If you are reading this, chances are you are a student and are not sure how to be smart with your student loans. This is completely understandable seeing how the student loans are going up, and wages are not catching up as much as you would like them to. Many students have understood the need for a strategy to navigate this chaos. Two options that may be of value to you in this situation are student loan refinancing and student loan forgiveness programs. Here’s what you need to know about student loan refinancing:
How do you define Student Loan Refinancing?
Student loan refinancing basically means acquiring a new loan with different repayment terms and a more favorable interest rate in place of your current loan. You may refinance your private loans or federal loans. However, refinancing federal loans can strip you of some protections that come with them.
How do you distinguish private loans and federal loans?
Many things differentiate private loans from federal loans. However, these are the primary differences between the two:
- In the case of private loans, lenders need you to make repayments while you are still in college. There are a few exceptions, though. However, in the case of a federal loan, you may put off your repayments until university is over, graduation takes place, or when you change your enrollment status.
- Federal loans typically have fixed interest rates that are lower than private loan interest rates and credit card interest rates. Private student loans generally have variable rates of interest. These rates can go higher or lower than federal loan interest rates, depending on the circumstances.
- If you happen to have borrowed federal loans, you may be eligible for loan forgiveness, and have a sizeable part of your loan balance forgiven. However, private loan lenders do not make such provisions.
What should you bear in mind before opting for Student Loan Refinancing?
If you plan on refinancing your federal loans, you will be forced to relinquish the following protections:
Income-Driven Repayment Plans
The Income-Driven Repayment (IDR) plan is a widely known protection offered by the federal government. The purpose of the income-driven repayment plan is to help borrowers simplify and streamline their loan repayments. This plan provided by the federal government considers your income level and develops a strategy for loan repayment in accordance with the same. In a nutshell, the IDR plan makes for an excellent short-term solution. If you desperately need to break from continuous repayments, this is for you. However, you will have to pay higher interest rates.
This federal protection enables you to lower the loan amount you are liable to pay or stop making loan repayments for up to three years. During the deferment period, the interest in your deferred loans does not accrue because the government handles it. However, once you choose to opt for student loan refinancing, you will lose this protection.
Forbearance is another federal protection that has proven to be incredibly beneficial. It refers to the choice to delay your monthly loan repayments because, for some reason, you are unable to make them every month. During your forbearance period, you can expect the interest on your loans to accrue. In other words, you will have a higher loan balance when you start making your loan repayments. It is vital to consider your current financial situation and priorities before opting for this or any other federal protection. Just like the IDR plan, forbearance works well as a short-term solution, but you are better off not using it unless it is your last resort.
Are you Eligible for Student Loan Refinancing?
It should go without saying that you need to find out if you are eligible for student loan refinancing before choosing a lender that you want to go with. Lenders of private loan refinancing typically have relatively difficult eligibility criteria in comparison to lenders of federal loans. You need to do your research and jump to a conclusion once you figure out which lender’s terms work for you.
Most lenders value your credit score. Needless to say, an excellent credit score can give you the edge over the rest of the applicants. Aside from a great credit score, make sure you submit documents that prove that you have a regular source of income, savings, and degree.
You can check your credit score for free on Credit Karma. Aside from this, it offers a variety of features, one of which is the Credit Karma Tax review.
What happens if I don’t qualify?
Chances are you will not qualify for student loan refinancing on your first attempt. Here’s what you can do instead
Apply Many Lenders
This is obvious. Move on to the next lender if you do not get approved by this one. Also, find out why you did not get approved. Doing so may boost your chances with the next student loan refinancing lender. Also, approaching more lenders increases your odds of getting approved.
Apply with a Cosigner
If you are unable to get approved by a lender due to a low credit score or income level, getting a cosigner can drastically improve your chances. Your co-signer maybe your parent, spouse, or any other family member. However, you must ensure you get someone who has an impeccable credit score and history.