Loans (US)

Student Loan refinance: how does it work?

Learn how a student Loan refinance works so you can decide if it is suitable or not for you. Keep reading to find out the advantages and disadvantages.

Student Loan refinance: decrease the interest on your current loan

Refinancing your student loan can be a good idea. Read this article to see how it works. Source: Adobe Stock.
Refinancing your student loan can be a good idea. Read this article to see how it works. Source: Adobe Stock.

In general, refinancing your student loan is a way of decreasing the amount of interest you owe and paying on your current loan.

Usually, it is good to think about refinancing your existing student loan. However, it is only suitable if you consider all terms and conditions.

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Also, you must pay attention to your current situation. In addition, if you have a federal student loan, refinancing is not worth it since you would lose forgiveness opportunities and government protection.

On the other hand, refinancing a private student loan might be a good thing in certain situations.

Keep reading to find out in which cases refinancing your loan would be suitable for you!

What is Student Loan refinance?

Imagine that you already have a student loan, no matter if it is private or federal. Basically, refinancing means a lender will pay off your current loan and will give you a new loan with new terms and conditions.

The main point of doing it is to lower rates and monthly payments.

For example, let’s suppose you have a $50,000 private student loan at a 7% interest rate. And you will pay that in a 10-year term.

Therefore, you will be paying approximately more than $570 as a monthly payment. 

However, you find a lender to refinance it at an interest rate of 5%. It would decrease your interest and the monthly payments on your total amount owed.

So, you would save money. Also, sometimes, terms can increase or decrease, depending on your refinancing option.

In summary, you must consider all factors, terms, and conditions before deciding to refinance your student loan.

As mentioned above, in case you have a federal student loan, refinancing wouldn’t be the best idea since you would lose government protection and opportunities like forgiveness. 

On the other hand, refinancing a private loan under certain circumstances would be a reasonable decision.

How does Student Loan refinance work?

Not everyone is eligible for student loan refinancing - see if you are. Source: Freepik.
Not everyone is eligible for student loan refinancing – see if you are. Source: Freepik.

Refinancing your student loan might be worth considering in certain situations. If you could lower the amount of interest you pay or your monthly payments, you should consider refinancing your current loan.

Otherwise, it is risky. Firstly, not everyone can apply for a student loan refinance since it requires a good credit score and a stable income. If you don’t have that, you need a co-signer who has.

Also, let’s suppose you are halfway through paying off your existing loan; it wouldn’t be the best idea to refinance it for a longer term.

Basically, you must find a lender that offers low rates and better terms and conditions than the current ones you hold.

The main point of refinancing a student loan is to lower interest and monthly payments. Furthermore, you can decrease the terms in certain cases.

However, it is recommended that you do vast research in order to find a good lender that actually offers affordable, flexible, and secure terms and conditions.

Second of all, after choosing one, it will buy your current loan, and you will assume a new loan with this lender. 

Moreover, if you have a private student loan, it would be good to check if your current lender wouldn’t offer a refinance option for you. Usually, they do!

As mentioned above, if you have a federal student loan, refinancing it is not a good idea most of the time.

The government offers protection and opportunities like forgiveness that you lose if you refinance your loan.

Now, take a look at the advantages and disadvantages before signing up for student loan refinancing. 

Advantages

  • Possibility of lowering the amount of interest you pay and lowering the monthly payments;
  • Possibility of getting better terms and conditions than the existing ones.

Disadvantages

  • Lose protection and opportunities in case you have a federal student loan;
  • It requires a good credit score and a stable income. Otherwise, you need a co-signer who qualifies for student loan refinancing.  

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What is the difference between student loan refinance and consolidation?

A good credit score allows you to refinance your student loan with better interest rates! Source: Freepik.
A good credit score allows you to refinance your student loan with better interest rates! Source: Freepik.

Refinancing your loan is an action that you take with private lenders. As said before, refinancing your student loan means a lender will buy it, and you will get a new loan with new terms, rates, and conditions.

On the other hand, a student loan consolidation is a federal program that gathers all loans into one by a Direct Consolidation Loan.

In summary, student loan consolidation simplifies the debt payoff process by consolidating all federal student loans into one.

Therefore, the interest rate won’t change.

In addition, through this program, borrowers might be able to qualify for government opportunities.

Recommendation: Mortgage Refinancing – is it worth it?

A student loan refinance is not always a good choice. Sometimes, it is not an option. However, refinancing your loan might be a good idea depending on your situation and the new terms and conditions offered.

In general, you must consider your current interest rates and terms, your creditworthiness, your employment status, and your existing loan conditions.

The same as student loan refinancing, you can also refinance your mortgage. The main point of doing it is basically the same. So, you refinance it to lower interest and monthly payments.

But there are some other factors you may enjoy considering to decide to refinance your mortgage.

For example, refinancing your mortgage could eliminate your mortgage insurance. Also, you may be able to consolidate your high-interest debt.

However, it is recommended that you learn all the advantages and disadvantages before signing up for mortgage refinancing.

Therefore, check out the next post to find out more about it!

Mortgage Refinancing

How to apply for the Mortgage Refinancing

Mortgage Refinancing: is it worth it? Check out how it works and how you can get an amazing offer through Credible Personal Loan Marketplace.

About the author  /  Aline Augusto

My name is Aline Mesquita; I'm a writer here on the blog, where I write about finance in general and other subjects. I have been working with content creation for ten years. Also, I'm post-graduated in Project Management, with expertise in SEO practices. Currently, I am studying finance, market trends, and cryptocurrencies.

Reviewed by  /  Aline Barbosa

Senior Editor

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