Student loan refinancing can seem like one of those topics you’d rather avoid. It can be both confusing, annoying, and unfortunately, may remind you of that student debt you’ve been trying not to think about. We’ll try to help take this feeling away by explaining what student loan refinancing is, and how you may be able to benefit from it.
What is student loan refinancing?
Put simply, student loan refinancing is the process of getting a new loan to replace your current one. When you do this, your new loan pays off the old one, and then you start again with an entirely new loan. This will include a new loan provider, a new interest rate, and a new payment plan. To get your new interest rate, your current financial situation will be taken into account, including your credit rating, history, and your earnings. Something to note is not everyone may be able to apply for student loan refinancing. If you’re interested and if you’re eligible, we recommend talking to a personal loan advisor like ELFI. They will be able to assess your financial situation, and then suggest the best loan options for you.
As an example, assume you have a student loan of $30,000, and you’re currently paying 5.7% interest. You’ve been paying off your loan over the last two years and have built up your credit rating. You decide to look at refinancing options and find that you’re eligible for a new loan at 4.2% interest. On this large sum of money, this amount of a decrease in interest will have a significant impact on your monthly payments and the total amount you then have to pay.
Should you consolidate your loan or refinance?
Consolidation is the process of adding several loans up and consolidating them into one single loan. If you have many different loans from several different providers, this may be confusing or take a lot of time to manage. By consolidating your loans, you’ll be able to combine these so that you only have to deal with one company, and will be able to negotiate a payment plan that suits you. This is very similar to refinancing, and means you can essentially pay off all your smaller loans, and add them into a big one. This can be beneficial if you’re trying to get a lower payment plan, as you may be able to take the loans out over a more extended period of time. The interest you’ll pay is based off an average of the loans you’re consolidating. Another benefit is if you’re close to not being able to make a payment, and you’re worried about your credit score. You can consolidate your loans, get a lower payment plan, and then get back on track with your payments.