The Complete Guide to Refinancing Your Student Loans

What if there was a way to cut the cost of your outrageously priced student loan? That’s what refinancing promises: ideally, you save thousands of dollars in interest over the life of your loan. But that’s not necessarily the whole story. Here’s everything you should consider before refinancing.

You’ve probably heard the term refinancing before. It’s the process of transferring your current loan to a new loan, with a whole new set of terms, rates, and fine print. There’s mortgage refinancing, car loan refinancing, and yes, student loan refinancing. A private lender takes over your student debt, and you get a brand new loan.

NerdWallet crunched some numbers and figures the average student loan borrower could save about $1,145 by refinancing. Your own savings will depend on a number of factors: how much you owe, the loan terms, and the difference between your old and new interest rate. If you know anything about compound interest, you know interest adds up fast. A new rate could make a big difference.http://ift.tt/1HR1T5B...

You can refinance a private or federal loan, but it’s important to know what you’re giving up when you do.

Are You Okay With Losing Your Federal Loan Options?

Your federal loan comes with a few relief options if financial times get tough. For example:

• Income-Based Repayment and Pay as You Earn: You get a reduced monthly payment, depending on your income.
• Deferment and Forbearance: Your payments are postponed for a period.
• Federal Student Loan Forgiveness: In special cases, loans are completely forgiven.

We’ve written about how these options work. However, when you refinance your federal loan, it becomes a private loan, which means you’ll lose these benefits. If you think you might be in a tough spot down the road in which you need to use these options, you’ll want to think twice before refinancing.

The Difference Between Consolidation and Refinancing

As we’ve said before, consolidation refinances your loan into a new loan, with a new repayment schedule. You’re probably thinking, how is this different from refinancing?http://ift.tt/1VBXTiN...

The purpose of refinancing is meant to get you a better rate, whereas consolidation is mostly to avoid defaulting on your loan or just to combine several loans into one. Lender SoFi lays out a few other general differences between consolidation and refinancing:

There’s also difference between federal and private consolidation. With federal consolidation, your new interest rate is determined by the average of all of the loans you’re consolidating. With private consolidation, you could get a lower rate, because the new interest rate is based on your credit, not your previous rate. So yes, consolidating a private loan could also mean you incidentally refinance it.

Find Out if You’re Eligible

Unfortunately, a lot of people who could benefit from refinancing aren’t eligible for it. Generally, you need to have strong credit and a somewhat high, steady income. Different lenders have different criteria, but here’s what the Washington Post has to say about it:

The grim reality of refinancing, however, is that most borrowers — the average bachelor’s degree graduate with debt owes $29,000 — aren’t eligible for the deal. Education refinancing requires steady income and a high credit score. Citizens Bank takes on the federal and private student loans of borrowers with a minimum FICO score of 660...SoFi’s average client makes $150,000, chief executive Mike Cagney said, and has an average FICO score of 770. The company has never had a client default.

It makes sense, though. If a lender is willing to cut your rate, they’re want to make sure you’re going to pay. Yes, this pretty much translates to: you need to earn a decent living and you need to have great credit. Also, some lenders only offer refinancing options for Bachelor’s or Graduate degrees.

Of course, your eligibility may vary depending on the lender. MagnifyMoney has a list of lenders and their requirements. Here are a few on their list that have somewhat flexible criteria:

• Citizens One (Citizens Bank): To get the best deal, you should have at least a bachelor’s degree. They will look at your credit history, and want to make sure that at least the last three payments on your student loans have been made on time. If you don’t have your degree, you need to have made the last 12 payments (principal and interest) on time. You must make at least $24,000 per year. They offer fixed rates starting at 4.74% and variable rates from 2.33%.
  
• Help: This service will find a community bank. Community banks can actually be expensive. You need to have 2 years of good credit history, with a DTI (debt-to-income) of less than 45% and annual income of at least $24,000. Fixed rates are available, starting at 6.22%.
  
• Upstart: You need to have a degree (or be graduating within 6 months). A minimum FICO of 640 is required. Fixed interest rates starting at 5.7%. This is more of a traditional personal loan than a long term student loan refinance.
  

Student Loan Hero also offers a list of reasons why borrowers often get rejected, and what you can do. For example, if you don’t earn a high enough income to refinance, you might consider asking a parent to cosign. Cosigning isn’t for everyone, but it’s an option nonetheless. Other than that, if you don’t qualify, it probably just comes down to improving your credit and paying off any other debt.http://ift.tt/1fUOQZc...

Decide on Your Terms

Let’s say you are eligible and you’ve decided refinancing is right for you. Great; now it’s time to pick and understand the terms of your new loan. Once you have a lender in mind (and you can use a tool like Student Loan Hero to find one), here are the basic loan traits you want to look for:

Fixed vs. Variable Rates

The lender will probably offer either a fixed or variable rate option.

Fixed rates are usually a bit higher, because they stay the same for the life of your loan. Variable rates are lower, but a little riskier. You might start off with a nice low rate, but that rate can easily increase, depending on the economy. For example, if you’re in the States, and the Federal Reserve decides to raise rates, your own variable student loan rate will probably increase, and you’ll pay more per month. You might even pay more than you would have with a higher, fixed rate; you never know. Are you up for that risk? You’ll have to decide for yourself.

In deciding, you’ll want to know how often the lender adjusts this variable rate, and you also want to know if there’s a limit on how high they can raise it, as student loan attorney Heather Jarvis suggests.

Length of the Loan

Like any loan, you also want to decide on the length of the new loan. The longer it takes you to pay it off, the more you’ll end up paying in interest. However, if your loan term is short, your monthly payments will be higher.

Most lenders offer different options: 5, 10, or even 20 years. Some of them even have hybrid loans, in which you pay a fixed rate for the first five years, then switch to a variable rate for the last five years.

Either way, know your options and weigh them with your income to decide what’s best for you.

Protections and Discounts

Find out what happens if you have trouble paying back your loan. Even if you’re not expecting this, it’s good to know what protection your lender offers. As CBS explains, some of them will let you postpone payments for a while if you lose your job.

Additionally, they suggest checking for any discounts. Some lenders will give you a break on your interest rate if you use their auto-pay option.

You’ll also want to find out how they handle extra monthly payments beyond the minimum. As we’ve pointed out before, some lenders will apply any extra payments toward your interest rather than use it to pay down your principal, where it actually makes a difference. Correcting this is probably as simple as a phone call or writing “apply to principal” on the check. Still, you want to know how they handle this.http://ift.tt/1XfmIli...

Refinancing can definitely save you some cash, but you have to know what you’re getting into. Especially if you have a federal student loan, you also want to know what you’re giving up (those hardship options). As you would with any account, read the fine print, ask about the details, and make the best decision for your financial situation.

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