It seems like the amount of student loan debt just keeps going up and up—now totaling about $1.75 trillion. If you feel like you keep paying your student loans but the balance just stays the same—or even increases—you might want to consider a student loan refinance. These are some questions to ask before refinancing your student loans.
What Does It Mean to Refinance Student Loans?
Student loan refinancing is a common practice, which can help individuals improve their relationship with their debt. Refinancing is generally one of the most practical and popular ways for people or organizations to make their debt repayment more affordable. But what is refinancing?
In simplest terms, refinancing is replacing one loan with another one. It’s really that simple. If you have a student loan that is proving to be unaffordable, or even just more expensive than necessary, refinancing can help you get better interest rates and repayment terms.
There’s really nothing sketchy at all about doing a student loan refinance. While many will be cautious about making any moves with debt, there’s really nothing to worry about when it comes to refinancing your loans. All that’s happening is you’re getting a new loan with better conditions that will totally replace an old one.
Getting to a better place with your debt probably sounds like a good deal. But not everyone will benefit from a student loan refinance in the same way. It’s important to ask certain questions before deciding to refinance your student loans.
Questions to Ask Before Refinancing Your Student Loans
Even though a student loan refinance will be beneficial to a lot of borrowers, there are several important considerations you need to make before going through with the process. Ask these questions before completing a student loan refinance:
Will I lower my interest rate?
The most-cited reason for refinancing student loans is typically because a borrower wants to lower their interest rate. Your interest rate is a critical loan component because it determines how much you’ll end up repaying to the lender above your original loan amount. Being able to significantly lower your interest rate through a student loan refinance can drastically improve your financial health.
Can I refinance with the Department of Education?
This is likely the most important question to answer specifically regarding student loan refinancing. While you can consolidate loans through the federal government, it’s only possible to refinance through a private lender. This has a potentially big impact on those who are considering a student loan refinance on federal loans. Student loans from the government come with highly attractive protections, such as income-driven repayment plans and loan forbearance. When you refinance, you will lose these benefits. This is something you have to carefully consider before deciding to refinance your student loans.
Do I need to have good credit to refinance?
While you don’t need to have perfect credit to do a student loan refinance, you’ll have a difficult time finding a lender with a low credit score. Most private lenders are going to want to see a credit score of at least 650 before approving a student loan refinance.
What’s the difference between fixed and variable rates?
Those who are looking at student loan refinancing deals might be seeing options for fixed or variable interest rates. There is a very important distinction to make between these. A fixed rate won’t change over time. If you take out a loan with a fixed four percent rate, it will stay a fixed four percent rate. On the other hand, variable interest rates will change with market conditions. If you get a variable interest rate that starts at four percent, next year it might be three percent—or maybe six. This can look appealing because variable rates are typically quoted lower against fixed ones; but ultimately variable rates are much riskier than a fixed rate that’s guaranteed to stay the same.
There are lots of things borrowers should ask before deciding to refinance their student loans. These are just a few of the most important questions. While refinancing isn’t going to be right for everyone, many will benefit from the process. It’s essential, however, to have a deep understanding of your personal financial situation, as well as how refinancing will affect it.