Federal Student Loan Refinancing Possibilities and Reasons for it
Student loans have always been a burden to student, they always looking for an escape route from the night mare. One potential solution is student loan refinancing. Refinancing federal student loan has become one of the basic options.
Generally, the sooner you refinance student loans, the better. When you refinance, a lender pays off your existing loans with a new one at a lower interest rate. That will save you money in the long run and from the very first payment.
Now the big question is, can you refinance your federal student loan? You can refinance both federal and private student loans even if you’ve already consolidated or refinanced. You can’t transfer private loans to the federal government, but you can refinance federal student loans through private lenders.
Student Loan Refinancing
Student loan refinancing is the process of consolidating your existing student loans – federal, private or both – into a new, single student loan with a lower interest rate. When you refinance student loans, you make one monthly payment to one student loan servicer.
With a lower interest rate and lower monthly payment. Student loan refinance is a smart tool to save money and pay off your student loans faster.
And by shaving off a few percentage points, you can save thousands of dollars and get out of debt faster. Sounds appealing, right? While there are cost-saving benefits, it can be a risky move for federal student loan borrowers in particular.
Pros
One of the primary reasons borrowers choose to refinance federal student loans are;
- The ability to secure a lower interest rate or monthly payment. For borrowers with very good or excellent credit, this can translate into thousands of dollars in savings over the life of the loan.
- If you are eligible for a lower interest rate than you are currently paying on your federal student loans, then refinancing likely makes sense for you as long as you aren’t dependent on federal benefits and repayment plans (more on that in the next section).
Cons
- If you refinance to a longer repayment term, your payments may be lower, but it will take you longer to repay the debt.
- When refinancing federal student loans is the loss of borrower protections that often make federal loans attractive in the first place.
- Federal student loan borrowers frequently have access to income-driven repayment plans and student loan forgiveness programs, all of which will disappear once a loan is refinanced through a private lender.
- Furthermore, federal loans tend to have more generous forbearance periods, and it’s exceedingly rare to find a private lender that offers the same level of deferment benefits.
Refinancing Your Federal Student Loan
If you’re considering refinancing your federal student loans, it’s important to weigh the pros and cons carefully. The cost savings can be worth it for certain borrowers, but for the majority of federal student loan borrowers, it may not be a good idea. There’s too much to lose in regards to benefits and protections.
However, refinancing your federal student loans may be a good idea under certain circumstances. For example, if you have a steady job, hefty cash reserves and plan to pay off your debt in a short time, refinancing can make sense as a way to lower your interest payments and pay off the debt faster.
But there’s no hard and fast rule about who should refinance their federal student loans and who should not. So if you have federal student loans and are looking to save money on interest through refinancing, first assess your current financial situation.
Understand what benefits and protections you stand to lose, and make sure the benefits you are getting are worth it.
How to Refinance Federal Student Loan
You may wondering how to refinance student loans. One of the first things you should do if you are considering refinancing your federal loans is to take a look at your credit history and score.
1) Review Your Credit History
While the fixed rates attached to federal student loans are set by Congress and are not dependent on your credit score or expected income, private loan rates are.
As such, borrowers with average or below average credit scores will have a difficult time finding rates whether those are fixed interest rates or variable rates that justify refinancing. Or, in some cases, borrowers will need to add a cosigner to the loan agreement.
2) Select a Private Lender
If you determine that your credit score is good or that you have a reliable cosigner, the next step would be to select a private refinancing lender. There are numerous private lenders that offer refinancing products, making it important that you shop around before deciding on a specific lender and submitting a loan application.
As you peruse various refinancing options, you’ll want to take note of rates and terms—how much the loan will cost and how long you have to pay it off.
Keep in mind that today many lenders offer instant rate quotes. Typically, these are based on general information, like; the total loan amount to be refinanced, your income, and your credit history.
In many cases, lenders use a soft credit inquiry to determine your rates, but always verify this before requesting a quote, as a hard inquiry, particularly more than one, can damage your credit.
3) Get Your Personal Information Ready
Though each application process differs, you’ll likely need to provide information about your current loan, like how much you owe.
You’ll also need your current income, social security number, and basic contact information, including; your physical address, email address, and phone numbers.
If you need to add a cosigner to your application, you will also need similar information about them, including their social security number.
Why Refinance Student Loan
If done correctly, refinancing can potentially save you thousands in interest payments. But saving money isn’t the only reason you might want to consider refinancing. These are some of the most common reasons borrowers decide to trade in their student loans.
- Lower your monthly repayments
- Have more flexibility with repayment
- Combine multiple student loans
- Take a cosigner off a loan
- Change your servicer
Final Point
Refinancing federal student loans is possible, but borrowers should make this decision carefully. Most cases, refinancing can lead to big savings and lower monthly payments. And others borrowers may find out that the reduction rate by the federal government is better.
Below are some other alternative to refinancing your federal student loan;
- Federal Student Loan Consolidation
- Enroll in Autopay
- Consider Income-Driven Repayment Plans
