Refinancing Student Loans
How Refinancing Student Loans Can Save You a Lot of Money
There’s a very good reason why student loan debt is discussed frequently today. At the present time, there is in excess of $1.35 trillion dollars of student loan debt owed by borrowers in the USA. Is it any wonder that refinancing student loans is so popular?
This tremendous amount of debt is taking its toll on so many individuals. On the Federal student loans alone, a little more than 13% are in default before they even reach two years of repayment. That is a very serious default rate.
If you, as a student loan borrower, are beginning to have difficulties in repaying your debt, don’t wait until you’re in default. You need to consider refinancing student loans and/or perhaps consolidating them. In this article, we’re providing certain facts that pertain to refinancing only.
Here are some important facts to consider in doing a refinance of your student loans:
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- Big difference between refinancing or consolidating student loans
You need to understand the primary difference between a refinance and a loan consolidation. In a loan consolidation, several federal student loans are combined into one loan through a government program. The resulting rate of interest is a weighted average of the rates on the loans being combined, and your single monthly payment is calculated on that average rate.
Refinancing student loans is done by a private lender. If you want, you can combine your government loans with other loans from a private lender. Usually in a refinance, the new rate of interest is lower. The private lender will base the interest rate on your credit rating and financial status. The stronger your credit rating, the lower the interest rate.
- Federal loans can be refinanced
As we mentioned above, most private lenders will allow you to combine federal loans with other private loans in a refinance. As a matter of fact, even if you had a federal loan consolidation previously, that too can be included in a refinance.
Before you consider a student loan refinance, you need to consult with a professional who is knowledgeable in that area. There are consequences that exist when you refinance a federal student loan with a private lender.
- You may receive a lower rate of interest
Current interest rates on federal student loans are between 4.29% and 6.84%. Competition between private lenders is strong, and some are offering rates as low as 2.5%. It’s a good idea to shop any refinance and take advantage of this. You can save a substantial amount of money, and also have a lower monthly payment.
- Competition among lenders in refinancing student loans saves you money
When you’re ready to refinance your student loan debt, you can get quotes from several private lenders. This will enable you to choose the best deal.
- Part of the interest could be tax deductible
Based on current IRS rules and your gross income, some of the interest that you pay on a student loan refinance may be deductible on your tax return. You need to consult a tax professional to see if it is.
- Any student loans that are forgiven become taxable income
There are situations whereby a private lender will forgive some portion of your student loans in a refinance. If so, the IRS has its hands out and wants you to pay income taxes on the amount forgiven. This applies to most types of debt, and does include student loans.
- Once you do a private refinance of a federal loan, it stays private forever
One of the rules that often causes a borrower to not refinance a federal loan, is that it becomes private forever. Any benefits that attach to the federal loan are lost, and there’s no going back. That loan is no longer eligible for consolidation with any future federal loans that you may incur. That’s why it’s crucial that you understand that fact before you refinance a federal loan with a private lender.
- It’s possible that you may have more repayment options in a refinance
When you receive quotes from various lenders in a refinance, you may have more flexibility in the terms of repayment. Because of the strong competition among private lenders, some will offer incentives. They range from lower interest rates if you pay on time for a certain period of time, to different lengths of time to repay the loan. Right now, you can probably find a refinance quote that will fit your needs.
Remember though, before going through with a refinance, carefully consider all of your options. Also, we urge you to consult with a knowledgeable professional so you can be sure that refinancing student loans is the best option for you.