If you want to take out a student loan, you need to sign a
promissory note. This is essentially a contract. By signing it, you promise to
repay the amount you owe plus interest, among other terms and conditions.
Students often sign their promissory notes without thinking
too much about this promise. Of course, when they go from borrowing that money
to actually repaying it, their point of view often shifts. Their goal becomes
changing the previously agreed-to terms, especially that interest rate
increasing the amount they owe.
Seemingly, the most straightforward way to do this is
refinancing the loan at a lower interest rate. A lower rate means less
interest, which sounds great. However, it’s far from the only consideration
when refinancing. Here are four others to know.
1. There is no federal refinancing. Congress sets the
interest rate for federal student loans, and most of these rates are fixed by
law, no matter how solid your credit or income becomes postgraduation.
You may be able to refinance your federal student loans into
a private loan. The same goes for refinancing a private loan into a new private
loan, too. However, you cannot refinance federal or private student loans into
a federal loan.
Some legislators have proposed making this an option, but it
does not currently exist. You may think you’re doing this by consolidating your
federal student loans, but that’s not the case.
2. Consolidation and refinancing are different. Many
borrowers think consolidating their loans will lower their interest rate the
same way that refinancing would. This confusion is common because these
options are similar: Both replace your old loans with a new
loan with new terms. However, a federal loan consolidation won’t lower your
interest rate, even if it seems like it did.
Federal consolidation loan interest rates are the weighted
average of the interest rates of their underlying loans, rounded up to the
nearest one-eighth of a percent. The result is a rate that may be likely lower
for some of your previous loans, while also being higher for others. In short,
the weighted average means that things mostly just balance out.
Consolidation has its benefits. For instance, you can choose
the servicer you wish to work with, as well as potentially qualify for
additional repayment and forgiveness options. But you won’t get a lower
interest rate.
3. Refinancing will change your loan's terms. When you
refinance a loan, your interest rate may decrease, depending in part on your credit
score or whether you have a cosigner. That drop is the large font headline for
choosing this option. However, other changes are in the fine print.
As mentioned above, a refinanced loan is a new loan, with
new terms and new conditions. That means your new, low interest rate could
increase. It also means your old loans go away. And the latter is important
with federal student loans.
Federal student loans come with protections that can help
you if you’re struggling with your payments. You may be able to use repayment
plans that decrease these amounts or put them on pause altogether.
You also may qualify to have loans forgiven under certain
criteria. Most private loans do not offer options like these, and once you
replace your federal loans with a private loan, you cannot move or consolidate
the loan back into a federal loan to get these benefits.
Postponements and forgiveness may not seem as important as
slicing your interest rate, but take the long view. Calculate how much you’ll
save with a lower interest rate. Is it hundreds or even thousands?
Next, consider how much those protections are worth to you,
not only right now but also if you lost your job or faced a different financial
emergency. Think about if you would you sell them for the amount you’ll save or
whether you have a large emergency fund saved. Your answer can help you figure
out if refinancing is right for you.
4. There are other ways to reduce interest. If you have
federal student loans and want to keep their protections, you may have options
other than refinancing to lower your interest rates, so explore those first.
Many servicers will reduce your rate if you enroll in automatic payments.
They also may do the same if you make a set number of
on-time payments in a row. Call your servicer, and ask it they offer these
benefits or others.
In addition, consider paying extra every month. There is no
penalty for prepayment with federal Educational loan, and
paying off your loans faster can reduce the amount of interest you pay overall,
even if your rate stays the same.
Ultimately, these reductions may not subtract as much from
your monthly payments as refinancing would. Still, add these benefits to those
from keeping your loans in the federal student loan program. The result may end
up making more sense for you overall.
No comments:
Post a Comment