How Does Student Loan Refinancing Work?July 18, 2019
By Caroline Farhat
When you agree to take out a student loan, you also sign on to a specific set of terms and conditions that cover things such as your payment schedule and the interest you’ll pay on your loan. These terms represent the obligations of the borrower and cosigner until the loan is completely paid off. Interest rates for federal student loans are determined by the government, whereas private lenders will set their terms according to your credit score (or that of a cosigner).
Can I Change my Loan Terms?
Before graduating, you probably didn’t give much thought to student loan repayment terms. That being said, student loan terms that fit your needs and goals before starting school aren’t always ideal for you following graduation. For this reason, it is possible to change your loan terms after you graduate, and if you’re approved for a new loan, the new loan servicer pays the old loan servicer for the cost of the loan. The student loan debt is then transferred to the new loan servicer. With the new loan typically comes new and better student loan terms.
Why Should I Refinance my Student Loan?
Simply put, student loan refinancing works when you can take out a new loan in order to pay off the first loan with better terms. Here are four reasons why you might want to refinance your student loan:
Your Credit Score Has Improved Since College
Student loans provided by the federal government don’t take credit scores into account – every borrower is given the same interest rate regardless of credit history. If you have taken out a private loan, your interest rate could have been impacted by your or your cosigner’s credit score. After a few years in the workforce, your credit score usually improves. An ideal time to refinance your student loans is when your credit score exceeds 650. This should enable you to refinance your loan at a lower interest rate. Most student loan refinance companies will require a minimum credit score for refinancing approval, so be sure to seek that information out before applying.
A Longer Credit History Could Improve Your Interest Rate
Interest rates for private student loans are usually affected by your or your cosigner’s demonstrated credit history, and most student loan refinance companies will provide a minimum credit score to apply for refinancing. A refinancing company will also usually provide favorable terms to a borrower who has illustrated a financially responsible credit history – for example, by paying bills on time. An individual who has multiple defaults on their credit history is likely to receive less favorable terms or be turned down for refinancing.
Overall Interest Rates May Be Lower
Interest rates for student loans are tied to certain economic indicators at the time you applied for the loan. So, you may have a student loan with an above-average interest rate because you went to college when interest rates were high. When interest rates decrease because of changing economic conditions, you will almost certainly be able to refinance and get a better deal on your new loan.
Refinancing gives you the option of consolidating several loans with different interest rates into a single loan with a more favorable interest rate. One loan with one interest rate is much easier to manage.
Fixed and Variable Interest Rates
When you apply to refinance your student loan, you can choose between a fixed or a variable interest rate. A fixed rate doesn’t change unless you are refinancing again. A variable rate will fluctuate over time based on certain economic indicators. Variable rates coincide with low-interest rates across the economy, and they can sometimes fall to below 3%. If you find yourself with a high income and interest rates are declining, then it may be possible to get a great refinancing deal. This works by choosing a variable interest rate and paying off your loan entirely before interest rates start rising again, or by taking advantage of a low fixed interest rate and sticking with it.
Avoiding the Risks of Refinancing Student Loans
Refinancing your student loan can be a great choice, but there are some risks you want to watch out for:
- High-interest rates. If interest rates are high, you might end up paying more over time than if you had stayed with your original loan.
- Too many fees. Make sure that refinancing fees don’t outweigh the savings from your lower interest rate. Look for student loan refinancing that comes with no fees.
- Unrealistic repayment schedules. Federal student loans provide you with access to repayment plans based on a low yearly income. Make sure that you can meet the monthly payments on your refinanced loan.
When Should I Refinance my Student Loan?
The primary reason to refinance your student loan is to shift into a much more favorable loan. That loan could have a lower interest rate and save you money. Additionally, if you qualify, you’ll have the flexibility to adjust the repayment terms. This means that you could pay the loan off with a shorter term or extend the term so it costs you less every month or is easier to manage.
Use ELFI to Refinance Your Student Loans
You may be pleasantly surprised at how easy it can be to repay your loan faster and more effectively. Doing so can help you avoid the stress of too much student loan debt and enjoy a more prosperous financial life. It can be hard to tell when the best time to refinance your student loan is, so click here for a handy student loan refinancing calculator to determine how much you might save. For a no-obligation consultation, call ELFI at 1.844.601.ELFI.
Terms and conditions apply. Subject to credit approval.
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