The Smartest Way to Refinance Your Student Loan

refinance student loans

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  • Over the last 30 years tuition fees for students have continually risen, with today over 1.6 trillion student loan debt in America.

    You may have been slogging through payments for several years or you are just beginning to repay your student debt, you’re probably wondering – ‘Am I going about this the right way?’.

    If you are in such a predicament refinancing your student loan may be just the answer. Refinancing allows you to consolidate existing private and Federal student loans into a new, single student loan with a lower interest rate.

    As a result, you pay lower monthly repayments, which can free up extra money to repay additional student loan debt, save or invest. By refinancing your student loan smartly, you could save more than $20,000 over the lifetime of your student loans.

    For example, if you have student loans of $100,000 with an APR of 8% over a 10-year repayment term; by refinancing your loans you can lower your APR to 3% with the same repayment term, which will lower your monthly payment to $248, saving you a whopping $29,720.

    You’ll also find rates for student loan refinancing from 1.81%, as the Federal Reserve have reduced the student loan refinancing rates to an all-time low. This is great news for borrowers who want to refinance loans to get a lower interest rate, save money and pay off debt faster.

    Some providers charge no fees to refinance student loans and no prepayment penalties; so you can pay off student refinanced loans anytime with no charge.

    Here are some of the smartest student loan strategies to make you debt-free and how to refinance student loans:

    Private Student Loan Interest Only Payments

    If you are struggling to make repayments on your student loan with a private lender, it is worthwhile contacting them immediately. It is likely the private lender will offer you an interest only refinance plan for a specific period.

    With an interest-only repayment plan, borrowers pay back only the interest which accrues on your loan each month, this will significantly reduce your monthly payments.

    An unexpected benefit of this refinancing option is that it will force you to save money every month to honor your financial obligation. This will allow saving money to become a habit, lowering your risk of defaulting when you must make larger monthly repayments.

    To note, this refinance strategy only takes care of the accruing interest not the principal loan amount, you’ll still have to pay back the full loan cost.

    Consolidate Private Student Loans

    By consolidating student loans into one debt consolidation loan, you essentially are refinancing your loans. This allows you to concentrate on one loan generally with a fixed interest rate, a fixed term and one sole payment to make a month.

    By consolidating either federal or private student loans into one package you can qualify for the full total amount owed.

    Lenders offer fixed rates as low as 3.25% when consolidating, loan terms range from 5 all the way up to 20 years and loan amounts start at $1,000.00 to a high of $100,000. 

    Borrowers can also receive a .25% reduction if they choose automatic payments, you’ll find most lenders offer an ‘autopay’ option.

    To note, in certain circumstances student loan consolidation can lead to loss of some borrower’s benefits including principal rebates and loan cancellation benefits.

    Refinance Student PLUS loans:

    If you helped your son or daughter through college, it might be time for a little financial relief. A parent borrower can refinance their Parent Plus loan with a private lender, it is a similar process to student refinancing.

    As the parent borrower you obtain a new student loan at a lower interest rate lowering your monthly repayments, these proceeds are used to pay off your existing Parent PLUS loan.

    With such a refinance package you are still the borrower and are financially responsible for the repayment, but the federal government are no longer the lender.

    You can also transfer the student PLUS loan to your child, the lender will evaluate your child’s financial situation and may be able to offer a suitable refinance package leading to savings.

    Income-Based Repayment Plan (IBR)

    The Income-Based Repayment Plan is for borrowers who owe direct subsidized and unsubsidized loans including student PLUS loans (not made by parents) and consolidation loans.

    To qualify for this loan refinance option, you must make on-time payments for 20 years for loans disbursed after July 1st, 2014 or 25 years for loans disbursed before 1st of July 2014.

    Your monthly payment will be adjusted, and you will pay either 10% or 15% of your discretionary income, based on when you borrowed.

    This option is for those who have a high debt balance and need smaller monthly payments due to a lower income. The IBR is one of four debt relief programs initiated by the Federal government to promote student loan forgiveness. If you expect your salary to remain low or your family to grow over the next 20 years, IRB may be the refinance option for you.

    Refinance Your Student Loan

    Student loan refinancing makes sense if you have a high percentage of private or Federal student loans with a high interest rate generally between 8% or higher. By actively searching for lenders who can provide a lower interest rate with a shorter term you could save a significant amount in the long term. 

    With refinancing you can adjust the term of your loan between 10 and 25 years and choose from interest rates as low as 3% – even if you weren’t to accelerate payments by refinancing a student loan of $30,000 over a 10-year term to a rate of 5% would save you $3,245.00.

    other valuable tips:

    To qualify for student loan refinancing good credit is required, most lenders require a FICO score of 600 or higher with a debt-to-income ratio of no higher than 45 percent.

    You can calculate your DTI by dividing the total of your student loan and monthly outgoings by your gross monthly income. The loans must be obtained for a degree from an accredited institution and you must have verifiable employment for at least 12 to 24 months.

    Individual student loan providers like SoFi offer excellent refinancing packages, while a company like Credible scour through different lending partners and presents you with the best refinancing options available based on your personal needs.

    Image Credit: refinance student loans by Pixabay

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