Refinancing a Student Loan – Be Aware
5 Steps to Consider Before Refinancing a Student Loan
In other articles, I have discussed the cost and debt implications of having a student loan. With the rising cost of college tuition, many young adults are getting in over their head and looking for answers once they graduate. Refinancing a student loan can give you lower monthly payments and allow you to build more savings or pay current debts off.
It‘s important to first ask yourself the ever important question of why you want to refinance your student loan. If you have a fixed rate Un-subsidized Stafford Loan, which is the most common type of federal loan for students, you need to be aware that interest rates for these loans have not changed.
Many refinancing options will switch you from a fixed rate loan to a variable rate loan. This means that the monthly payments on your loan may be smaller when you first refinance but could increase significantly over time. A variable rate loan could end up putting you in a worse position down the road.
You may lose some perks in having a Federal Student Loan by refinancing a student loan. If you can’t make your payments because you don’t have a job, the payments can be deferred for a period of time, or you may qualify for a reduced monthly payment based on your current income. Certain professions can qualify for public service loan forgiveness, where the government will discharge part of or your entire loan.
If you have good credit, a stable career, a strong emergency savings account, and decide that refinancing a student loan makes sense, here are 5 steps to consider:
- You must be already out of school in order to qualify for a refinance.
- Know how much of a monthly payment you can afford. This will help you find the right loan for your situation.
- Decide if you simply need smaller monthly payments or a longer repayment term.
- If you have several loans, Federal and private, consider refinancing (instead of consolidating) just the private loans and leave the federal loans in place for the perks.
- Shop around. Avoid the bigger banks and look into credit unions and even your current private loan lender to see if they will consider lowering your interest rate.
Whatever you do, make sure you understand all of the terms and conditions that apply to your current loan clearly before signing on the dotted line. It’s not a bad idea to speak with your college counselor and even a financial planner to make sure refinancing a student loan is truly in your best interest. Don’t commit to any deal until you know it’s the right move for you.