Student loan refinance can sound like a great way to save money and reduce stress, but there are some serious drawbacks you need to be aware of before you jump in.
Here are seven things you need to know about student loan refinancing before you start the process.
Types of loans
Federal student loans and private student loans. You can’t consolidate federal and private loans together, so you’ll need to refinance your private loans separately. You can refinance both types of loans through a private lender, but there are some things you should know before you do. Here are seven important facts about refinancing your student loans.
1) Private lenders only lend for undergraduate degrees – Some companies will give you a graduate degree on top of the undergraduate degree if you’re willing to pay higher interest rates.
2) Student loan consolidation is not the same as refinancing – Consolidation is when you combine two or more loans into one new loan with better terms (lower interest rate).
Refinancing is when you take out a new loan with different terms (new interest rate). When it comes to consolidating your loans, the only thing that changes is the name on the account; nothing else will change in terms of payments or repayment plans.
If you want to save money, find out what type of debt (private or federal) has the highest interest rate and try to consolidate those first.
3) Interest rates for private loans are variable – The rates on these loans can change monthly depending on the current market environment.
You can also read  Here are the latest student loan refinance rates. And here’s who should, and should, not consider refinancing their student loans
4) Repayment term is determined by the time at school not time in repayment- A 10-year term would mean 10 years from when you graduated college, regardless of how long ago that was.
5) Payments start immediately- Your monthly payment begins right away even though it’s calculated over a longer period.
6) Loan forgiveness may be available- The company may forgive the remaining balance after a certain number of years if you continue making monthly payments without any defaults.
7) Canceling your contract usually means paying back the full amount- The company generally expects borrowers to repay their entire loan, even if they cancel their contract early because they lost their job or couldn’t keep up with payments due to an illness.
There is usually an exit fee associated with canceling the contract early. Generally, this charge starts low and gets progressively higher until the borrower repays the loan in full.
While many people think they should use a private lender to refinance their student loans instead of dealing with FAFSA paperwork, others say that using a company like SoFi might make sense since they specialize in financing education. They also offer scholarships and other programs to help students get ahead financially.
Private Refinancing is an option
- You can refinance both federal and private loans.
- Rates are based on your credit score and other factors.
- Refinancing could save you money on interest.
- You may be able to lower your monthly payments.
- Private lenders offer different repayment options than federal lenders. 6. Some borrowers who have a bankruptcy or foreclosure in their past can qualify for refinancing with a private lender, even if they have defaulted on their federal loans.
- If you refinance with a private lender, the amount of your loan will change, which will affect the amount of your monthly payment or the total cost of the loan over time.
When it comes to repaying your loans, you want to pay more than just the minimum balance each month. The best way to do this is by making extra payments above and beyond what’s required each month. These higher payments help reduce the amount of interest that accumulates, so you end up paying less overall.
They also make it possible to finish paying off your debt sooner and put an end to those monthly bills. For most people, using financial aid refunds as well as taking out low-interest federal loans makes sense because they’re less expensive than private ones. But if you’re looking for additional help lowering your student loan costs or lowering your monthly payment, refinancing with a private lender might be worth considering.
IBR or PAYE, which one should I choose?
If you’re looking to lower your monthly payments, the Income-Based Repayment Plan (IBR) or Pay As You Earn Plan (PAYE) may be right for you.
But how do you decide which one to choose? IBR and PAYE are similar in that they both cap your monthly payment at 10% of your discretionary income, and let any remaining balance go into deferment after 25 years of repayment.
The difference is in the interest rate: with IBR, it’s capped at 5%; with PAYE, it’s capped at 10%. So if you have a higher debt load, choosing PAYE could result in more savings over time. For instance, an undergraduate degree holder carrying $30,000 in loans would pay $1,350/month under IBR; under PAYE their monthly payment would be $527.
However, if you only have loans from graduate school or professional schools like law school, then choosing IBR might be best because there will likely be no difference between the two plans’ monthly payments–both should remain around $150-$200/month on those sorts of debts.
And if you’ve already consolidated your federal loans into a Direct Consolidation Loan, then paying off those before refinancing will also lower your monthly payment by avoiding the 6.8% fee charged by most private lenders.
Regardless of which plan you choose, remember that there’s a lifetime limit of 150% – 240% of the original loan amount before payments are extended indefinitely (and interest accrues). Additionally, while IBR will allow forgiveness after 20 years of full-time employment in public service occupations, PAYE doesn’t offer this benefit.
If you’re still not sure which way to go, consider these questions: Is your monthly payment manageable now? Will it stay manageable as your salary grows over time? Which repayment plan will save me the most money in the long run? It depends on what type of job you want to pursue in the future.
If you want to pursue a high-paying career where salaries tend to increase rapidly over time, IBR may be your best bet since it limits your monthly payment based on current earnings and will eventually become affordable once your salary rises.
But if you want more flexibility when pursuing different careers throughout life, PAYE could work better for you since it caps your payment at 10% regardless of what type of job pays well–a recent study found that many people change careers several times during their working lives.
Ultimately, figuring out which one is right for you comes down to evaluating your situation and financial needs. The Department of Education has a helpful calculator here.
Interest rates can be negotiated
If you’re looking to refinance your student loans, the first thing you should do is try to negotiate your interest rates. Many lenders are willing to work with you, especially if you have a good credit score. Keep in mind, though, that the lower your interest rate, the higher your monthly payments will be.
To figure out how much you’ll save on interest over time, divide the total amount of money you’ll pay into what you’d pay at the new (lower) interest rate. For example, let’s say that your loan has an 8% interest rate and it would take five years to repay it in full.
You’d end up paying $2,000 more in total ($10K at 8% versus $8K at 6%). But if you were able to get it down to 5%, then it would only cost $1,600 more ($8K at 5% versus $6K at 6%).
That’s still an increase of 40%, but it could make sense for people who can’t afford the larger payment upfront and want some immediate relief from their debt load. Refinancing may also be helpful for borrowers who don’t have federal loans. Private loans typically come with variable interest rates that may change year-to-year based on economic conditions, which can make them difficult to budget.
Income-Based Repayment (IBR)
If you’re struggling to make your monthly student loan payments, you may be eligible for Income-Based Repayment (IBR). IBR is a repayment plan that caps your monthly payments at an amount that’s based on your income and family size. If you qualify for IBR, your monthly payment could be as low as $0 per month.
Plus, any remaining balance on your loan will be forgiven after 25 years of repayment. You can find out if you qualify for IBR by answering a few questions online through the Department of Education.
Keep in mind that if you go this route, you’ll lose eligibility for most types of federal financial aid programs (like grants and scholarships) as well as interest-free periods when repaying your loans during school.
It’s also important to note that there are some downsides to signing up for IBR. For example, the government has specific repayment plans with more favorable terms than IBR that might better suit your needs.
Additionally, not everyone qualifies for this program, so it won’t work out if you don’t meet the qualifications or don’t want it long enough.
Conclusion
In Conclusion, the process of refinancing your student loans can be a good idea if you want more control over your payments and if the interest rates on your loans are significantly lower than what you are currently paying, if there is any chance that you may have a sudden increase in income in the future, then it may not be worth it to refinance now because of how income based repayment plans work. Refinancing student loans also has some drawbacks as well.
One thing to consider is whether or not you will still have an investment advantage from having access to federal tax benefits from a variable rate federal loan. However, these tax benefits usually only apply when the interest rate on your variable rate federal loan goes up, so this will depend on the stability of where you plan to live and work for the foreseeable future as well as which program would offer you better protection against rising interest rates.
Culled from ViralityBuzz
