If you have multiple student loans, it might be a good idea to take out a new loan and pay off the existing ones for effective debt management. And this can be done by refinancing the loan. This will replace all your student debts with one loan and a single monthly payment. Below, we will look at the seven things you must keep in mind when refinancing student loans.
- Understand The Economics Behind Refinancing
First of all, you need to have a clear understanding of the economics of refinancing, specifically the details that deal with repayment amount and interest rate. When you refinance, you should end up with some benefits. Otherwise, getting a refinance will make no sense. If you will not be able to bring down the interest rate or cut back the monthly repayment amount without increasing the interest over the term period, you will be better off avoiding such refinance options.
- Consider Your Existing Loans
Start by listing out the details of all your existing loans. The amount of money outstanding, the monthly payment amount, the interest rate of the loans, whether they are federal or private loans, and so on. This will give you the required information that is necessary to make the right decision about the refinance. For example, if you have private and federal loans, then you can rule out loan programs that categorically avoid consolidating both of the loans into a single loan since it would simply be a waste of time.
- Whether To Opt For A Fixed Or Variable Interest
Just like you had to choose which type of interest rate need to be applied when you first took out the loan, you will need to do it again when refinancing the loans. Consult a refinancing expert and see whether switching to a new interest rate calculation procedure will be to your advantage or not. If all your loans currently have fixed interest rates and it is estimated that the interest rates will fall further over the next few years, you should look at refinancing the loan with a variable interest rate.
- For Those Seeking Federal Refinancing
In case you have taken federal loans, you need to know that you cannot refinance it for a new federal loan. There are no programs for it. What you can do though is to refinance the federal loan to a private loan. In the same way, a private loan can be refinanced for a new private loan but not into a federal loan. This is an extremely important point that you should keep in mind when looking to refinance student loans.
- Consider Taking Personal Student Loans
While a private student loans take care of your tuition fees, a personal student loan helps you meet all the ancillary expenses including housing, travel, books and computers. When taking a personal student loan be sure to borrow what you can repay. If you are enrolled for a degree program in a reputed college and have good credit history, getting a personal student loan will not be a hassle. Check https://www.credible.com/ to have a better understanding of personal student loans.
- Check The Repayment Plans
You should be very careful when refinancing your federal loans with private loans. With a federal loan, you would have been able to apply for more affordable repayment plans in case you face financial difficulties later down the road. But once you apply for a private loan, all such advantages are lost. So, if you are not in a strong financial position, you will do well to stick with the federal loans.
- Consider The Interest Rate For Federal Loan
When you are consolidating federal loans, you should know that the new loan won’t have a lower interest rates. This is because federal loans use weighted averages of individual loans to calculate the new loan’s interest rate. Though some loans will have their interest lowered slightly, other loans will see an increase in interest rate. As a result, the interest rate for the consolidated loan will mostly remain unchanged. However, other benefits of refinance will remain. These include being the debtor of a new lender with whom you might qualify for some forgiveness options.
- Check The Debt To Income Ratio
The new interest rate charged on you will largely depend on your debt to income ratio. Since you probably took the loans when you were entering college, there is a good chance the debt to income ratio you currently have as an employed person will be far different than the previous one. To calculate debt to income ratio, all you have to do is to divide the income with your existing debt and convert it into a percentage. If your debt to income ratio is quite low, you can expect to refinance the loan at lower rates. However, if the debt to income ratio is on the higher side, you should look at improving it by increasing the income.