“Deciding when to refinance student loans is an important financial move. Hence, it requires considering and critically evaluating the best options available in your case. This way you can act smart and save a considerable amount of money on interest payments as well. However, student loan refinancing is not always the best option. This article explains how to decide on when to refinance student loans and whether it’s right for you or not.”
The question “when to refinance student loans” is often complimented as a smart financial move. Moreover, many people suggest that it is always better to refinance student loans as soon as you can. However, this isn’t true, nor does it turn out to be an excellent move for everyone.
This means that while some people might benefit from student loan refinancing, it isn’t the best option in each case. Hence, deciding when to refinance student loans requires careful evaluation of several factors concerning your circumstances.
For instance, not being able to understand whether a newer loan with a different interest rate will either strengthen or weaken your financial position can lead to a wrong decision and an otherwise avoidable financial burden.
What is student loan refinancing?
What is meant by refinancing student loans?
Student loan refinancing happens when you swap or exchange your current outstanding loan for a new loan. In other words, student loan refinancing means obtaining a new loan to pay off or settle your current loan.
And just like any other type of refinancing, the main purpose of refinancing student loans is also the same. It is to lower the interest rates than what you are currently paying and/or extend the loan payback term.
Consequently, this also answers our main topic ‘when to refinance student loans’. Among a few other things to consider before refinancing student loans, if you are getting a lower interest rate and/or an extended loan payback term could primarily be the main reasons behind refinancing your student loans.
However, doing this is not as simple as it may seem. Thus, shopping around for, if not the best but obviously better loan options, can be a rigorous activity.
For instance, looking for better student loan refinancing options to replace your existing federal student loan with a private lender. Similarly, switching with a different private lender or applying for a new and better loan opportunity with the same private lender will take some time.
Understanding how does student loan refinancing work
Another key aspect to understand while deciding when to refinance student loans is to understand how student loan refinancing works. This means knowing what the process of student loan refinancing is and what procedures it involves.
How does student refinancing work?
To better understand how student refinancing work, we have broken the entire process into the following steps.
Selecting the student loans to refinance
Once you have figured out when to refinance student loans, the next crucial step is to figure out the student loans that you want to refinance.
Be careful when doing this and choose wisely. A quick piece of advice to help you out during this step would be to consult and seek professional guidance from an expert.
Start surveying lender websites for rates and loan terms
Once you are sure that you have selected the right student loans for refinancing, start browsing private lending entities’ websites. Gather as much information as possible related to interest rates on new loans and applicable terms in each case.
Only private lenders offer student loan refinancing
Remember that only private lending entities offer to refinance student loans. Hence, if you decide to refinance a federal student loan, any federal protections available on such loans will be lost. Some examples of federal protections include potential loan forgiveness and specialized repayment plans.
Prequalification process vs formal loan application
Another important thing about private lenders is that some offer prequalification as well. In this, prospective borrowers enter basic information about themselves and their outstanding loans. After evaluating this information, the lender will quote an interest rate.
A major difference between the prequalification process and a formal loan application is that, unlike a formal loan application, the prequalification process does not alter your credit score.
Comparing rates and then applying accordingly
Next, perform a thorough comparison of the different rates that are available to you. Select the best and the most appropriate in your case and then apply for it accordingly.
Using funds approved & benefits of revised rate and repayment term
Once your loan is approved, its funds will be utilized for the full settlement of your outstanding student loans. This is the point where repayments on your new loan begin. A reduced interest rate or shorter repayment term on your new loan means paying a lesser amount against the refinanced loan in comparison to the previous student loan.
Student loan refinancing application getting refused or denied
Two major reasons behind rejection or denial of student loan refinancing applications are insufficient credit score and income. Also, a lending entity has a legal obligation toward unapproved loan applicants to provide them with reasons for refusal.
When to refinance student loans?
Should you refinance your student loans? – Requirements for student loan refinancing
Deciding when to refinance student loans takes into consideration a few important things. These include revisiting your financial positions, rechecking each figure, your savings if any, as well as any loan benefits that you are currently entitled to such as in the case of federal student loans.
The following is a list of situations, sometimes also regarded as requirements, to opt to refinance your student loans.
1. Having a solid credit score
Your credit score is the preliminary factor to suggest whether you should or shouldn’t opt for your student loan refinancing. Remember that the higher your credit score is, the more opportunities you have for securing a lower interest rate.
However, if you do not have an attractive credit score to obtain a lower interest rate, perhaps you should consider alternate repayment plans that are available.
2. Your outstanding student loans are from private lending entities
Because of refinancing your student loan, there is a possibility to lose some benefits that are otherwise available with federal student loans. However, if your outstanding student loans are already from a private lender, you do not have anything to lose in this case.
3. Your current student loans carry a variable interest rate
Variable interest rates are never a viable choice in the long term especially when rates are continuously rising. Rising variable interest rates mean that you must make bigger payments every time. Hence, if your current student loans carry a variable interest rate that is increasing, a better option could be to refinance student loans.
4. Having several outstanding student loans
Student loan refinancing is also beneficial when you have numerous outstanding student loans with different interest rates and due dates. Having more than one or many outstanding student loans is not simply hard to manage but can also be great financial stress as well.
By refinancing your several student loans with a single new loan, you have the convenience of having only one repayment obligation each month.
5. Meeting the lender’s minimum balance requirement
Some lenders have the policy to lend or refinance a loan only if you meet their minimum balance requirement.
6. Having a degree
Besides all the above, some lenders also require prospective borrowers to have a degree to qualify for a loan or refinancing. For instance, an associate degree or bachelor’s degree.
When you should not refinance your student loans?
Circumstances and Situations when refinancing student loans can be a bad choice
As already mentioned at the beginning of this article, deciding when to refinance student loans requires a thorough evaluation of your current situation and circumstances. Subsequently, the outcome of this evaluation may or may not seem to favorably align with your decision on when to refinance student loans.
To help you overcome any confusion in deciding when to refinance student loans, here is a list of situations and circumstances when you shouldn’t consider refinancing your student loans.
1. Having already a lower interest rate loan
One of the primary objectives behind deciding when to refinance student loans is to get a cheaper loan. This means replacing your current outstanding student loans with the ones carrying a lower interest rate.
However, if you aren’t able to find a lower interest rate or are already paying the lowest interest rate that is available in the market, you probably are in the best position. Hence, you should forgo the idea to refinance your student loans until you find a lower interest rate.
2. Having federal student loans
Another key aspect to reconsider when deciding when to refinance student loans is when you have federal student loans. Since federal student loans accompany some benefits which loans from private lenders do not offer, refinancing means abandoning those benefits.
Remember that refinancing student loans is always done through private lenders. But private lenders do not offer benefits, on new and refinanced loans both, that federal student loans come packed with. For example, federal student loan deferment or Public Service Loan Forgiveness.
However, if you are considering when to refinance student loans because of extra financial stress from your federal student loan payments, there is still a way out. Consider switching your current repayment plan to an income-driven payment plan. This way your payments will be based on your income and household.
3. Having declared bankruptcy or defaulting on a loan
While you might be deciding about when to refinance student loans, many lenders won’t be interested in offering you this facility if you have recently defaulted on your loans or declared bankruptcy.
4. Refinancing fees tend to be more than the savings
When you decide on when to refinance student loans, do consider the applicable refinancing fees. For example, application fees or origination fees are typically charged as a percentage of the total loan amount.
Compare the amount of these necessary fees with the amount of interest that you expect to save. Hence, if the amount of applicable fees is more than your interest savings, do not refinance your student loans.
Remember that in matters related to financial decision-making, what works best for one person can be the exact opposite for the other. Therefore, we always recommend seeking professional advice from an expert.
If you are having trouble figuring out when to refinance student loans in your case, then we can surely help you decide the best options that are available to you. Whether you are interested in a lower interest rate or an extended repayment plan, our experts at AttorneysFunding.com can assist you throughout.
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Call us now at (916) 471-2678 or click here to book a free consultation session and discuss your mortgage needs with one of our expert loan officers.