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College students are being saddled with high debt, including credit cards and student loans. Historically, this debt is the highest at this point. Some parents are having to help their kids pay off their debt, but with retirement looming this is not always possible.
A discussion about student loans and saving money on them should start with talking about how to go to college with no loans.
If you’re already saddled with the loans, looking for ways to save money is a great idea. However, if you’re still debt-free from college, know that there are alternatives to high debt.
In this post I talk about how to get a higher education without taking on debt. For those already in debt, refinancing your student loans may save you money, if you can get a refinance.
What is a student loan refi? This is when you can get a private lender to restructure the terms of your loans at a lower interest rate. Basically, your bottom line improves because you’re paying less in interest. However, you still have to pay the entire loan over an agreed upon time.
Should you refinance your student loans?
A refinance doesn’t work out for every situation. You’ll have to take a look at your loans and decide if refinancing will make you better off. You can refinance private loans and Federal Students Loans.
Before deciding on a refinance take a look at these.
Make sure your overall personal finances are in good shape. Make sure that you can make payments on the new loans. If you’re refinancing Federal loans, you won’t be eligible for special programs like, loan forgiveness and income driven repayments. This is why it’s important that you can make the payments under a private refinance.
Make sure you qualify. You or a co-signer, if you don’t have good credit, must have a good credit score. You need to show that you can make the payments under the new loan consistently.
Make sure Refi works for you, it saves you money. The whole point of refinancing is to save money on interest rates. So, if the new loan delivers this saving, it may works out for you.
How much can you save by refinancing?
Depending on the new interest rate, a refinance can save you a lot of money over the life of the loan. There are 2 reasons for these savings. Your monthly payments will be lower, you’ll have some money left over. You can also pay the loan faster because you have more money available.
It’s important to know the difference between a fixed rate and a variable rate when it comes to refinancing. A fix rate doesn’t change during the term of the loan. A variable rate changes during the life of the loan. The variable rate is adjusted according to the LIBOR market. You may be able to get a lower variable rate at the time of refi, but know that this rate changes.
How much can refinancing costs you?
The refinance of a student loans does not cost any money, generally. This refi is different from a mortgage one, there are no points, application fees etc. The cost to refi should not be an issue for a student loan. There may be costs associated with late payments and other violations, read your new contract carefully.
How to be eligible for refinancing
Lenders have different requirements to approve student loans refinancing. In general, these are the factors that influence the decision to approve a refi. If you,
- Have good credit score – 650-700s
- Attended an accredited school – Lenders generally require that you attended a Title IV accredited school.
- Have enough income to afford the new loan payment. Lenders consider your total income and your income in relation to your debt. This is also called the Debt to Income ratio.
If you don’t qualify because of your income or credit score, you may still try to apply with a co-signer with excellent credit. You can also take action to fix the issues before applying for a refi again. You can reduce your total debt by paying off credit debts or by paying off some of your outstanding loan.
Obtain your credit report and score from Transunion and find out how you can clean it up before the refi.
If you need help organizing your income and expenses, see this article – Control your Finances.
The Bottom line on student loans refinancing
Find out what types of student loans you have. If you have Federal loans and are really struggling to make payments, refi may not work out for you.
Instead, try the Federal Loan Consolidation or an Income driven repayment program. These programs will restructure your monthly payment.
For private loans, you can do the refinance if the interest rate work for you and you qualify. You won’t be missing out on benefits because private loans are not eligible for federal programs anyway.
Be aware of students debt relief scams. These scams are on the rise in the country and students are susceptible to them because of the high amount of debt some are carrying. Always do your investigation BEFORE getting into a contract for debt relief.