cost of attendance.
You can refinance parent PLUS Loans through a private lender. But your lender will require you to meet the minimum credit requirements. Some lenders may allow a cosigner for your loan when you don’t have a good credit score.
Student Loan Refinance with a Cosigner
While it is possible to refinance federal student loans through a private lender, you may not meet the eligibility requirements. In such situations, you may refinance with a cosigner who is in a better financial position. This option allows you to access higher amounts and better rates.
If you fail to pay the loan, the cosigner will be responsible. Cosigners are typically parents, aunts, uncles, or other family members. In addition, many private lenders offer a cosign release option. When your credit improves, you can remove the cosigner from your loan.
Take Time to Consider the Options
So, can you refinance student loans? Yes, you can. But it is always advisable to start by doing thorough research on the options you have.
Private lenders may have lower interest rates and more options than federal loans. Take time to consider your options before choosing one that aligns with your financial needs.
Make sure you pay your bills on time and your credit score is in the mid-to-high 600s or you have a cosigner before you consider refinancing. Perform due diligence before settling on a deal. There are online tools you can use to get an affordable loan. If you meet these criteria and are looking for a low interest rate and easy process, explore the options at Splash Financial.