Tuition rates in the country have shot up in the past few years to the point where students are leaving school with tons of debt that they cannot pay off. This has been affecting many students to the point where they have to work for several years to fully pay off their loans.
Regardless of who you are, you want to be able to pay off your loans as quickly as possible before the interest rates start to pile up on you.
If you are in a troublesome spot, there are a few other solutions that you can try to help pay off your loans. One of the more popular ideas that we are going to be talking about today involves attempting to refinance your student loans.
We are going to talk about what it means to refinance your student loans, how you can go about refinancing them, and finally the pros and cons that are associated with refinancing your student loans.
Hopefully, by the end of this, you will have a good idea of how to refinance your student loans and will be able to decide if it is right for you. Let’s jump right into things and first talk about what it means to refinance your student loans.
What Is Refinancing Your Student Loans?
The term itself can be a little confusing, but refinancing student loans is quite a simple process.
All you are going to want to do is take out another loan to pay off your current one.
The old loan terms are completely replaced by the new loan’s agreement and it can allow for some extra bargaining power.
You would only look to refinance your student loans if you could get a better interest rate than the rate you currently have with your loan.
If you are going to have to end up paying more when you refinance, there is no point in you doing it. Therefore, you must carefully weigh out the pros and cons that are associated with refinancing your student loans to best take advantage.
The other reason you might look to refinance your student loans is to combine everything into one payment. With student loans, they are often broken down into multiple loans.
For example, you might have a combination of private loans and federal loans that are both subsidized and not subsidized. You’ll notice that each of these loans has a different interest rate and can result in you having to make different payments each month.
By looking to refinance your student loans, you can pay off all the loans with a new loan and then only have to worry about paying back one lender. Ideally, the new interest rate will also be better than the old one, giving you more financial freedom.
If the interest rate is going to be the exact same with this new company, you can at least rest easy knowing that you are managing your debt through only one company by refinancing your student loans.
Why Should You Refinance Your Student Loans?
We briefly mentioned why you should refinance your student loans, however, we did not go into too much detail about it. In this next bit, we are going to be covering the pros and cons of refinancing your student loans to give you an idea if it is worth it or not for you.
Please remember that each person can potentially be in a unique situation. Therefore, it might make sense for one person reading this to refinance their student loans, while it doesn’t make sense for another person.
The Pros Of Refinancing Your Student Loans
Potentially Lower Interest Rates
The biggest reason why you might look to refinance your student loans is to avoid having to make hefty interest payments.
If you have greatly improved your credit score since graduating, you might find yourself able to refinance your student loans into a new loan that has a lower interest rate. This isn’t a guarantee, however, it is worth looking at as any money saved is welcome.
A Change To Your Payment Plan
In some cases, you might be in a much better financial position to pay the loan off, and in others, you might want yourself in a worse position.
If you are struggling to pay off your debts, you might want to refinance your student loans into a longer payment plan.
Yes, this will result in you having to pay more interest, but it can give you more financial freedom.
You can look to turn a five-year payment plan into a ten-year or even twenty-year plan.
On the flip side, if you are in a much better financial position, you can refinance your student loans to shorten your payment plan and end up paying less interest. You can take a ten-year payment plan and turn it into a five-year payment plan.
Yes, you will have to pay more money, but in the long run, you are going to be saving in the form of interest payments.
You Can Co-Sign To Get A Better Plan
When you are given a loan, the interest rates that you receive correspond to your income and your credit score. With most students, they are not in the best financial situation going through university, therefore they are given loans with fairly high-interest rates.
Once you get out of school, even if your financial situation hasn’t improved, you now have the option to apply for a new loan with a co-signer.
A co-signer in a way vouches for your ability to pay off the loan and therefore can result in lower interest payments. Please note, however, that you have to make sure you are making your payments in time, especially if you applied with a co-signer.
You Can Streamline Your Payments
The big reason why you might look to refinance your student loans is simply to streamline everything into one area. As we talked about earlier, it can be frustrating to have to make multiple payments to different lenders.
This can even result in you forgetting to make a payment at the end of the month. By working to refinance your student loans, you can end up making only one payment per month, making things that much easier to handle.
The Cons of Refinancing Your Student Loans
While there are advantages to refinancing your student loans, there are also some negatives you have to be aware of.
Higher Interest Rates
The interest rates you get on your student loans are based on your credit score. If your credit score is quite low when you are looking to refinance your student loans, your interest rates are going to be through the roof.
In these situations, you are going to end up making larger payments to cover all of that interest. Unless you are in a dire situation where you have to extend the duration of your payment plan, we would not recommend refinancing your student loans if you are going to end up with a higher interest rate.
You Might Not Be Eligible For Refinancing
The other situation you might run into is that you simply are not able to refinance your student loans. In most cases, you are going to have to have an average credit score at least to refinance your student loans.
If your credit score is low, you might be rejected. To get around this, we would recommend bringing in someone to co-sign the loan with you.
As talked about in the advantages of refinancing your student loans, having someone co-sign with you can make you eligible for refinancing your student loans.
Potentially Longer Payment Plans
When looking to refinance your student loans, you might be forced back into five-year, ten-year, or twenty-year plans. This can be frustrating if you are nearing the finish line for paying back your student loans.
If you are going to have to take on extra years, you might want to simply forget about refinancing your student loans and instead focus on paying them off.
How To Refinance Your Student Loans?
If you have decided that you want to refinance your student loans, you now have to learn how to go about doing so.
You cannot refinance your student loans through the government, instead, you are going to have to go through a private lender.
Simply apply for the loan with them and once you are approved you are good to go. Use the new loan that they have given you to pay off all existing debt, and now focus on the new debt that you have.
It’s not a hard process at all and is definitely doable should you choose to do so.
There are plenty of pros and cons as to why you might want to refinance your student loans. Take a look at your financial situation along with the state of your loans to see what is going to be best for you.
In some cases, you might want to refinance your student loans while in others you might want to avoid it. Take a look at the current payment plan you are on along with interest rates. By looking at the bigger picture, you can see if you should refinance your student loans or not.