Refinancing Student Loans: How It Works

I remember I used to have nightmares about my student loans. But here, this article is like a Genie out of a bottle to let you know useful ways of refinancing student loans. Whether you are a student or not, we all love the bling of some money resting in our wallets by the drawer. As far as we stretch our eyes, we can only see different, creative, and entertaining ways for us to spend our money – but wouldn’t it feel great if I told you that something can actually let you save up to $30,000 over the life of something that we call “student loans”. That feels good, doesn’t it?

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The magic of Refinancing student loans:

Refinancing student loans can help combine your existing federal and/or private student loans with a new low-interest student loan. If you have read up till now, I am pretty sure you will work it out and save some money for later use. Like maybe buy a house or a car you have always dreamt about or pay off to something when you are old and retired. Refinancing student loans will lower your interest rate, lower your monthly payment, and speed up the time where you have to live your life being buried under a debt of loans.  

A pro tip for my fella out there. The other big benefit of refinancing your student loan is that you can choose another term that suits your purpose. You can choose a loan term of 5, 10, 15, or even 20 years. Choosing a longer term can reduce your monthly payments, but choosing a shorter term can help you pay off your debt faster and save money that you will be spending on interest rates. So whatever sails your boat – but at least, you have an option.

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How Refinancing student loans? – A million-dollar question.

The trick is to find a compatible lender who will pay off your student loan and offer a lower rate of interest. This way you can maintain your flexibilities accordingly – but it is easier said than done. Following are the ways to dig in deeper – let’s take a look.

1. Think it through if the decision of refinancing is the right choice for you:

Yeah, everything that saves us money shines bright in our eyes but not everything that sparkles is gold. Refinancing your student loan is great for saving but you need to know if refinancing is the way to go for you or not. To qualify for the lowest interest rate and meet lender refinancing criteria, you need a strong loan and financing capabilities – meaning strong credit.

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Since we all know that the pandemic has reshaped many things, so if you are planning to refinance your f loans, just know that they will not fit the criteria for government programs like Student loan relief and Income-driven repayment. But if you are on a private loan side, then you have fewer downsides to face.

Have a Strong Credit score:

Your credit score doesn’t matter for many big things in life but when it comes to refinancing your student loan, this is where it steps in. Your credit score measures and interprets your financial liability. Before you get selected, your credit score tells the lender that you will be repaying the debt on time. Top student lenders expect the minimum credit score to be anywhere around 600. However, some lenders do not have a minimum credit rating and that’s when things get easier. Let me whisper into your ear that a credit score of 800 can maximize your chance of getting that student lender approved.

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2. Do your Research for lenders:

As we read above, it is easier said than done. If you are someone who hasn’t done his research before, you might think it is easy to get names out but every program fits different people in different situations. There are many banks that finance student loans, if that’s what you fancy go for it – but if you are someone who doesn’t have a college degree, then go for a lender who doesn’t require a college degree. There are also many bonus programs with different perks – do your research and pick the one that fits best in your shoes.

3. Do the math – Estimate your benefits:

Once you’ve identified some lenders that suit your needs, you can go and check what each one has to offer. After all, the best lender is the one that offers the lowest interest rate. To refinance student loans, you can compare interest rates from multiple lenders at the same time or visit each lender’s website individually. It is not that hard; you just have to find what will get you to save more money than what you are saving right now.

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4. More is less – apply for multiple lenders at once:

We have always heard that less is more but in this case, more is less. After comparing the interest rates, you need to contact multiple lenders to maximize your chances of getting approval. There is no limit to the number of lenders you can apply for refinancing student loans.

To save as much money as possible, please choose the shortest payback period you can afford. If you want to reduce the monthly repayment amount, then choose a longer repayment plan only if you want other charges to be processed first or have other expenses to prioritize.

5. Get the application done and sign it off:

Let’s say you find a great lender and it looks like you qualify for a great deal of refinancing your student loan that will actually help you save. Fantastic! Now it’s time to apply. You’ll just need to share some basic info with the lender about your current loan, along with a few docs about your financials. This is what most lenders will need from you:

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  • Your name and address
  • Proof of residency
  • Proof you graduated
  • The type of degree you earned
  • Proof of employment
  • Your income
  • Loan or payoff verification statements

6. Wait for the magic to happen:

At the end of the processing period, the new lender pays the existing lender or service provider. From now on, your payment to the lender shifts. You will pay monthly refinancing fees for the new lender and not to the one you used to pay before.

Make sure you continue to make payments to existing lenders or service agents until you are sure that the process is completed by the new lender.  Don’t worry that you might overpay the existing because if that happens, you are definitely getting a refund. With some extra cash resting in your bank account and in between your books, trust me you will be happy if this is the right thing for you.

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