Federal student loans offer some key benefits you don't always get with private student loans. For example, you may be one of the millions of federal student loan borrowers enjoying a temporary break from payments under the CARES Act.
Whether you have a college loan, graduate student loan, medical school loan or Sallie Mae MBA loan, they will not accrue interest during this forbearance period. However, it's important to note that private student loans do not fall under the legislation's umbrella.
If you have private student loans, now could be a good time to assess your repayment options and consider refinancing. Refinancing private student loans could result in saving money if you're able to refinance to a lower rate. And it could also yield lower monthly payments which can mean less stress on your budget.
To understand just how much refinancing can save you, you’ll need a student loan refinancing calculator and a good idea of what rates you can qualify for.
Not sure if a student loan refinance is the right move? Here's a closer look at the benefits of student loan refinancing.
You can get a better interest rate
Student loan interest rates have been trending down since the start of the COVID-19 pandemic, when the Federal Reserve opted to slash the Fed funds rate to near zero. Refinancing private student loans now could work in your favor if you're able to lock in lower rates.
Keep in mind that having a good credit score is key to securing the best rates. Bad credit could affect your loan eligibility, loan amounts and loan options, so getting any debt or payments in order before a necessary credit check is crucial.
You may also consider refinancing private student loans if you're interested in switching from variable interest rates to fixed interest rates or vice versa. Check your rates at Credible, where you can easily compare rates from multiple lenders in one place.
You may be able to pay off private student loans faster
Refinancing private student loans can help with saving money on interest, but it could also help you pay off debt sooner. When you refinance to a lower rate, more of your monthly payment goes toward the principal of the college cost.
The faster you can pay off private student loans, the faster you can free up money in your budget to work toward other personal finance goals. For example, you may be interested in buying a home which means being able to afford a mortgage.
Federal and private loans for college both have repayment periods set by lenders, but if you can refinance and pay off the debt before the end of the loan term, you can likely avoid accruing interest.
You can use an online tool like Credible to get prequalified student loan refinancing rates without affecting your credit score.
You don't risk losing federal student loan benefits
If you have federal student loans, you likely know that they come with some built-in benefits. Those include deferment and forbearance options, grace periods, income-based repayment plans and the potential to secure loan forgiveness, depending on your career plans. And of course, federal student loans are covered under CARES Act protections through Sept. 30, 2021.
Refinancing private student loans won't put you at risk of losing any of those benefits since they don't apply to private student loan debt. But think twice if you're considering refinancing federal student loans with private loan servicers.
"A pending loan forgiveness amount is being proposed by Congress and the president and it may be beneficial to wait until that is finalized," says Fred Amrein, CEO and Founder of student loan resource site PayforEd.
Any forgiveness program by the government may not extend to private school loans, so refinancing a federal student debt into a private education loan could cause you to miss out on a chance at loan forgiveness.
What you'll need to qualify for a student loan refinance
If you'd like to refinance student loans, two of the most important lenders consider are your debt-to-income ratio and credit history, says Amrein. Reviewing your credit history can help you determine how likely you are to qualify on your own or whether you may need a creditworthy cosigner.
Specifically, consider your:
- Credit score
- Credit utilization rate
Whether you have any past delinquency or default items on your credit reports
Amrein says that a cosigner can potentially help you qualify for lower rates when your credit is less than perfect. But it's important to understand what cosigning means, in terms of who's legally responsible for the debt and how it may impact both your credit scores.
What to do next
There are usually no downsides to refinancing a private loan if you can qualify for one at a lower rate than you already have. Not only could it mean saving money, but loan repayment could also be more manageable when combining multiple student loan debts
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