As a college student, you’ve likely thought, “It’s time to learn how to refinance my student loans.”
Refinancing can be a fantastic way to relieve stress from the student loans you’ve borrowed.
There are many steps to follow and a couple of things to keep in mind before starting the process.
Should I Refinance Private or Federal Student Loans?
As someone dipping their toes into student loans for the first time, you might be wondering whether federal or private loans are better.
The thing is that with refinancing, you can’t refinance federal student loans.
However, there are extra benefits to take advantage of with federal loans to help lessen the financial burden.
Refinancing is only available with private lenders.
It’s also important to note that you can’t transfer your private student loans to federal loans to receive extra benefits.
Private vs Federal Student Loans
Private student loans are significantly different from federal because you acquire them from private lenders like banks and credit unions.
The terms of your loan agreement can differ considerably depending on where you get your loan from.
Let’s take a look at the features that make private loans differ from federal loans.
One of the most significant differences between federal and private student loans is refinancing.
With private lenders, you can refinance your loans to get lower interest rates or find another lender.
You will often be able to sign up for a new agreement with better terms to make it easier to pay your debt back.
Most student loans that you get from private lenders need to be paid back earlier than federal loans.
You will likely agree to a repayment plan that starts the month after signing up for a loan.
In some instances, you can find borrowers willing to postpone the payments while in school.
It is guaranteed that to get a private student loan, you will have to go through a credit check.
This process is what makes it challenging for many students to get private student loans.
Many don’t have much credit, and in many cases, if they do have credit, it is not strong enough to receive a loan.
As you have to go through a credit check before receiving a loan, the interest on your account can vary by financial situation.
For example, students with low credit are likely to have higher interest than those with high credit.
However, like federal loans, you will typically receive a fixed interest rate or opt for a variable rate if you prefer.
With private lenders, one of the most important things for students to make a note of is prepayment.
If you can pay your private student loans off early, you could face an extra charge or penalty.
This situation occurs because the bank doesn’t receive the interest for the rest of your term by paying a loan off early.
Important Steps to Take Before Refinancing
Now that you know the differences between federal and private student loans, let’s explore some things before refinancing.
In most cases, as long as you have a good financial history, refinancing should be relatively straightforward.
However, every student must ensure they are getting the best possible deal for their loans.
1. Review Benefits
There’s no doubt there are plenty of lenders in the United States that offer student loans.
This higher level of competition means that each lender needs to stand out by offering perks.
As an account holder, you should be able to access several important things, including:
Interest Reductions (Private)
With private loans, there is the possibility of getting reduced interest rates based on how you set up your payments.
Students who opt for auto-withdrawal of their payments can save anywhere from 0.25% to 0.50% from private lenders.
Loan Forgiveness (Federal)
Federal student loans allow you to get loan forgiveness after showing up to 25 years of regular payments.
However, you’ll have to be signed up for an income-driven repayment plan to receive this benefit.
Bundled Discounts (Private)
This benefit isn’t guaranteed, but if you own multiple products from a single private lender, you might get discounts.
You can likely save on your interest if you have a savings and checking account along with your student loan.
Income-Driven Repayment Plans (Federal)
One of the most considerable benefits of federal student loans is their income-driven repayment plans.
Using this method, you can set up a payment plan that fits comfortably within your income.
If your income changes, you can adjust the total amount you pay monthly to reduce your student loans.
2. Improve Your Approval Chances
Even though refinancing is a well-known process for many students, it doesn’t mean you are automatically eligible.
Making sure you have a solid financial history can significantly improve your chances.
Our recommendations for improving your approval chances include the following steps.
- Pay off Debt
This entails managing as much of your debt as possible, such as paying off credit cards and outstanding bills.
- Increase Your Credit Score
By fixing poor credit, you will have a far better chance of getting approved for refinancing with private lenders.
- Improve Your Income
Students with a steady job that offers a good income are most likely to be approved for loan refinancing.
- Manage Your Debt-to-Income Ratio
If you know that your outstanding debt is significantly higher than your income, start to pay it down immediately.
3. Compare Different Rates
Another essential step to getting the best rates for your loan is to compare different ones from various lenders.
As mentioned, student loans are a highly competitive marketplace, and as such, lenders have different rates available.
You’ll want to choose a lender with not only the most benefits but also the most affordable interest.
How to Refinance My Student Loans
Let’s get into the steps you’ll want to follow when it comes time to refinance your private student loans.
Step 1: Choose a Lender
First, you are going to want to find a private institution that gives you everything you need.
By considering their interest rates and qualification criteria, you can get the best possible deal.
It can always be beneficial to confirm the benefits of signing up with a specific lender before agreeing to a loan.
Another common instance is for students to stay with their current lender rather than finding a new one.
In these cases, you will work with your current bank or credit union to develop a new agreement.
Although it can be convenient to stick with the same lender, it is still recommended you explore other options.
By comparing rates, you can ensure that you are paying less towards interest and more to your principal balance.
Over time, this can make a considerable difference to how much of your loan you pay off during your term.
Step 2: Review Loan Terms
It’s far too often that students find themselves in a situation where they have signed up for a poorly structured loan.
The last thing you’ll want is to be on the hook for tens of thousands of dollars with a low-quality agreement.
Always ensure that you read the fine print of your loan to ensure you’re financially prepared for the responsibility.
Not only will you want to consider the benefits and interest but also the length of your term.
The length of your term affects the total amount you are responsible for paying back monthly.
Also, confirm whether your payments begin while in school or if they can be deferred to a later date.
Step 3: Find a Co-Signer
Another essential step that students forget about is the importance of a co-signer.
Most likely, you don’t have strong enough credit to be eligible to receive a student loan on your own.
In these cases, you must have a family member act as a co-signer on your behalf.
Co-signers essentially put their name on your loan so that if you default on payments, they are responsible.
Ask someone in your family who has a strong financial history to help improve your chances of receiving a loan.
Step 4: Prepare Your Documentation
The next step you will have to follow is to get all of the necessary documents to begin the application process.
Your lender should provide you with a list of things you’ll need.
You’ll likely require a government-issued ID, proof of employment and residence, and a credit check.
Step 5: Apply for Refinancing
The final step of the process is to apply for refinancing through the lender you’ve chosen.
They will guide you through the process, though many have easy-to-use online applications you can fill out.
After applying, all you have to do is wait for your approval, and then you can begin taking advantage of your new loan terms.
As a student thinking, “It’s time to learn how to refinance my student loans,” there are several steps to consider.
Working with a private lender can be easy when you choose the right institution to work with.
Choosing to refinance can help lessen the burden of your student loans and work with a friendly, helpful lender.