When you apply for student loans you usually are just starting your journey to financial independence. As you begin that journey, you usually have very little debt, credit, or income. These issues are normal during your student years, but they don’t lend to the best loan rates you can get. As you grow in your ability to be financially savvy, you will develop an increase in your credit score. This increase in score will provide you with better rates.
It may seem like a cosmic joke that as you make consistent payments on your student loans and increase your credit score, you are more eligible for loans at a lower rate. While it can be hard to swallow, all that hard work can actually help you pay off your current loans at a lower rate.
What is Refinancing?
Refinancing is using your increased credit score to get lower rates for the loan you are currently paying on. Refinancing is basically a transfer of your loan amount to a new loan under new terms. This is essentially taking out a new loan to pay off an old one. This is a great idea if you have significantly improved your credit score and are now eligible for better interest rates.
This is also a great step if you find yourself with multiple student loans all requiring their own monthly payment and charging interest on both. Consolidating your loans is a great way to make one easy payment each month. This will eliminate separate interest rates.
Refinancing should be done when the interest rates are generally lower than they were when the loan was taken out. Being able to predict the rise and fall of interest rates isn’t possible, but there are some things to look for when deciding if it is the right time to refinance. If you want to know more about the rise and fall of interest rates check out Investopedia.
When to Refinance?
Refinancing is a good option right now. After two years of national deferment on all federal loan payments and interest, the payments will resume in August of 2022. While it is possible that the federal student payments will be deferred longer, it is more likely that interest and payments will start up. It is a good time to refinance when you have improved your credit score enough to make a dent in your interest payments.
If your credit score ranges from 300-669, your credit is considered bad to fair, and refinancing would most likely hurt more than help. If your credit score is between 670-739 your credit score is considered good. If your score is good, it isn’t a bad idea to look at refinancing options. Anything above 740 is considered very good and refinancing would probably improve your loan terms.
Pros of Refinancing
Reducing the interest rates of your current loan is the main pro for refinancing. However, there are a lot of good reasons to refinance your student loan that aren’t just lower interest rates. Because you will be paying less each month, you could potentially pay off your loan sooner. When you refinance, you could choose a shorter loan duration to pay off sooner. If you choose a shorter loan length, your monthly payments will probably increase so make sure you can afford higher payments in your budget.
By refinancing and consolidating your loan you can simplify your loan payments into one monthly payment. This will save you time and money on your payments. If you got a cosigner to help you get your first loan, you can use your newfound credit prowess to relieve the cosigner of their duties. This will help you remain more independent in your finances.
Cons of Refinancing
When you refinance, it is possible to lose any student loan forgiveness you might be able to qualify for. If you refinance with a private loan they don’t offer the same repayment and deferment options. Private lenders are not as forgiving and relaxed with their repayment plans. This means once you refinance, you will typically be held to the terms of the loans without any chances for deferment or forgiveness, whereas with federal loans you have some flexibility with payment options.
Deciding if it is time to refinance your loans can be overwhelming. If you feel like you need more time to raise your credit score before you refinance, check out this article. If you are looking to raise your score, it helps to keep making your full payments on time each month. Making consistent payments each month will ensure that your credit score continues to increase. When your credit score has increased to above 700, refinancing might be the right move for you financially. Comparing all your refinancing options will help you choose the loan that fits in your budget and can ease some of the financial burden of your student loans.