4 Factors that Affect Interest Rates for Student Loan Refinancing

Student loan refinancing can ease your debt burden by reducing your interest rate. Refinancing means paying off your current debt with a new loan. The new loan, then, takes the place of your old one, and you will make payments to the new lender. People generally refinance because something has changed to allow them to capture a better interest rate. Depending on a few factors, this may be true for you.

#1 Your Credit Rating

When a student first takes a student loan, he or she likely has a short credit history and low to no income. This is the curse of student loans: most people have to take on the largest debt they will ever take on while they are the poorest they will ever be. Because of this combination of bad circumstances, student loan rates can be very high. However, once you graduate from school and begin your employment, you will likely find a different situation. You will have an income and you will slowly be building your credit score. If your credit score and income are high enough, you will be eligible for a much lower rate on your refinancing loan than you received on your original student loan.

#2 The Economy

It is also possible rates may be more competitive through no accomplishment of your own. In fact, a low national prime interest rate is usually the result of an economic failure on a larger scale. During a recession, the Federal Reserve typically lowers the national interest rate to encourage lending. Students who received a loan right before a large rate drop are most susceptible to rates that are far above the market norm. If you took your student loan when interest rates were high, you may want to consider refinancing while interest rates are low.

#3 Loan Options

You may choose to enter a less flexible loan to drop your interest rates. There are several ways your loan can be less flexible, including unfavorable terms or use of collateral. For example, if you use a home equity line to refinance your student loans, then you are collateralizing your home in order to achieve a low rate. Your home will be on the line, making this new loan more rigid and riskier for you. However, the reduction in interest rate may make up for the added risk in your eyes.

#4 Prepayment Penalties

One major factor that can add to the expense of any refinance is prepayment fees on the old loan. A lender assumes your loan contract based on a certain anticipated income in the future from your loan. When you pay the loan off early, the lender loses a piece of that profit. To compensate for this, the lender asks you to pay penalties. You should note that federal loans do not have prepayment penalties; however, federal loans are not eligible for a number of private refinancing structures. Most private loans will have prepayment penalties, and you will need to take out a larger loan for your refinance in order to cover these costs. The larger the loan, the more expensive it becomes.

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