Consider these seven questions to see if refinancing makes sense in your case.
1. What Are You Trying to Achieve?
Are you trying to reduce monthly payments? Are you trying to save interest costs and pay off your debt sooner?
Does your current loan have terms and conditions that you’d like to remove? Define your objectives and avoid indecision caused by a flood of options –- paralysis by analysis.
2. What Type of Loan Do You Have?
Do you have federal student loans, student loans from private lenders, or both? Federal student loans offer many protections such as loan forgiveness programs and income-based repayment options that are not available with private loans.
Be confident that you won’t need the safety nets of federal student loans before going with a private lender.
To find out if you have a federal student loan, log into the Federal Student Aid website. Under the repayment estimator page, select “view or add your loans.”
3. What’s Your Monthly Payment Goal?
Regardless of your objective, you need to define your acceptable monthly payment boundaries.
Review your budget – or create one if you don’t have one – to determine your monthly repayment target. A good estimate is no more than 10 percent of your discretionary income.
4. What’s Your Credit Situation?
If you plan to refinance with a private lender, you’ll need a good credit score (preferably 700 or greater).
You’ll also need a steady income and minimal additional debt (credit cards, etc.) to qualify for a suitable interest rate.
If your credit is poor and your objective is to lower monthly payments, you may be better off consolidating your loans with a direct consolidation loan.
You may lose some protections from your current student loan, but your new loan may also qualify for income-based repayment or public service loan forgiveness programs.
Some private lenders will allow you to combine federal and private student loans, but you can’t incorporate private loans into a federal direct consolidation loan.
5. How Does Your Current Interest Rate Compare With Options?
Generally, refinancing only makes sense if you can get a lower interest rate.
Federal student loans are currently fixed-rate loans (4.45 percent for undergraduates and 6.0 percent for graduates for the 2017-2018 academic year), although older student loans may be variable. Private student loans usually have higher interest rates.
Now that you’re out of school, you may be able to refinance through a private lender and lower your rate.
Fixed rates can vary from 3 percent to 9 percent based on creditworthiness. The more your financial situation has improved, the more attractive refinancing becomes.
6. What’s the Payoff Amount?
Remember that you aren’t paying off the original loan amount.
The total payoff amount is the remaining loan balance including interest, for all loans that you’re consolidating. Make sure you take this into account when you evaluate loan offers.
7. What’s the Lender’s Terms and Track Record?
Private lenders may offer a variety of incentives to gain your business.
Compare loan terms carefully to see if they meet your needs, and then check the historical performance of your chosen lenders online. The Better Business Bureau is a good place to start.
Refinancing may not be the best option for you – but if you don’t investigate the options, how can you know for sure?
This article was provided by our partners at moneytips.com. Photo ©iStockphoto.com/BraunS
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