What Does It Mean to Refinance Student Loans?

What does it mean to refinance student loans?

This is a bigger question now than ever, as more and more students are becoming burdened by debt.

Although going to college or university can open numerous doors in the future, it’s likely one of the most expensive investments.

Understanding what loan refinancing is and when to take advantage of it can help you to save thousands.

What Does It Mean to Refinance Student Loans?

Most institutions agree that refinancing student loans is nearly the same thing as loan consolidation.

In these instances, students can group their borrowed amounts into one lump sum payment.

For example, if you’ve borrowed from three financial institutions, you can consolidate your debt into one total.

You’ll typically have to find a lender willing to offer loan refinancing or consolidation.

The lender will pay off the initial financial institutions in favor of you opening a new and larger loan with them.

They will also offer a comfortable interest rate that makes paying your debt down a more attainable venture.

There are several benefits to student loan refinancing, as we’ll explore later in this guide.

It can be a phenomenal way to streamline your payments so that you can handle your debt more effectively.

Also, it can help you save plenty of money when it comes to interest rates.

How Does Student Loan Refinancing Work?

With a general idea of what it means to get student loan refinancing, let’s look at how the process works.

Fortunately, the majority of companies make it quite simple to take advantage of.

Step 1: Paying the Initial Lender

As mentioned, the first step of student loan refinancing revolves around paying your initial lender back.

For example, if you opened a student loan with your personal bank, your loan refinancing company will pay the loan off.

A simpler way of looking at this process is as if you are going from one bank to another to open a new, larger loan.

Step 2: Streamlining Payments

The next step of loan refinancing is to ensure you have one payment that you’re responsible for monthly.

Some lenders allow you to opt for bi-weekly or weekly payments, depending on preference.

Your new loan will be all of your previous student debt consolidated into one sum.

What makes student loan consolidation appealing is that you only have to manage a single payment.

Many financial institutions also ensure that your payment fits comfortably within your income.

This feature is essential for all income earners, as you’ll want a single loan payment that is attainable.

Step 3: Determining Interest Rates

As with any type of loan, there will be interest rates affixed to the new loan you’ve acquired.

It is one of the most significant advantages of student loan refinancing, as you could get lower interest rates.

The lower your interest, the more you will be putting towards your principal balance at the end of every month.

The majority of lenders typically offer either fixed or variable rates, depending on preference.

Fixed rates stay at a specific percentage throughout your loan, while variable interest rates can fluctuate.

Some prefer variable rates, as it means you could get lower rates than fixed interest, but they can also become higher.

The Benefits of Student Loan Refinancing

The concept of student loan refinancing is quite simple, which is undoubtedly a huge benefit.

However, there are several other great things that it offers, which is why it’s so popular.

Managing Debt

The most notable advantage of this process is that it helps you effectively manage your debt.

If you are the type of person who finds it challenging to manage multiple monthly payments, this simplified process is ideal.

You won’t have to worry about paying back state and federal loans from various lenders.

Instead, you will have a single payment that you need to handle, making it easier to remember.

As such, you’ll be able to make more on-time payments and eliminate debt significantly faster.

Many students also find that it helps keep them motivated to pay their student debt off, as you can make better progress.

Lower Interest Rates

Another phenomenal benefit of most student loan refinancing companies is the interest rates they offer.

When compared to standard student loans, these interest rates can be one-third of the cost.

For example, instead of owing 11.50 percent on your student loans, you could owe 2.5 percent or less.

It’s important to remember that the sole premise of debt consolidation is to help make repayments easier to manage.

With that said, lenders are bound to have more competitive interest rates to help you pay more towards your principal.

Not only will it make managing your income simpler, but it can also help you pay your loans down faster.

Manageable Payments

It will help if you manage your finances in a way that is easy for you to handle.

Between your average living expenses and a little expendable income, your debt should allow you to live comfortably.

A debt refinancing company will assist you with making affordable monthly payments based on your income.

With the right lender, you can come up with an amount guaranteed to pay regularly.

This process helps make sure you have allocated the perfect amount of money to all of your responsibilities.

There is no doubt that it helps eliminate the headache of managing your finances on an average income.

what does it mean to refinance student loans in the US
Refinance Student Loans form on a desk.

Extending Your Term

When you sign up for any type of loan, you will also be responsible for picking a term.

Your term is the total number of months you have to pay the entirety of the debt off.

With the crippling costs of student debt, it can be challenging to pay the total amount you owe during your initial term.

You can opt to extend your term by refinancing so that you have more time left to pay everything down.

Also, you can typically choose a longer-term, which helps lower your monthly payments over an extended period.

Alternatively, you can shorten your term to pay your loan off faster, depending on your financial situation.

Switching Lenders

Signing up for student loans can be exciting, as it means you have the financial backing to start going to school.

However, students rarely do enough background research into their lenders before signing up.

Unfortunately, you could find yourself working with a lender that doesn’t offer many perks for being a client.

When you decide to refinance, you have complete control over the new lender you want to work with.

You will have the opportunity to shop around to find the perfect company with all of the benefits you could dream of.

You might be able to find lower interest rates, additional benefits for switching lenders, among many other advantages.

Who Qualifies for Student Loan Refinancing?

Now that you know how student loan refinancing works and its benefits, it’s time to determine if it is right for you.

Although this process can help you save thousands over your term, there are eligibility requirements to consider.

Depending on the lender, not every student will be able to refinance or consolidate their loans.

Debt-to-Income Ratio

One of the first things lenders will look at with loan refinancing is your debt-to-income (DTI) ratio.

Your DTI is a term used to consider how much you owe compared to the amount of take-home money you have.

The sole premise of looking at this figure is to determine if you are a high-risk client.

High-risk clients are people who might find it challenging to pay their loans back due to low income.

It is far less likely that a lender will work with you if you have a high level of debt than your income.

Degree Type and Educational Background

Two other key areas of interest for student loan lenders are the type of degree you have and your educational background.

Did you know that most lenders won’t offer to refinance students who never completed their degree program?

In most cases, you will have to be a graduate before you become eligible to apply for refinancing and consolidation.

Also, some lenders have restrictions on the types of degrees they can assist with.

For example, expensive degrees in law and medicine are often ignored within smaller loan refinancing companies.

It is also important to note that some lenders require students to have minimum degree requirements.

Credit Score

As with most loans, another considerable part of deciding if you can receive student loan refinancing is your credit.

Your credit score gives a financial institution insight into the loan amount you can handle and your payment history.

If you have a low credit score, it means you have no credit history or have had challenges paying the debt back.

Every lender wants to ensure they are doing business with individuals who are guaranteed to pay their loans.

Solid credit scores are a surefire way to have financial institutions seriously consider your application.

Student Loan Balance

The last factor bound to affect where you get loan refinancing is your student loan balance.

The majority of lenders will have minimum and maximum amounts that they work with.

For example, companies might only offer loans to students who owe a minimum of $15,000.

Where this becomes particularly challenging is with expensive degrees.

Many lenders have maximum amounts as well, which might only cover a portion of your degree costs.

This concept becomes challenging for specialized degrees, especially in medicine and law.

Final Thoughts

Those asking what does it mean to refinance student loans could significantly benefit from the process.

The advantages are extensive, from finding a better lender to getting your hands on more affordable interest rates.

It is time to reconsider your debts to find a more affordable pathway to managing student debt.

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