What is a student loan refinancing?
A student loan refinancing typically involves taking out a new loan to pay off your existing debt.
Refinancing student loans can potentially lower your interest rate, fees, or/and allow you to get better repayment terms, helping you save money. However, it is important to consider whether your loan is private or federal and what benefits are available to you.
While it is possible to refinance both private and federal loans, you should be aware that refinancing federal loans with a private loan means foregoing many of the benefits that federal loans provide. By refinancing, you will lose federal protections like federal deferment or forbearance programs, income-driven repayment plans, and student loan forgiveness.
Federal student loans can help you finance the costs of graduate education, but they can’t cover everything. When that’s the case, private student loans can help cover all overruns.
The process of refinancing a student loan is not much different from a personal loan application. To begin with, it’s best to check your credit score. Private student loans come from major banks, credit unions, and online lenders, and unlike federal student loans, they require a credit check.
When you qualify for a student loan refinancing, the interest rate you will be offered depends on several factors including your FICO score, income, debt-to-income ratio, loan type and the repayment term. Lenders are typically looking for a credit score of about 650, and at least two years of employment or minimum income level for approval.
Many student loan refinancing companies allow potential borrowers to get prequalified and view an estimate of the rate they might qualify for without a hard credit pull.
Even if you’ve been prequalified, you still need to submit a final application. You will be asked to provide additional information as well as supporting documents.
If you’re approved, you’ll need to sign some final paperwork. If you’re denied, the lender will inform you of the reason for the denial.
If you have poor credit and need to refinance, you may be able to qualify by adding a co-signer. You could also work on improving your credit and lowering your debt-to-income ratio to qualify.
Ultimately, once you get approved and sign all the paperwork, a new lender will pay off your current lender or servicer. Continue making payments to your current lender or servicer until you get confirmation that the transaction is complete. If you pay more, you’ll get a refund.
Refinancing your student loans is a relatively simple process, and shopping around for the best options can result in big savings.
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