Choosing to refinance your student loans can save you money and lower the monthly payments. Still, before signing on for a student loan refinance, there are several questions to ask while exploring your options.
1. How will your interest rate be calculated?
Loan providers charge you for the money they are lending using either fixed or variable interest rates. When your loan rate is fixed, you will know the percentage interest charged on the principal for the entire life of the loan. The variable rate can fluctuate. When you refinance your student loans you can often get a lower rate on a variable loan, but your rate may fluctuate over the life of the loan.
2. What will the new loan term be once you refinance your student loans?
Term refers to the length of time you have to repay the loan. Often you are choosing between 5, 10, 15 and 20-year options. When deciding, take into consideration how much you can afford to pay now. A longer term will lower the monthly payment, but you are going to pay more interest while you are repaying the loan. Consider your goals — lower payments now or overall reduction in the cost of the loan — when making a decision.
3. Can you use a cosigner, and is there cosigner release?
A cosigner can help you with eligibility to refinance your student loans and lead to a lower rate. Once you have met requirements for a release (such as a certain number of full, consecutive payments paid on time) you can apply for a release. If release is allowed, the cosigner is freed from responsibility for the loan.
4. Are there any additional fees?
A lender may charge a student loan origination fee. Or you might be charged a fee if you miss a payment or default on your loan. You should also determine if there is a prepayment penalty prior to making a refinancing decision.
5. Does the lender work with you if you experience financial hardship?
Some lenders will offer forbearance policies allowing reduced or postponed payments if you run into difficulties making monthly payments. Keep in mind that a hardship is not needing extra money to pay for a wedding, but rather unforeseen issues such as unemployment or medical concerns. If you are at risk of missing payments, always be sure to reach out to your lender before there is a problem.
6. Are there additional ways to save money when you refinance your student loans?
Some lenders will give you an interest rate reduction if you set up automatic payment withdrawal from your bank account.
These questions have been focused on information you need from the potential lender. Before refinancing you might also consider your side of the equation. You need to take stock of your personal financial status as well when making the smartest decision about refinancing.