Student loans. Without them, college educations would not be possible for large segments of today’s population. Whether attending state colleges and universities or private institutions of higher learning, the fact remains that student loans ease the financial burden of college for many students who would not otherwise be able to pay to attend college at today’s rates.
Once graduation takes place and the time to begin repaying those student loans kicks in, many families, unfortunately, face hardships that make paying these loans back challenging. Fortunately, there are strategies you can employ that allow you to refinance student loans for more favorable terms and rates.
Finding a Lender
Finding a lender to refinance student loans is often the most straightforward part of the process. The key is to find the lender that offers the best terms and services to meet your needs. One of the benefits of refinancing student loans, when compared to refinancing a mortgage loan, is that you do not have to worry about things like closing costs, points, etc. You owe the amount of money you refinance and the interest.
Be aware that, unlike the federal student loan program that guarantees student loans to all, regardless of credit, refinance lenders often require that borrowers have good credit, with many requiring scores in the high 600s to qualify. Even among those that do qualify, terms and interest rates can vary substantially according to how high your credit is.
Getting the Best Loan Terms
One of the things you might want to consider to get the best possible loan terms for refinancing your student loans is to apply for several loan programs and compare their offers.
It is not just about the best interest rate, though that is certainly an important consideration. Also explore your option for repayment terms such as:
- Duration of the loan. Like interest, this affects the total interest you will pay over the life of the loan.
- Monthly payments. Can you afford to meet the obligations this loan represents and all your other loan obligations?
- Options for relief. Does the lending institute offer any options or protections for you or your loved ones if you die before you pay off the loans, or are unable to work temporarily due to illness or injury, or get laid off from your job?
Other things to consider are the types of loans available for student loan refinancing. For instance, fixed-rate student loans provide security that allows you to know the interest rate you will pay for the life of the loan while adjustable-rate loans often offer lower initial interest rates but may rise sharply when interest rates increase.
Refinancing vs. Consolidation
Consolidating student loans is often something offered through the federal student loan program. That allows students to combine all their student loan payments into a single payment each month. It is much easier to manage a single monthly payment on one set day each month than multiple payments spread throughout the month. Additionally, students may take this opportunity to extend the term of the loan. That can lower monthly payments substantially. The downside of this option, though, is that you will pay more in interest over the life of your loan.
Refinancing is different in that students seek lenders outside of the federal student loan program to cover the entirety of their student loan debt. They then refinance the total amount of a lower interest rate.
Before you refinance your student loans you need to understand that doing so transitions the loan from the federally protected student loan to a private loan from a private lender. This eliminates many of the protections, such as:
- Deferments
- Forbearances
- Death and disability discharges
- Default rehabilitation programs
These are all available through the Federal Student Loan program but not through the private lenders that refinance them.
For most students, it is best to consider options within the federal student loan program before seeking to refinance with a private lender. However, there are some situations in which private lending is absolutely the way to go, especially for those who have excellent credit scores.
When it comes to refinancing student loans, there are plenty of lenders to choose from for those who have outstanding credit and are interested in reducing the amount of interest they pay. However, it is wise to compare options to seek the best possible terms for your student loans and to decide if consolidation is a better option for maintaining benefits offered through the federal student loan program option.