How Does Refinancing Federal Student Loans Work?

How Does Refinancing Federal Student Loans Work?

Federal student loans are financing award for students that are heading to college. The Federal Student Aid Office reviews nearly 20 million financial aid applications a year. Just like any other loan, there are certain conditions in which student must follow upon application and during the grant. The U.S. Department of Education’s federal student loan program is the William D. Ford Federal Direct Loan (Direct Loan) Program. Under this program, the U.S. Department of Education is your lender. Private student loans are also available, but experts advise that students should exhaust all avenues for federal aid first. Private student loans have some conditions and terms — very good credit or a co-signer needed – that make them difficult. The interest rates usually are higher than those on federal loans and there are some involved that aren’t part of federal loans.
The federal student loan borrowers have certain rights such as to have access to a variety of repayment plans — including an income-driven plan, which bases your monthly payments on your discretionary income. The income-driven plan that makes consistent payments for 20 to 25 years may be eligible for student loan forgiveness. Federal student loan borrowers also have access to deferment and forbearance options. These options can put student loan payments on pause if you are unable to make your monthly payments.

Refinancing with Federal Government

Federal student loans have many built-in consumer protections such as death and disability discharge, generous deferment and forbearance options, and the right to cure a default. These programs may not be embodied in the contract, however, they are provided by federal law which makes them incredibly strong. These perks can come in handy if you’re working in a low-paying field or if you are hit with hard times. As a consequence of refinancing, federal student loan borrowers will give up benefits offered under the federal loan.

Congress has already set the interest rate for federal student loans, and these rates are fixed by law. However, one of the biggest advantages of keeping your student loans with the federal government is repayment-plan flexibility. It also offers loan-forgiveness options for public servants that are also worth considering.

Refinancing Into A Private Loan

When borrower chose to refinance federal loans into a private loan, it is considered a one-way street out of the federal loan system. In other words, there's no way to re-convert a private loan back into a federal loan. When you are working with a private company, you are on their playing field and dealing with their rules. If the borrower is qualified and confident to make payments each month, privately refinancing your loans might be strongly be considered, potentially saving thousands of dollars in interest through the life of your loan.
When refinancing has been lingering into your head, you may consider the following:

1. The goal. There some reasons to refinance student loan: locking into a lower interest rate, reduce monthly payments, or get rid of debt faster.

2. The interest rates. For the past 10 years, interest rates on federal student loans have ranged from 3.40% to 8.50%, depending on the type of loan and the rates offered at the time of origination. Private student loan rates have an even wider range, from about 4% to about 15%. Refinance your loans is to replace the existing student loans with a new one. Thus, could be a chance to shop for a lower interest rate and get a better deal.
3. The student loan payoff amounts. The payment you’d need to make to pay off your student loans in full and this includes the interest which will pose to be higher. Refinancing student loans can change your loan terms and monthly costs. If you’re considering refinancing student loans, you’ll want to make sure your new payments will be manageable.
4. Payment capability for each month. The student repayment period must depend on your needs and unique circumstances. The longer loan term will result in lower monthly payments, considering that you have a low income, high living costs, a high student loan payoff amount, or a combination of these. For a shorter repayment term, you can get out of debt faster and often comes with a lower student loan rate, helping you get out of debt while paying less.

If you’re already making extra payments, that’s a good sign you could afford to switch to a shorter repayment period to save even more.
5. Good credit. Having a good credit to refinance student loans will be a core factor that lenders will consider when deciding whether to approve or deny your student loan refinance application. A good-to-excellent credit score is required by most lenders, with minimum score requirements typically set at 650 to 680. Most lenders also tie refinancing rates to credit scores, with the lowest rates extended to borrowers with excellent credit.
7. Meet lender’s requirements. Meeting the lenders’ income requirements or steady income will allow you to afford monthly payments and repay your student loans. Income isn’t the only factor that lenders look at but also in how much you owe relative to your pay. This is measured with a debt-to-income (DTI) ratio that finds what percentage of your monthly income goes toward minimum payments on existing debt.
9. Lender’s flexible repayment options. It is wiser to consider refinancing with lenders that offer borrower protections, such as deferment and forbearance. Remember, refinancing student loans means you’ll lose access to federal repayment plans. You need to check the policy which will allow you to adjust your payments if you’ve hit a rough financial patch. You should also ask about their policies and willingness to work with borrowers who are struggling to repay.