Personal finance can be the cause of many headaches for a large subset of the population. All of these numbers and convoluted payment systems are too complicated.
Well, unfortunately, all of that is just another part of life. Student loans seem to be a part of life as well, almost like there’s no way around them. The thing is many people don’t know they can actually change the terms of their initial loan by choosing to refinance. It isn’t a decision to be made lightly, and is kind of complicated in its own special way.
To help out anyone who’s curious, here’s a good FAQ on student loan refinancing:
What’s student loan refinancing?
What happens during loan refinancing is either the original lender allows you to change the terms of your loan (changes in interest rate and monthly payments), or an outside refinancing company buys out your debt from the original lender, and now, you pay that second company back under their specific terms — no more complicated than that.
Is this the same as consolidation?
It turns out that no, refinancing and consolidation are two very different beasts, even though they seem nearly the same. Refinancing is essentially getting a brand new loan, while consolidation is putting all of your loans together to make a sort of super loan with the interest rate being an average of all of your existing ones. They’re similar, but not the same.
Is it a smart financial choice?
For many, choosing to refinance their loans helps them achieve their goals of financial freedom. In the world of education loan finance, there are two big reasons why people choose to refinance. The first is to reduce their interest rates, so they end up paying less in interest over the course of their loan, saving them money long-term. The second is to reduce monthly payments, which can enable a household to live much more comfortably each month-long interval by alleviating the overall financial burden.
What risks are there?
If you choose to refinance a federal loan, you lose access to any specialized federal payment plans, as well as any of their loan forgiveness programs. You’re beholden entirely to the new creditor. If you like flexibility in your payment plans to reflect major changes in your life, refinancing can be a dangerous move. Figure out exactly what you’re agreeing to before you take the refinancing plunge.
How do I qualify?
Your debt-to-income ratio, overall income, and credit score are all checked over with a fine-toothed comb before anyone is willing to offer you refinancing terms. Based on their cut-offs in those three fields, you’ll either qualify for refinancing or you won’t — as simple as that. If you have a good job, a few other outstanding debts, and a good history of paying back debts on time, there’s a good chance you can get a much better deal on your loans.
As with any major financial decision, diligence is vital when deciding what’s best for your future. It’s not impossible to end up getting worse terms than you started with. Don’t be fooled by flashy promises or in-your-face marketing. Make sure all of the terms are spelled out in plain English, with nothing hiding behind the curtain.