Student loan refinancing is a service offered by private banks and lenders to college graduates with student loan debt on their hands. It’s sometimes referred to as student loan consolidation, but do not get it mixed up with the federal consolidation loan program (they have a couple similarities).
So in essence, when you refinance student debt with a private lender, you are asking that lender to supply you with a new loan. This new loan pays off the old debt, and you are then stuck with paying off that loan under a different repayment agreement. That’s what refinancing is at its most basic, but there are a few other details that I should hammer out.
Earlier, I said service is also referred to as student loan consolidation. That is because the service of refinancing allows you to combine, or consolidate, multiple student loans together into just one loan. On another note, both federal and private student loans are eligible for student loan refinancing.
That explains one basic part, but there is another big aspect, and arguably the main incentive, to consider: the new loan agreement. As mentioned, you’re entering into a new loan agreement which means a couple things. You’ll possibly have only one student loan. You’re going to get a new interest rate on that loan. You’ll probably have a different monthly repayment plan on that loan. Depending on how these new terms work out, refinancing can be both helpful or hurtful – a.k.a there are pros and cons.
Let’s start with interest, or APR. Lenders and banks evaluate the creditworthiness of student loan refinancing applicants which directly impacts the interest rate on their loan. If you can get a low interest rate on the loan (at least lower than your previous interest rates), then you’ll save money over repayment (assuming you don’t miss a payment) since interest accrues at a slower rate. Typically, super prime or prime consumers have a better chance at qualifying for a low rate. You’ll want a good credit score if you’re going to apply.
Next up: a new loan repayment plan. You have the option to completely restructure your repayment schedule. Most lenders offer anywhere from five-year, ten-year, fifteen-year, to twenty-year repayment terms.
Depending on what you pick, you can accomplish a couple different things. If you pick a short-term repayment term, then you’ll be on the fast track to paying off student debt completely. You’ll probably have larger monthly payments to deal with, but you’ll be finished paying them sooner. This means you’ll face a greater monthly financial demand, but you’ll save money by avoiding interest capitalization over a longer term. Conversely, you could pick a longer term and experience the opposite: spending more on interest over time at a lesser monthly financial obligation.
Those are a few basics to student loan refinancing. Mainly, remember that it can save money on student debt, and you can tailor a repayment term to your own financial needs. However, it’s tough to qualify for in general, and it’s even harder to qualify for ideal terms.