7 Question Quiz-Should I Refinance My Student Loans?
Refinancing or consolidating multiple loans may be a great financial move and improve your financial health immensely. Or will it? How do you know if this is the right chess move? Let’s take a look a 7 question quiz to see if this is checkmate for you.
1) What are the reasons to pursue refinancing or consolidation of student loans?
Lower interest rate A lower interest rate means you keep more money in your pocket over the lifetime of your repayment term.
Change your variable interest rate loan to a fixed-rate loan. While federal student loans are fixed-rate, private loans can be either fixed-rate or variable.
Lower your monthly payment. Typical student loan repayment terms range from 5 to 20 years. By extending the repayment term, you can significantly reduce the amount of money you're required to pay each month.
You anticipate earning more soon. Some plans base your monthly payments on your current income, and plans where your payments gradually increase over a period of time..
You want to consolidate multiple loans into one easy payment. Consolidating can provide you with one easy-to-remember payment deadline and make it easier to track how much you owe and to whom.
You want to release a co-signer. With no steady income and little to no credit history, many students find themselves needing a co-signer to qualify for student loans.
2) What are the reasons not to refinance or consolidate your student loans?
You're close to paying off your loans. If you only have a couple years or a few thousand dollars left before your loans are paid off, no reason to consolidate.
You're not having trouble with your payments. If the main reason you're contemplating consolidation is to make it easier to track all your loans, you may want to think twice..
You're conscious about lifetime cost. Reducing your monthly payments can help you in the short term but may wind up costing more in the long term
You may pay an origination fee. Depending on the lender that you select, you may or may not be charged an origination fee of anywhere up to 2 percent. This adds up on large loans.
You could lose perks from your current lender. Some loans come with borrower benefits like principal rebates, interest rate discounts and loan cancellation benefits, you may not want to forfeit.
You could forgo other repayment options. This includes deferment, grace periods and income-based payment plans. Don’t lock yourself into something you will not be able to pay.
3) What are you looking for in a lender?
In case you haven’t noticed, there is a bounty of start-up companies and established banking institutions all waiting to service you with a loan. But how much do you actually know about what one company offers compares to another. Some have traditional, and stricter methods, while other offer new innovative ways to service loans. Educate yourself here on all the available loan refinancing and consolidation companies and how they stack up against each other. You may be a bit surprised.
4) Will you need a co-signer? And why is this important?
If your income or credit score is too low, the bank will require a cosigner to insure your student loans in the case of default. The important concept to remember here when shopping lenders, is not all lenders are keen to cosigner releases. Some companies will claim this as a perk but will drag paperwork endlessly to keep it from happening. Keep your eyes open to this if you plan on using a cosigner.
5) What are terms for a refinanced student loan?
The “term” is going to be the ‘expected amount of years in which you are expected to repay your loan’. Banks typically offer 5, 10, 15, and 20 year repayment terms. Be sure you know realistically how much you can afford. If you choose to go after the pay-off aggressively, make certain your financial forecast supports your plan. It may be all about the interest savings, but this won’t work if you fall into hard times.
6.) What are the typical credit score, salary, and debt-to-income requirements?
Most banks require a ~680 credit score or higher, 45% maximum Debt-to-Income ratio and minimum monthly salary of $2,000, depending on your total debt load. Be sure to ask the credit score requirements before submitting your application. Check out start-up companies who offer better eligibility requirements.
7). Do they refinance student loans from my school and/or my degree program?
Always ask first which schools are eligible for that specific companies refinancing service. Some banks will not lend to student loan borrowers who have attended for-profit private institutions, community colleges, and/or certificate programs. When all is said and done, you are going to discover banks are going to be much tougher to get refinanced, then a start-up loan consolidation company. Do your homework on these companies before you commit.