Student loans have been an effective way of meeting the educational expenditures over decades in the US economy. A student loan is specifically designed for students to pay for their education expenses and carry substantially lower interest rates and suitable repayment schedules to help students pay them back when they are capable of. Student loans are different from scholarships and grants and are supposed to be paid off.
This sometimes acts as a barrier and discouragement for the borrower. However, there are suitable arrangements made for the repayment of such loans. Among the various options available with the borrower is loan forgiveness for people who wish to choose certain career options, discharge of student loan for students who are incapable of repaying the loan, suitable repayment plans such as income- based repayment plan, income contingent repayment plan, pay as you earn repayment plan et cetera. Other than these, a student can apply for consolidation of multiple student loans to improve his/ her ability to repay or getthe loan refinanced.
Refinancing of student loan
Refinancing a student loan means entering into an agreement with a lender such that the lender pays off the current loan of the student and a new loan is taken out, usually at a lower interest rate and hence a lower monthly debt payment. Refinancing is different from consolidation because consolidation is merely combining the current debts, whereas refinancing involves taking out a new loan.
For example, if a student gets his$100,000 loan carrying a 6.8% rate of interest refinanced in the beginning of the ten year standard repayment plan, at suppose 5.5%, the student would be able to earn a benefit of $8000 interest amount over the life of the loan. The new lower loan interest rate is based on the borrower’s credit history. It is therefore advisable to have a good credit profile to avail the best terms of a refinanced loan.
Factors to be considered before refinancing
Some key factors to be take care or considered are:
- The borrower should be crystal clear about the term of the refinanced loan. Loan term varies from 5 to 20 years. Lower term of loan implies lower aggregate interest amount, however a larger payment is to be made monthly compared to a longer loan term. The borrower should analyse his future financial position and decide accordingly.
- Repayment terms and conditions should be known to the borrower before entering into a refinances loan agreement. The borrower should also be aware of the amount of monthly loan payment, mode of repayment, beginning stage of the repayment and charges due in case of late payment or default.
- Sometimes, an origination fee is charged by the borrower for refinancing a loan. This fee can be up to 2% of the total amount of refinanced loan. This fee is added to the loan repayment amount.
- Refinancing offers the option of releasing the co- signer once the loan is refinanced. On the other hand, sometimes, due to very poor credit history of the borrower, some banks might demand the need of a co- signer for the loan. This requirement should be known to the borrower before refinancing.
- A borrower should know about the maximum limit of refinancing that the bank offers. This limit varies from bank to bank and depends on various factors such as level of education, such as under graduation or graduation.
- Customer support services can better or worsen your loan repayment experience. Therefore it becomes important to research about the consumer support system of the bank before applying for refinancing.
Advantages of refinancing a student loan
Refinancing can have some advantages, such as:
Reduced interest rate: Given that an individual is in good position to negotiate a lower interest rate for the refinanced loan, refinancing can prove to be quite money- saving. A lower interest rate implies lower interest payment, which can be really helpful for an individual to get rid of the debt faster without default.
Reduced monthly payment: The biggest benefit that debt refinancing provides is lower monthly payment that increases cash savings and helps the borrower to budget his expenditures more efficiently. Also, the standard repayment plan of a student loan is ten years, whereas, a refinanced loan can be paid in a time period ranging from 5 to 20 years. Hence, refinancing reduces monthly payment largely.
Flexibility in repayment plans: Paying off a low- interest loan becomes a lot easier if supported by flexible plans of repayment. A suitable repayment plan can be an effective means to come out debt. The magnitude of this advantage is somewhat diminished in case of federal student loans because the US Department of Education itself offers a number of repayment plans. However, students with private loans are not in a position of having tailor made repayment plans, which is why refinancing becomes all the more effective.
Release of Co-signer: Refinancing can, in most cases, release the co- signer attached to a student loan. This can provide a mental relief to the borrower with no stress hampering personal or professional relationships.
Change of bank: Refinancing a student loan can mean changing the bank that is managing one’s loan. Sometimes, borrowers are not very happy with the customer support services of a particular bank. Such a change would then act as a breather to the borrower and add to mutual relation of the borrower and the bank.
Undoubtedly, refinancing a student loan offers multiple benefits and hence is an attractive option for people willing to get their loans repaid with ease. However, to avail these advantages, one has to fully aware of the terms and conditions that this option contains. It is important to understand that the refinanced loan is also a loan only that is waiting to be repaid.
Refinancing is just a means to make repayment easier. It is not a way to get rid of student loans. What is really required to pay off a student loan is hard work and self motivation to keep up with the repayments and keep away from defaults.