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You’re not alone if you use student loans to help pay for your college tuition. The average student borrows more than $30,000 for a bachelor’s degree, which is much higher for those pursuing a master’s or doctorate.
However, the terms of these loans may confuse some people, and many graduates have trouble keeping up with high monthly payments with their entry-level jobs.
One way to reduce your monthly payments and possibly lower your interest rate is to refinance your student loans. Do you have multiple loans? Refinancing can help streamline them into one payment. This can help you ease the financial burden and pay down that debt faster.
We’ve broken down the process into four easy steps to refinance your student loan.
1. Crunch the Numbers—Is refinancing right for you?
Before you make any changes to your student loans, ensure you have all the information you need to make the best choice for your situation. It may seem enticing to consolidate all your payments into one that’s more manageable. But you must look into all your options before committing to refinancing.
One thing to remember is that lowering your monthly payment will often increase the life of your loan. This means the total you pay over time will be much higher if you continue making those minimum payments. So, even with a lower interest rate, you could pay much more in interest than you would if you could pay down the loan more quickly.
You can refinance either private or federal loans. However, if you have federal loans, you should check to see if you qualify for government programs to help you lower your payments or even forgive the loans entirely.
You could look into the Public Service Loan Forgiveness program and income-driven repayment plans. If you refinance your federal loans with a private lender, you won’t be able to qualify for these programs.
2. Compare Different Lenders and Their Refinancing Options
Many lenders offer student loan refinancing, but how will you decide which one to use?
First things first, do your research. Look up consumer reviews for all the lenders you’re considering. You will be dealing with this company for many years, so focus on well-established lenders that provide reliable and responsive customer service and transparent policies and procedures.
After narrowing it down to the best four or five options, compare each based on the refinancing options they can provide. At this point, you’ll need to give them basic information about your current loans, payment schedule, and your income. Each lender will send you a few refinancing options based on your financial situation.
3. Choose Your Lender and Payment Plan
Once you receive offers from different lenders, it’s time to read the fine print. You might be tempted to choose the one with the lowest monthly payment, but look closely at all the loan terms. These include:
Interest rate
Check to see if the offer includes a variable or fixed interest rate. A variable rate means that the interest may fluctuate every year, so be prepared if the rate starts very low—it may grow much higher suddenly, which can result in higher payments and lengthening the life of the loan.
Monthly payments
Make sure you understand how the monthly payments work. Some lenders will offer a graduated payment plan, meaning your payments will be low for the first few years and gradually grow over time. This can be a good option if you expect to earn a higher salary soon. Otherwise, you may prefer your monthly payment to remain the same for the entire life of the loan.
Length of the loan
If you have a goal for when you want to finally pay off your loan, pay attention to the end date or how long it will take you to reach that final payment. The lender might offer terms from 10 to 30 years. You can always reduce that timeline by making extra payments whenever you can.
4. Gather Your Documents and Submit the Application
Now that you’ve chosen a lender and a plan you’re satisfied with to refinance your loan, you can make it official. Submit all the required documents with your loan application, such as the name and address of your current lender (or lenders), your social security number, and recent pay stubs or other proof of income. If you have one, you must also provide your cosigner’s information.
Your new lender might take a few weeks to a few months to process your application. To keep your original loans in good standing and avoid any late payment penalties, you should continue to make regular payments as usual until you get notice from your new lender with your new payment schedule.
Empower yourself financially by considering the option of refinancing your student loan. You can actively manage your debt and work towards financial independence through these four straightforward steps.