Here’s why you need to refinance your student loans now

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Your student loan monthly payments are very high and other lenders may have better offers. How do you save money and access a repayment plan that works for you?

Student loan refinancing may be the answer to high interest rates. When you refinance, you take out a new loan that pays off the rest of your existing student loans. This new loan could either have a lower interest rate, helping you save money on interest over time or a new repayment schedule, which can make your monthly payments more manageable.

With interest rates are likely to rise soon – and the possibility of many interest rate hikes this year – may now be the best time to refinance your student loans. Here’s everything you need to know to get started.

Refinancing of private versus federal loans

If you have a student loan debt, you have either a private or a federal loan – private loans are provided by a lender such as a bank, government agency or school, while federal loans are financed by the federal government. It is estimated that 90% of student loan debt held is for federal loans. In most cases, it would make sense to refinance private loans, which tend to have higher interest rates, rather than federal loans, which tend to have lower interest rates and more regulation.

When refinancing a private loan, you will do so with another private lender. You can not refinance a private loan into a federal loan. Student loan expert Mark Kantrowitz, author How To Apply For More Financial Aid To The Collegesays that if you have a private loan, it is currently advisable to refinance a fixed rate loan before interest rates are rising.

If you have a federal loan, get one repayments may be on hold, and you can discuss refinancing if you are worried that you will be able to afford the monthly payment when the freeze is lifted. In this case, there are other options you should explore first, such as Income Repayment (IDR), which can help make monthly payments more affordable, pandemic relief benefits and, most importantly, loan write-off programs, such as Public Service Loan Forgiveness.

Although refinancing your federal student loans is often discouraged, if you think it is the right choice for you, Kantrowitz advises waiting until the November midterm elections for refinancing: “If the student loan write-off is over, it will be before the middle “So refinancing will now undo your eligibility for forgiveness.”

What to consider before refinancing

1. Check your credit score and improve if necessary

To qualify for a lower interest rate than your current loan, you will need a good credit score. ONE FICO score at least 670 is considered “good” and can help you qualify for a student loan refinancing … higher credit score may also qualify for lower prices. Your current loan payment history will also help your credit score: If you are having problems with your current student loans and have lost some payments, lenders may be reluctant to sign a new one.

If your credit is poor, talk to your lender about adjusting your payment plan so you can get back on track. In the meantime, work on improving your credit, because the key is to pay off your debt and make your payments on time.

Prior to refinancing, Kantrowitz advises checking your credit reports (free) and looks for errors. If you find errors, you can remove them challenging them; Your creditor will have 30 days to confirm the accuracy of your report or correct any errors, so it is best to access your credit report 30 or more days before refinancing.

2. Evaluate your income and debt-to-income ratio or DTI

Lenders will likely also look at your income, your co-signer’s income (if you have one) and the DTI ratio (total monthly debt payments divided by your total gross monthly income).

Your income level shows lenders that you are earning enough money to repay your loans and keep up with your payments. Kantrowitz suggests taking a look at the minimum refinancing income thresholds, which are usually around $ 30,000.

The DTI ratio represents the debt you have compared to the amount of money you earn. A high DTI, which indicates that you have more debt, can be a red flag for lenders. For example, if you owe $ 1,000 a month and make $ 4,000 a month, your DTI will be 25% ($ 1,000 divided by $ 4,000). However, if you owe $ 2,500 a month and make $ 4,000 a month, your DTI will be much higher – 62.5% – which could affect your ability to secure a new loan.

Generally, to refinance your student loans you want DTI 50% or less.

3. Compare lenders

It is important to buy from different lenders to make sure you get the best interest rates and terms. Kantrowitz focuses on examining monthly loan payments, total repayment terms and interest rates. He says, “Remember that higher repayment terms mean lower monthly payments, but more interest over the life of a loan. Try to avoid repayment terms longer than ten years and be sure to choose a program that offers the highest monthly payment you can. endure financially. ”

4. Find out if you qualify

As you shop for lenders, many can offer the default option, letting you see what your potential interest rates and monthly payments will look like. Based on the change from your current loan terms, you can decide if refinancing makes sense to you. The default requires a mild credit attraction, therefore will not affect your credit score. Please note that the default does not guarantee loan approval or specific interest rates.

5. Think of a co-signer

Student loan refinancing lenders often allow you to add a co-signer to your loan – or release one. If you do not have a long-term credit history, you may need someone with a good or excellent credit score to co-sign your loan. When you add a co-signer, he also takes responsibility for the loan. This means that your co-signer will be required to make payments if you are unable to do so and your repayment history will affect his credit score.

Conversely, if you want to release a current co-signer, you can refinance a private student loan only in your name. To do this, make sure you meet the criteria for credit and successive timely payments.

Next steps for refinancing

Once you have committed yourself to refinancing your student loans, there are steps you can take to secure the interest rate and payment plan you want.

First, start your shopping with other student lenders. Compare interest rates and terms and qualify to browse your options and decide which loan term and lender best fits your budget. Once you have decided on a lender, you will submit a formal application and wait for approval, which usually takes two to three weeks. Once your new lender approves your application, they will repay your old loan directly and you will start making regular payments to your new lender.

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