July 7, 2023
Refinancing student loans may feel like a complex and overwhelming process. To help you navigate through this journey, we’ve compiled a list of five essential questions you should ask before refinancing your student loans.
1) Are you planning on refinancing federal loans, private loans, or both?
Federal loans come with a variety of benefits. Including, but not limited to public service loan forgiveness and income-based repayment options.
Forgiveness of your loan essentially means that you are no longer required to repay some or all of your loan, depending on eligibility. For example, you may be eligible for Public Service Loan Forgiveness if you are employed by the government or a not-for-profit organization. Potential forgiveness isn’t the only benefit of federal loans. Income-based repayment (IBR) is a federal student loan repayment program that adjusts the amount you owe each month based on your income and family size.
It is important to remember when borrowers refinance federal student loans through a private lender, the borrower forfeits eligibility for federal repayment and forgiveness programs. You are not required to refinance 100% of your loans. For example, you may choose to refinance your private loans without including your federal loans; that way you may still be able to enjoy these benefits.
2) What are the current interest rates on the loans?
Lower interest rates could lead to significant long-term savings. Additionally, reducing the loan term, which refers to the duration for repaying the loan, could further enhance your savings. To determine your current rates, reach out to your loan servicer if you are uncertain. Understanding your interest rates is crucial when considering refinancing options.
3) What is your current monthly payment and how long do you have left to pay off your student loans?
Refinancing to a shorter term may result in higher incremental payments, but you would pay less collective interest over the life of the loan. Conversely, refinancing to a longer term may decrease your monthly payment, but will increase the total interest paid over the life of the loan. This may be the most beneficial option for those looking to free up their short-term cash flow. It is important to remember to evaluate your financial situation before deciding what option aligns best with your goals.
4) What is your credit score?
Your credit score is crucial to the refinancing process. Because the rates and terms that you will receive are heavily tied to it. Many private lenders use a preapproval process, enabling you to see the rates and terms you may expect before submitting a formal application.
If you are unhappy with your credit score, consider taking steps to improve it before applying.
5) What is your employment situation?
Lenders often look for strong and consistent monthly income when assessing loan applications. A stable income can increase your chance of approval and lead to a lower interest rate.
Refinancing your student loans may feel like a daunting task, but by addressing these five questions, you could make the process a little less stressful.
Please note that the information provided on this website is provided on a general basis and may not apply to your own specific individual needs, goals, financial position, experience, etc. LendKey does not guarantee that the information provided on any third-party website that LendKey offers a hyperlink to is up-to-date and accurate at the time you access it, and LendKey does not guarantee that information provided on such external websites (and this website) is best-suited for your particular circumstances. Therefore, you may want to consult with an expert (financial adviser, school financial aid office, etc.) before making financial decisions that may be discussed on this website.
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