Refinance Student Loans: What You Should Know

It may be beneficial to refinance student loans if you currently have high interest rates. Many students have high interest rates because they had low to no credit at the time they sought the loans; this is mostly true with loans from private lenders instead of government lenders. Refinancing basically means paying off your current loan with a new loan at a better rate. There are disadvantages to consider against the lower interest rate when you decide whether it is a good option for you.

Advantages to Refinancing

The primary advantage to refinancing a loan is getting a lower interest rate on your new loan. Private student loans have higher interest rates than federal student loans, so you will likely only see an advantage if you currently have a private loan. If your credit score has improved or if the national prime interest rate has dropped, you may be able to get a new loan at a lower rate. 

Lower rates make your loan less expensive. Considering all options to reduce your interest rate will pay off in the long run. For example, you may be able to secure your new loan against an asset that you recently acquired. This will make the loan less risky for the lender and cheaper for you. If you are hoping to pay off the loan sooner, you may even be able to refinance for higher monthly payments that put you on the fast-track to being student debt free.

Disadvantages to Refinancing

Refinancing is a form of debt modification. When you modify a loan, the lender will make less money than they originally anticipated. As a result, they will assess penalties against you. These penalties are disclosed in the loan contract you originally signed. Depending on your loan terms, the penalties may be minor or extreme. High risk borrowers tend to have worse loan terms, meaning many student borrowers will face large penalties for refinancing.

Aside from penalties, the lender will also notify the credit bureaus when you modify your loan. This means your credit score will drop. Future lenders will also see the red flag on your credit report. You should only refinance if you believe the savings will counteract this negative credit information. Further, refinancing is a better option when you are not looking to seek another loan in the near future.

Refinancing Alternatives

Other types of loan modification may benefit you more than refinancing alone. You may be able to settle the debt for one lump sum. Then, you can take a new loan for that sum and pay a lower interest rate on the new loan. This saves you in more than one way because you end up reducing your principal as well as lowering your rate.

If you have multiple loans, you may consider student loan consolidation. Borrowers can take one new loan to pay off multiple debts. This can extend to car loans and personal loans as well, leaving you with one monthly bill for all of your debt. Again, any form of modification comes with disadvantages. When you are looking to modify, though, you should consider all options.

 


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