As interest rates continue to rise, you might be wondering if it’s a good time to refinance your student loans. Private lenders offer a variety of refinancing options for borrowers with outstanding student loans.
Refinancing your student loans can lower your monthly payments and combine multiple student loans into one, but it might not be the right choice for everyone. Here are some questions to ask before refinancing your student loans.
Do You Meet the Lender Requirements for Refinancing?
The first question to ask is if you meet the financial and credit requirements for refinancing with a private lender. Unlike borrowing from the federal government for a student loan, borrowing from a private lender to refinance means you will have to show that you have good credit and the ability to make your monthly payments.
Each lender has different requirements for approval, so you should research those requirements before filling out a refinancing application.
For example, some lenders may require a credit score of 650 or 680 and minimum income as low as $24,000 or as high as $50,000, depending on the total amount you want to refinance.
Most lenders also have a minimum loan amount that they are willing to refinance. Some will refinance $5,000 in student loans, others won’t consider you unless you have at least $40,000.
Will Refinancing Actually Lower Your Monthly Payment?
Before you can see if refinancing will lower your monthly student loan payment, you need to know the interest rate and term on your current student loans. If that information is not listed on your monthly billing statements, contact your lender to get that information.
Make sure to collect the current outstanding balance, interest rate, term, and monthly payment amount on each loan. Then, check to see if the interest rate and repayment term options actually lower your monthly payment.
If you don’t have great credit, the interest rate offered by the lender may end up being higher than the rate you are currently paying on your loan. Borrowers with federal student loans may also find that their payments go up after refinancing if they had been on a graduated payment or income-driven repayment plan.
If You Have a Cosigner, Can You Get a Cosigner Release?
Borrowers who have recently graduated from college and have not had enough time to build their credit history and income can have a difficult time qualifying for student loan refinancing through a private lender. In this case, someone, such as a parent, can serve as a cosigner on the refinancing.
The credit history and income of the cosigner may increase the probability of getting a loan approval and can help the borrower receive a better interest rate on the new loan. Without a cosigner release agreement, however, the cosigner is personally liable for the outstanding debt for the entire loan term.
Potential cosigners might not want to take on that financial liability for 10 or 20 years. So, some lenders have a policy for a cosigner release. These policies allow the cosigner to be released from their financial obligation after the borrower has made on-time payments for a specified period – typically a few years.
Can You Afford the New Monthly Payment?
Keep in mind that just because a lender offers you a lower interest rate than you currently pay on your existing student loans doesn’t mean your monthly payment will also be lower. In addition to the interest rate, consider the term of the loan and any special repayment options you have.
Federal student loans have an option for borrowers to make payments based on their current income level. This can be a helpful option for new graduates getting started in their careers.
Private lenders, however, don’t offer these types of payment plans. Alternatively, you may have a 20-year term on your current student loans, but the lender might not allow anything beyond 10-year terms on refinanced loans. While you will save on interest over the life of the loan, this isn’t helpful if you can’t make the payments now.
What Repayment Options Does the Lender Offer?
Finally, consider the flexibility of the lender’s repayment options. Lenders have different terms and conditions that they offer when borrowers refinance student loans, but most of them are less flexible than the terms of the original student loan.
This is especially true if you are refinancing a federal student loan. In general, you are stuck with the terms you agreed to at the time you refinanced your loan. But unless you refinance again, you can’t just change your refinanced loan term from 10 to 20 years. And it’s less common for a private lender to pause or lower your payments during a time of financial hardship.
In addition, not all lenders will allow you to defer payment of principal while you attend graduate school. So, you’ll want to consider all of those situations as well before you refinance your student loan.