Refinancing student loans is an option considered by a lot of graduates looking for easier payment terms and interest savings.
Whether you’re in the process of looking for student loan refinance companies, or have just found out about the pros of refinancing, we’ve put together a list of things you should know and consider before you actually make a definitive decision.
Refinancing Student Loans | 7 Things You Should Know
1. Lower Your Debt-to-Income Ratio
How much of your gross income goes to debt repayment?
To calculate, add all of your debt obligations: mortgage, car loans, insurance, credit card, and other obligations you may currently have, including child support or alimony.
Next, divide the total by your gross monthly income (your income before taxes).
That is your DTI.
According to the CFTB (Consumer Financial Protection Bureau), 43% is the highest DTI a borrower could accept.
How can you make your DTI more attractive to lenders?
You have two options: allocate a larger portion of your income towards paying off the debt (make extra payments), or decrease your debt.
If you’re trying to improve your DTI, you should know when to put your credit card away.
2. Read The Fine Print
Looking for the best terms is a given, but you should always take time to read the fine print.
Here are some of the things you need to check – preferably with a magnifying glass:
- Check the basic eligibility requirements of your lender. Do you pass all the requirements? Some people get rejected for reasons as simple as residence information.
- Do they add extra monthly payments to your interest, or your principal (where it should be)? If they add to the interest, how hard is it to switch?
- Lending company websites often highlight the amount of money you can potentially save by refinancing through them. Take it with a grain of salt. You can do the calculations yourself, using a refinancing calculator.
3. Refinancing: A Bad Idea if You Need a Longer Loan
It’s true that refinancing allows for better, more manageable payment terms.
You should know, however, if you’re looking to obtain a longer loan, refinancing might actually cost you more money in the long run.
While the idea of lower monthly dues is attractive, you may also end up paying more in accrued interest.
If you think you need more time and/or assistance, you may contact your loan servicer and ask for a longer repayment period.
Federal loans have provisions for deferment or forbearance which will save you during harder times.
4. It Will Allow You to Release Your Co-Signer
Nothing says adulthood quite like student loans.
Refinancing is a good way to release co-signers from their obligation, and give them back the chance to improve their credit scores.
5. …But You Have To Pay Right Away
Refinancing loans, unlike other student loan provisions, can’t wait until you graduate, or take a backseat as you pursue a graduate degree.
Once you take on the loan, the payment process begins, and you have to be ready.
6. Refinancing Student Loans Allows You to Win Some
When you refinance your student loans, you get to choose whether you pay on fixed or variable rates.
It will allow you to adjust based on market interest rates: lock in at fixed when the rates are looking up, and switch to variable rates when it looks like they’re on the down low.
Good news, some companies allow you to switch between fixed and variable rates without extra fees.
Refinancing allows you to focus on paying the principal fees.
Combined with a steady career and smart money management habits, refinancing may allow you to pay off your debt faster, and save up for your future earlier.
7. But When Refinancing Student Loans, You Also Lose Some
Federal loans come with its own set of provisions and advantages, all of which you lose when you refinance.
Income-based Repayment, deferment/forbearance, and loan forgiveness are terms that may come in handy during harder times.
Would you be okay with losing these protections?
Learn how you can refinance your student loan debt through crowdfunding by watching Salvador Briggman’s video below:
The bottom line is, know your reasons, compare and contrast with refinancing student loans pros and cons, and then decide whether to stick to your current loan or to start refinancing.
Have you refinanced your student loan debt? Tell us your experience in the comments below.
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