The following content is courtesy of Nate Matherson from LendEdu: the simple way to find, compare and apply for student loans and student loan consolidation.
Student loans aren’t as they used to be. The rapidly rising costs of higher education has made affording college on savings, scholarships, and grants difficult to say the least. Student loans were once a tool to be used as a last resort for paying for college. Unfortunately, over the last decade student loans have become the new normal for most graduates.
It’s tough to think that 7 out of 10 college graduates now graduate with student loan debt. The average graduate may not know how to tackle $30,000 in student loan debt, let alone know how to make the transition into the adult world.
I recently stumbled into a new concept that may prove beneficial for readers with student loan debt. The concept is called student loan refinancing.
We all know that you can refinance mortgages and auto loans, these are not new concepts. But student loan refinancing is an emerging industry and option for student loan borrowers. If you are stuck with a lot of student loan debt, or are paying high interest rates, you should consider student loan refinancing as pathway to better defeat your student loan debt.
Refinancing Student Loans
When you refinance a mortgage it is a pretty straightforward process – one loan, one new rate. But when it comes to student loans it can become a little tricky. Most student loan borrowers have more than one student loan. Many students borrow on a yearly or semester basis, and each time a new student loan was created. After graduation, it is common to have 4, 5, 6, or more student loans dangling.
When you refinance your student loans you consolidate all your separate student loans into one new loan. Student loan refinance is only offered by private student loan lenders.
A wave of student loan refinance lenders have entered the market over the last few years. Top student loan refinance lenders include SoFi, LendKey, and U-fi. I found that the guide linked above did a pretty good job summarizing the benefits offered by the top student loan refinance lenders. As you can probably tell, student loan refinance is being pioneered by lenders outside of Wall Street.
These lenders offers many options to consider. Variable and fixed rates are available from most lenders. And, most lenders allow borrowers to pick a new term length from 5 to 25 years. Unlike traditional refinancing, student loan refinancing comes without application, origination, or pre-payment fees.
Pros of Student Loan Refinance
Like other types of refinancing, student loan refinancing carries many benefits for the borrowers. The most obvious benefit of student loan refinancing is that you can refinance to rates as low as 1.90%. 1.90%! You don’t even seen secured loan rates that low.
If you feel trapped with those 8% private student loans, refinancing might help you save a lot. LendEDU, a marketplace for student loan refinancing, claims on their website that their average borrower saves over $10,000.
I stumbled onto LendEDU from an interesting Huffington Post article about student loan refinancing. According to Huffington Post, LendEDU allows borrowers to get quotes from all the top student loan refinance lenders including SoFi, CommonBond, and LendKey. Pretty cool free service if you ask me.
Odds are you won’t be able to refinance to a rate below 2%. It looks like most applications tend to fall into the 3% to 6% range. Even so, these rates are still below even federal U.S. student loan rates.
When you refinance you can also choose a new term length. By choosing a longer term length you can lower your monthly payment. The opposite is true if you choose a short term length. As a rule of thumb, shorter term lengths have lower interest rates in comparison to longer term lengths. And, variable rates are always lower than fixed rates. The advertised 1.90% rate is usually reserved for 5 year, variable rate borrowers.
Cons of Student Loan Refinance
Student loan refinancing isn’t a perfect solution for all 43.3 million student loan borrowers.
To qualify for student loan refinance, you need to be very creditworthy. Refinancing rates are so low because most lenders require applicants to meet tight underwriting standards. You must have good credit, a responsibility payment history, and good income.
If you’ve just graduated, you might need to wait a year before applying for refinancing. Don’t be shocked if you don’t qualify for student loan refinancing the first time around. LendEDU will let you see where you qualify without hurting your credit with a hard credit pull.
Another negative to consider is the fact that you will lose your federal student loan benefits when you refinance. Federal student loans such as Stafford, PLUS, and Perkins loans come stock with borrower protections in case of financial trouble. Federal student loans have income based repayment plans to help borrowers keep their student loan payments manageable.
Moreover, federal student loans are eligible for forgiveness via the Public Service Loan Forgiveness Program. While most people do NOT qualify for forgiveness, individuals with public service jobs should look into this option in more detail. Perhaps a future article in the works 🙂
Options for Canadians
Canadian students are given a 6 month grace period on their loans (every province except Quebec) after they stop attending school full time.
All provinces (except Quebec) also offer a repayment assistance plan for anyone having difficulty making their loan payments. The options may be different for each person but some of the available alternatives include a revised loan payment that is based on family income or not having to make any loan payments until income increases.
While the interest on student loans is deductible for taxes, refinancing the loans (to a private lender) may mean more savings because of the current low interest rates available.
Students living in New Brunswick, Newfoundland, Ontario and Saskatchewan that have both federal and provincial loans will automatically have them consolidated via the Integrated Student Loans program.
Student living in Alberta, B.C., Manitoba, Nova Scotia and P.E.I. are able to get separate (federal and provincial) student loans and they don’t automatically consolidate upon graduating.
Conclusion: At the end of the day, if you have student loan debt you should at least look at refinancing. The potential benefits will outweigh the cons for most student loan borrowers, especially if you have good credit and high interest federal or private student loans. Take 15 minutes this Sunday and fill out LendEDU’s application with your morning coffee.