Most college students literally have no idea how much they’re paying to go to school. Six figure student loan is a monster and to have a correct estimate of that is a must. If you are recent graduate you probably have noticed the many ads on different social websites encouraging you to refinance your student loans with them. These lenders are mostly targeting those early career professionals with stable income and good credit, indicating why ads are showing up on your feed. When a business refinances, it typically extends the maturity date. When individuals change their monthly payments or modify the rate of interest on their loans, it usually involves a penalty fee. It’s all about having good credit score and credit history that encourages lenders to seek for you.
Factors that taken into Account for in Order to Refinance
The first question that needs to be answered is whether one should keep his federal loans as they constitute majority of student loans or you should get it refinanced to private loans. Federal loans come with a variety of benefits and protections such as the ability to defer payments or go on forbearance at the times of financial hardships. Adjustments based on the income of individuals are, too, possible in federal loans and most importantly some borrowers can have their federal loans forgiven in certain circumstances. But a question that would creep in your mind as to why you should refinance federal loans to private loans and give all those benefits. The answer to that is refinancing to a private loan could save a lot of money. If that trade off sounds appealing to you, keep reading.
Private Loan Refinancing
The most important factors to consider in private loan refinancing are,
- Interest rate
- Repayment term
- Type of loan
- Fixed rate or variable rate
These factors will impact how much you can save by refinancing and how much you have to pay each month. Everybody wants the interest rates to be as low as possible. But the lowest rates are typically only available for the shorter repayment terms, and shorter repayments lead to higher monthly payments, since the loan is being repaid at a shorter period of time.
Fixed vs. Variable Loans
The major factor after deciding on the terms is whether the loan is fixed or variable. While a fixed rate always stays constant over the life of the loan, as it sounds, the variable option offers lower initial rates. However, these rates can change as the interest rate fluctuates, which are hard to predict by the way. Variable loans are good for people who believe they will make enough money in the future to cover potentially higher repayments if rates go up but for those who have unpredictable future income this might not be a good option.
Borrowers get curious about the fact that how banks decide what rate they give you. Although there seems variation, lenders typically look at the borrower’s credit history, income and debt to arrive at the rate they will offer a specific borrower. There are certain ways to ensure you are getting the lowest rate like,
- Make sure there are no mistakes on your credit report
- Include all forms of income in your application
- Pay up your revolving debt as much as you can
Some lenders also take into account the fact that you are applying with a cosigner. Convince your family members for cosigning your loan.
If this is so simple, why is it so complicated?
While the chart above breaks out the key factors for you to consider, it does not tell the whole story. For example, did you know that some of these lenders are banks and some are not? A couple of these lenders are peer-to-peer lenders. Peer-to-peer lending means exactly what it sounds like: borrowers receive funding from peer lenders, or actual people who provide capital. These peer-to-peer lenders will often match alumni with borrowers from the same school. Another non-bank lender has formed a network of credit unions to make loans to borrowers on one platform. Depending on the person, the evolution of these student lending platforms is either completely fascinating or deathly boring. While looking to refinance is to focus on rate and term and less on these lending models, since at the end of the day, rate and term is what will affect your bottom line the most.
In short, here is what recommended to graduates with high rate student loans: Decide if it makes sense for you to give up the benefits of federal loans in exchange for lower rates. If it does, take a look at the lenders in the market and see what rates they will offer you. Pick the lender with the lowest rate and with a term and monthly payment that makes sense for your situation. There is potential to save thousands of dollars by making the right decision, so it is suggested to do your homework and research these lenders.