Whether you’re graduating this year or graduated a few years ago paying off your student loan debt can feel like a daunting task. Especially if you’re not making much money from your job, you still have rent to pay, food to eat, transportation to pay for and let’s not forget about your weekend fun. It can be overwhelming to feel as though the majority of your check is going to your student loan debt. Today’s post will go over the thoughts you may have when it comes to if you should refinance your student loans.
What is the difference between debt consolidation and refinancing?
When you’re refinancing debt you’re replacing a loan with a new loan. The goal is to lower your interest rate that you’re currently paying. By reducing your federal student loan interest rate you could also be lowering your monthly payment. The lower your interest rate the more money that can reach your actual debt principal. I graduated in 2011 with $38,500 worth of debt when I paid off all of my debt my total debt pay off was $42,500 because of the $4,000 I paid in interest.
Debt consolidation This is when you combined your loans into a single loan. So instead of dealing with multiple bills, and multiple monthly payments your loans are bundled together so you just pay one payment each month.
Keep in mind that federal loan consolidation won’t lower your interest rate.
According to Usnews.com
“Federal consolidation loan interest rates are the weighted average of the interest rates of their underlying loans, rounded up to the nearest one-eighth of a percent. The result is a rate that may be likely lower for some of your previous loans, while also being higher for others. In short, the weighted average means that things mostly just balance out.”
Is Refinancing your student loans a bad thing?
This is a legit question, when I had student loan debt I always assumed that if I refinanced my student loans that it would just take me longer to pay them off. I guess I never really did my research and thought the only way to pay off my debt would be to put as much money towards my debt each month as possible. And of course using the debt snowball method to do so. Putting the majority of my extra money towards the debt with the smallest balance first while paying the minimum payments on all other debt until my main focus debt was paid off.
Student loan refinancing is a good idea if you have private student loans or you have federal loans and don’t plan on taking advantage of a federal forgiveness program or income-driven repayment plan.The biggest benefit of student loan refinancing is receiving a lower interest rate than your previous loans carried, which will save you money over time.
Can I refinance all of my loans?
Private loans are ineligible for federal student loan repayment plans, but having private student loans doesn’t make you ineligible. You can continue on these federal repayment plans with their federal loans but keep their private loans separate.
What options do I lose if I refinance my student loans?
Although you may be getting a lower monthly payment and interest rate, by refinancing your student loans the biggest disadvantage is losing repayment-plan flexibility. You must make sure to read the fine print and understand what you’re truly signing up for.
Here’s what you’re giving up if you decide to refinance:
- Loan Forgiveness – Forgives loan for people working in public service careers after they’ve made ten years of payments. You have to work for a non-profit, and have made 10 years of qualified payments consecutively. So not as many people will get to take advantage of this program.
- Income-Based Repayment Plans – Programs such as IBR, REPAYE, ICR of PAYE allow you to adjust your monthly payment based on your current level of income.
- Deferment or forbearance under federal rules. So if times get hard and you lose your job like I did (put your loans on pause while you get ya life together) you will not be able to receive deferment or forbearance. Meaning you’d need to rely on your emergency fund we talked about on day one.
- With Lendkey their refinance loans do come with forbearance, in fact, they offer the largest amount of forbearance in the market with 12 months of forbearance for 5, 7, and 10 year loans, and 18 months of forbearance for 15 year loans.
Am I eligible for Refinancing? These three things matter when it comes to refinancing:
Your credit worthiness
The majority of lenders look for credit scores to be at least mid 600s and higher. When it comes to your credit score it ranges from 300 to 850. If your score isn’t in the mid 600 range you may want to find ways to increase your credit score before applying. I talk about ways to improve your credit score in my FREE 5 day money course. You can sign up for my email course here.
Having steady income is an important factor when it comes to refinancing your student loans. There are certain careers that typically qualify because of their stability. It may be harder if you’re a freelancer and your income fluctuates from month to month. They need to make sure that you are able to pay your loans each month.
Debt service ratio
You deb service is calculated by dividing total annual loan payments by your net income. The lower your debt service ratio the better. It let’s lenders know that you are capable of repaying your loans with your current income. If you have a high debt service ratio it let’s lenders know you may have a hard time making your loan payments.
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Which Lender should I refinance with?
After you’ve done your research you have consistent income, a good credit score, you know how much debt you have, you know what kind of loan it is, and you understand what repayment plans you may be giving up by refinancing you should compare multiple lenders to see which one would give you the lowest interest rate.
Here are a few options to check out:
SoFi takes a unique approach to lending, offering lower interest rates and big savings. Here’s how. Sofi has two rates available. According to Sofi “Fixed Rates available from 3.250% APR to 7.125% when you enroll in AutoPay and Variable Rates start from 2.650% APR to 7.140% when you enroll in AutoPay.
If you decide to apply with Sofi here’s how it will work
- They will check your rate, this only takes two minutes. Sofi will do a soft credit pull to check your rate, you’ll also be asked about your loan amount you want to refinance as well as your employment information.
- You’ll then be asked to choose your loan term. Remember by choosing a longer loan term you will end up paying more money in the long run.
- Upload your personal documents.
- You have the option of signing a co-signer. Who doesn’t love options?
- Accepting a hard credit pull in order to check your score you will have to get dinged a little with a hard credit inquiry.
- Sign, agree and wait. Sofi typically takes 14 days to get pre-approved.
If you’re interested you can check out Sofi here.
With Lendkey you get loans from community based lenders that offer lower rates.
They offer Variable rates as low as 2.74% APR (5, 7, 10, 15, and 20 year terms available) and
Fixed rates as low as 3.15% APR (5, 7, 10, and 15 year terms available). There’s also a 0.25% Interest Rate Reduction with automatic payments.
To find out if you qualify for Lendkey Fill out their quick, online form to see personal rates in under 2 minutes. Enter your name, address, school,etc. and they’ll use a soft-pull of your credit to show you real rates. This WON’T impact your credit score.
Lendkey will then show you the best rates from over 265+ community lenders. Using their comparison tool, you pick the right loan for you & your budget with just a click. Check out if you qualify to refinance your student loans with Lendkey here.
There you have it depending on your current financial situation it may make sense for you to refinance your student loans so you can get a lower interest rate, be able to save more money, and hit your debt pay off date sooner. However you have to make sure you consider all of you things you would be giving up.
P.S. Don’t’ forget to sign up for my free 5 day email course on day 3 I’m giving you access to my free tips on raising your credit score worksheet.
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