Refinancing your student loans can help make the repayments more manageable and potentially save you thousands of dollars in interest. When you refinance a student loan, you are effectively trading your old loan for a new loan. The new loan will have completely different terms and a different interest rate too. Although refinancing sounds like a great solution, it’s not the best option for all borrowers. And even if it is a good option for you, going about it the wrong way could push you even further into debt.
Watch out for these common student loan refinance mistakes.
Federal student loans come with several protections including Income-Driven Repayment Plans and Loan Forgiveness Programs. When you refinance federal student loans they get converted to private loans. As private loans, they lose all protections associated with the original loan.
If you are working towards federal loan forgiveness, refinancing may not be the best solution for you. On the other hand, you may decide that the benefits of refinancing far outweigh the benefits associated with your federal student loans. In this case, refinancing is the better option. What’s important is that you are aware of the consequences of refinancing and make an informed decision. Forfeiting your federal student loan protections unknowingly could cost you dearly in the long run.
There are several lenders that offer refinancing. Every lender sets their own interest rates, payment terms, loan terms, and penalties for delayed payments. Sure, it takes time to compare different lenders but it’s totally worth the time it takes. The smallest difference in interest rates and penalties could save you thousands over time. You could miss out on a better refinance deal if you jump in and sign up with the first lender you come across.
No matter how attractive the first lender sounds, don’t rush in to sign the loan. Make sure to compare rates and terms from multiple lenders. It will take you just a few minutes to do at our Compare Rates page.
Usually, refinancing student loans should not cost you anything extra in fees. Unlike other loans, lenders generally don’t charge any origination or administration fee to refinance student loans. However, some lenders offer refinancing at very low interest rates and make up for it by charging miscellaneous fees. These are usually hidden in the fine print.
When comparing lenders, don’t focus on the interest rates alone. This is especially if the rate is too good to be true. Read through the fine print thoroughly to determine if you will have to pay any additional fees. If in doubt, ask the lender.
Not surprisingly, lower monthly payments will always sound more attractive. Unfortunately, lower monthly payments usually mean a longer repayment term. This may result in you paying more interest over the life of your loan.
When choosing your loan terms, consider your financial circumstances and long term goals. If you’re financially strapped, lower monthly payments can make the payments more manageable and help minimize the risk of defaulting. On the other hand, if you can afford the higher months payments, a shorter term may be the better option. You’ll pay off your debt faster and also pay less in interest.
Every loan comes with its own terms, conditions, and benefits. When you refinance, you lose all benefits associated with the original loan. Before refinancing any student loan, take time to weigh its short and long term merits. Do this for every loan you hold to avoid unknowingly losing out on some benefit. Refinancing is final and whatever benefits you forfeit are lost forever.
Most lenders will offer you the option of choosing between fixed and variable interest rates. At any time, variable rates are usually lower than fixed interest rates. However, this doesn’t automatically make them a better option. Understanding the features and pros and cons of each option can help you make a better decision.
With fixed interest rates, the interest rate is set at the time of taking the loan. This rate remains constant throughout the life of the loan. The advantage is that you know what your monthly payments are going to be for the full term. The downside is that you don’t benefit from fluctuations in the market interest rates. Fixed rate is a better option if it looks like it’s going to take several years to repay the loan.
With variable interest rates, the rate fluctuates depending on market conditions. These rates are typically much lower than fixed rates, however, there is no guarantee. The downside is that you are not rate-protected and may end up paying a higher rate. Also, it’s difficult to budget because of the inconsistent monthly payments. Variable interest rate is a better option for you if you expect to pay off your loans as quickly as possible, and if you can afford the higher monthly payments.
Your credit history has a major impact on the interest rate the lender offers you. The higher your score, the lower the interest rate. An unnoticed error can lower your credit score causing you to pay a higher interest rate unnecessarily. Before you approach any lender, make sure to check your credit report for errors. If there are any, get them rectified first.
Most lenders offer a 0.25% interest rate discount if you set up auto pay. This is a simple, straightforward process that involves setting up automatic debits from your bank towards your monthly payments. With auto pay, lenders feel reassured that they will receive their payments on time every month. A 0.25% discount may not seem like much, but it does help lower the overall cost of your student loan debt.
It can take a few weeks from the time you’re approved till your refinanced loan is processed. During this time, you must still continue making payments on your original loan. Only stop payments after the process is complete and you’ve received notification of the same. Stopping payments before will be considered as a missed payment. If the loan becomes delinquent or goes into default, it could
Refinancing offers several benefits, but only if it is done right. Doing your research will help you make more informed decisions, while also helping you avoid these common student loan refinance mistakes.
We hoped you enjoyed this article! Remember, you canand potentially lower your monthly student loan payments and save money.