As student loan totals continue to increase every year, many millennial’s are finding it hard to stay above water. How can they pay their bills, save for a home and invest in retirement while tackling their student loans? The problem seems difficult for many to comprehend. Wages remain stagnant as people continue to graduate with more and more debt.
Fortunately, they have options. Refinancing your student loans is a little-known fact and it is now a possibility for millions of graduates, and successfully refinancing can save you thousands of dollars.
But like the classes you took in college, refinancing requires some upfront homework before you can pull the trigger. Refinancing is a permanent decision, and there’s no redo you get if you do it wrong the first time.
Read below to see what you need to know about refinancing your student loans.
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Why Refinance Your Student Loans?
Most people refinance their student loans for two reasons: they can’t handle their current monthly payment and want it reduced or they want to lower their interest rate.
If you fall into the first category and have federal student loans, you have other options. Most federal loans allow you to choose an extended or graduated repayment program that will extend your loan term but give you a lower monthly payment. Many people struggle to pay back their loans, especially if they’re not earning a lot, are living in a high-cost city or owe a huge amount.
You can change your loan term almost at any time. If you switch to a 25-year term and then land a better job, you can jump back to the standard 10-year term.
If you want to refinance because you have a high-interest rate, your only option is to choose a private company. Currently, the federal government has no plans to offer refinancing on its loans.
Refinancing federal student loans should be carefully thought out. You can’t go back to your federal loans after you refinance. Federal loans have a range of benefits including deferment, forbearance and as mentioned above, various repayment programs.
If you have private loans, refinancing is a no-brainer because you’re likely not going to miss any special perks.
Whether federal student loan refinancing is worth the risk depends on the borrower. Some have stable jobs and are content to roll the dice. Others aren’t sure if they want to lose the option of deferment in case they go back to grad school or are truly struggling to pay the bills.
Also, if you’re interested in the Public Service Loan Forgiveness program, refinancing will strip away any ability you have to get your loans forgiven. Private lenders don’t offer forgiveness programs so if you’re eligible, it might be better to keep your federal loans.
Refinancing can you save money even if you get what appears to be a measly offer. For example, if you just graduated with $20,000 worth of loans and are paying 6.8% interest rate, changing to a 6.75% interest rate could save you more than $7,000 in interest.
The Process of Refinancing
Anyone interested in refinancing should check their credit report first, which you can do for free at annualcreditreport.com. A refinance company will determine what rate to offer you based on your income, credit score and other factors. You should check your credit report before refinancing to see if there are any inaccuracies that can ding your score.
If there are mistakes, you can send a letter and call the creditor to let them know. The Federal Trade Commission has sample letters you can customize and send out.
You can locate your FICO credit score by purchasing it on annualcreditreport.com or seeing if your bank or credit card marks it on your statement. Sites like Credit Karma show your Vantage credit score for fee. The Vantage score is similar to your FICO score but calculated differently.
Most companies want a credit score of 700 and higher. If you want to refinance, but have a lower score, take a few months to beef it up. Look through your credit report and see what’s dragging your score down. Do you have collections, defaults or late payments? Call those lenders and see if they can remove those negative marks.
Choosing a Company
In the last few years, a number of start-ups focused on student loan refinancing have sprung up. These companies buy up your student loans and give you a lower interest rate in exchange. Because these firms are widespread, students have more options if they want to refinance.
SoFi is one of the top refinance companies and offers fixed rates starting at 3.690% and variable rates at 2.430% with AutoPay. Not only can SoFi give you a better rate on your student loans, they also offer investment advice and career coaching. But they’re not the only company out there with significant perks.
So how do you choose with all the available options?
First, compare the interest rate. Once you apply to the companies, see what interest rates they offer you. Some can give you a fixed rate that will stay the same throughout your loan, while others offer a variable rate that changes depending on the market. Variable loans often have a lower initial rate, but that can change quickly. If you do choose a variable rate, make sure you can afford to make the payment if the interest increases.
Second, compare the terms. Are you being offered a 10-year, 15-year or 20-year term? Typically, the longer your loan is, the more you’ll pay in interest. Some graduates find that they end up paying more with a small interest rate because their loan is longer. Ask to see what the total interest will be so you can compare each offer fairly. Some companies also charge origination fees, so make sure to include those costs as you compare.
Many refinancing companies allow you to check your rate without doing a full application or taking a hard pull. A soft pull won’t appear on your credit report, unlike a hard inquiry.
Refinancing aggregate Credible lets you input your information and provides some sample rates to give you an idea of what you’re eligible for. They might ask for:
- Where you attended college
- What degree you had
- How much work experience you have
- How much you earn
- How much you want to refinance
- How much you pay for housing each month
After you give them the information and create an account, they prepare a short list of creditors willing to work with you. This list is not definitive and doesn’t mean you’ll be automatically eligible. It only serves as a guidepost for what’s out there.
You can sort the results by interest rate, monthly payment, total interest paid and more. Remember, if you want to lower your payments, see which company can provide the best deal. If you need to reduce your interest rate, check the total interest paid.
You can refinance your student loans as many times as you want. If the market changes and rates are suddenly lower, you can refinance with your current company or find a new one. If you refinanced the first time to get a lower payment and are now ready to start focusing on your debt, you can refinance to get a lower rate.
Refinancing can ding your credit score and cost you hours of your time, but overall it can save you thousands or tens of thousands. You can use that difference to save for a home, start a new business, take a vacation or pay off other debt.