Young people entering college are faced with many decisions. They have to choose which schools to apply to, how far away to move, and if community college makes sense — just to name a few. However, the biggest decision is often how they’ll pay for their education. Scholarships, grants, and money out of pocket can often cover some expenses, but most students end up taking out loans.
When you’re 18 and starting college, it’s easy to imagine you’ll be able to pay off $30,000. Once you get into the real world and start making money, that should be no problem, right? Unfortunately, that’s not always what happens after graduation, and interest doesn’t make repayment any easier. Student loans have become an overwhelming personal finance concern for many people. However, there are steps you can take to get your student loans paid off.
Reviewing all your financial commitments — your car loan and mortgage, for example — in addition to your student loans is a great place to start. After getting the lay of the land, one option to consider is refinancing your student loans. Refinancing is a way to get better interest rates and help make payments more manageable. As you start this process, there are a few things to know.
1. Refinancing Is More Common Than You Might Think
Financial situations and the economic market itself change all the time. As the market fluctuates and interest rates rise and fall, it’s only logical to revisit the cost of your education loans. Just because you locked in an interest rate years ago doesn’t mean you’re stuck with it for life. People are constantly refinancing their student loans for a myriad of reasons.
For example, if you take a new job with a higher salary, it’s smart to revisit your student loan interest rate. Financial institutions typically perform income verification during their evaluation, and if you’re making more money, you’re less of a financial risk for the lender. It’s worth seeing if they would reduce your interest rate. If approved, you’d then create a new payment plan that better aligns with your increased income. That could make completing your loan obligations in a shorter amount of time possible.
2. Refinancing Can Simplify Your Payments
When receiving financial aid information, new loans are offered each year rather than as a lump sum to cover the cost of your entire education. Some semesters you might have needed to take out less money for tuition because you received a scholarship or vice versa. Because of this, many students walk across the graduation stage with at least four individual loans with varying interest rates.
Those varying interest rates can lead to challenges and confusion when you start payments. Refinancing your student loans is effectively grouping all or a few of your loans together to create a new loan agreement. Ideally, the new loan is at a lower interest rate, which will help reduce the total cost of borrowing. That leaves more money to pay off the loan itself or invest in savings.
3. You Can Adjust Your Payments to Your Lifestyle
Like securing financing for a new home or car, student loan rates vary depending on the lender you work with. Comparing rates and finding the refinancing plan that works for you gives you flexibility. As with all loans, higher monthly payments can help you pay off your loan faster. However, lower monthly payments may be more manageable.
Depending on your financial goals, you may opt to do one over the other. There is no wrong choice because what is right depends on your personal goals. Remember to read the fine print, too. Some refinancing plans are more lenient than others. While certain lenders may forgive a missed or late payment before it affects your credit score, others will not. Similarly, some may charge additional fees. Avoiding these will help during your repayment process.
4. Lenders Will Review Your Credit
Whenever you want to access credit, as with a loan, lenders have to make sure you’re a reliable borrower. They’ll check your credit report and review it to see your history of payments. If they believe you’re a good candidate to pay on time, they’ll likely move forward in the process.
While your credit score isn’t the only factor under review, it can directly influence your rate. If your score isn’t where you want it to be, consider the factors that influence it and work toward improvement. A good score varies based on the scoring model, but the mid-600s to mid-700s is typically considered good. Although you can still apply for refinancing with a bad score, better credit will usually correlate to better terms. To improve your score, make sure you’re making payments on time, avoiding hard inquiries, and keeping your credit utilization below 30%.
Note that refinancing can also impact your credit score, especially during the application process. This is because lenders will likely do a hard credit check, which tells credit reporting bureaus that you’re inquiring about loans. Often the changes to your credit score will be only a few points. However, it’s important to keep this in mind, especially if you’re applying to multiple refinancing agencies.
Should You Refinance Your Student Loans?
The short answer is that it depends. Repaying your student loans can be a daunting task. Reviewing all financial options, comparing rates, and assessing your budget can help you make the decision that’s right for you. The nice thing is the option is there if you want to take advantage of it at any point. Being informed is the first step in making the right decision.
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