So, while student loans are very common, it’s not always easy to stay committed to paying these loans back and balances can quickly get out of control. There’s no doubt that refinancing a student loan can be a smart decision; however, it’s important that prior to making any refinancing decision you do your research and understand exactly what you’re getting into.
Many students start their adult life with a student loan. While borrowing money for a student loan is easy, paying it back on time can become problematic for many people. Many postgraduates struggle to meet their student loan repayments, which is why so many look for help through refinancing: they want to reduce the interest payable and thus reduce their monthly repayment.
What is Refinancing?
With student loan refinancing, a private lender will settle your existing loans and provide you with a new loan with new terms. Basically, you trade in your current student loan for a new loan with a private lender and, hopefully, get better repayment terms. It doesn’t cost anything to refinance a student loan and, by lowering your interest rate, it’s possible to save a lot of money over time. Refinancing should also give you the opportunity to choose a more suitable payment plan, with the option to pay the loan off more aggressively over a shorter period of time, or to pay the loan off over many years.
Because refinancing is a very important financial decision to make, it’s always a good idea to consult a financial advisor to ensure you’re on the right track. Boardwalk Wealth Management in Ann Arbor can assist with any questions or doubts you may have when it comes to refinancing your student loans.
Before you commit to refinancing your student loan, make sure you’re aware of the following –
No. 1: There Will Be No Loan Repayment Assistance
Because a student loan is a federal loan, students are protected should they have an accident, become disabled, or lose their job. Should any of these events occur and you’re unable to make repayments, the government may step in and offer some relief. In some instances, as with teachers, loans can be forgiven if a teacher has worked in the field for a long period of time. However, if you go ahead and refinance your student loans, your new loan becomes a ‘conventional’ loan and these options will not be available to you.
No. 2: You’ll Need to Qualify For A Traditional Loan
Because you are a student applying for financial aid, the underwriting company will allow some leeway on the requirements they’re looking for. However, the lender refinancing your loan will still require that you have a reliable and steady income, a certain credit score level, and a specific debt-to-income ratio.
No. 3: You Can Combine A Number of Student Loans into One New Loan
Many students take out a number of loans to finance their education, just to ensure all expenses are covered. Every loan requires that a payment be made, and these can ultimately combine to become one big headache. Refinancing your student loans means you can combine all loans, including private loans, into one loan with just one payment to be made.
No. 4: There’s No Guarantee You’ll Save a Lot Of Money
While there are many benefits to refinancing your student loans, you may not always save a lot of money. It’s true that many companies advertise low interest rates, but the reality is that the interest rate and terms of your new loan will depend on the amount of your debt, your income, and your credit score. If you have an established job while paying for graduate loans you’ll often be rewarded with better terms, maybe even 2% or less; however, if you’re just starting out and not established in your employment your interest rate could be as high as 4%.
No. 5: Loans In Your Parent’s Name Can Be Included in Your Refinanced Loan
Your parents may have taken out student loans on your behalf due to your lack of credit, high expenses, or inability to repay the loans. Loans taken out by your parents can be incorporated into the one loan when you refinance your student loans. In addition, all these loans can be taken out under your own name, with your parents co-signing to help you qualify for a good deal.
No. 6: Refinancing May Incur Tax Consequences
Note that refinancing your student loan to a personal loan changes the nature of the loan in the eyes of the IRS. If you have deducted student loan interest on your previous tax returns you should be aware that this deduction will no longer be allowed by the IRS.
No. 7: If Your School Is Not Accredited You May Not Be Able To Refinance Your Loans
If the college or university you attended was not accredited when you incurred student loans, it may not be a simple matter to refinance these loans. Accredited means that your school participates in a Title IV Federal Student Aid program, and many lenders require that your school is a participant of this program.
No. 8: Look For A Loan That Offers Flexible Repayment Options
When you refinance your student loans you’re effectively giving up government relief and deferred payment options. Try to find a lender who offers flexible repayments – this will cover you In the event of unforeseen financial difficulties.
No. 9: Declared Bankruptcy? You May Still Be Able To Refinance
You may be able to refinance even though you have declared bankruptcy; however, your lender may ask that you wait a few years before you apply. Your lender will be looking for recent proof of you repaying your debt, which shows them that they will also be repaid.
No. 10: Are You The Co-Signer? You May Still Be Able To Refinance
If you find yourself in the position where you co-signed on a student loan but the original borrower is now not in a position to refinance or repay the loan, some lenders will allow you, as the co-signer, to refinance the debt in your own name. This is because you have an element of responsibility should the loan go into default.
About Boardwalk Wealth Management: Offer financial planning & wealth management for individuals and businesses in Ann Arbor, Michigan & beyond. The foundation of Boardwalk Wealth Management lies in true dedication to our clients and determining what their wealth means to them. We offer investment management, tax planning, and retirement services. As a fee-only financial advisor, we do not sell financial products or collect commissions. We enjoy working with clients both locally and remotely.