Generally, the sooner you refinance your student loans, the better. When you refinance, a lender pays off existing loans with a new one at a lower interest rate. This will save you money in the long run and from the first payment.
When refinancing student loans, it's up to you to find a rate that will make a difference in your life. A private student loan of $30,000 with an interest rate of 8%, for example, will give you a monthly payment of $364 for ten years. Refinancing a ten-year loan with a 5% interest rate will save you a total of $5,494 and $46 per month, enough to cover up for a utility, cable, or phone bill.
When not to refinance student loans
In general, you cannot or should not refinance if:
Chasing student loan forgiveness: The refinancing of federal loans makes them ineligible for federal loan programs, including the forgiveness of public service loans and the forgiveness of teacher loans.
You have federal loans and could see a dip in your income: If your job has been or may have been affected by the coronavirus pandemic, or if there is a chance for a career change, do not refinance federal student loans. You will lose federal student loan exemption options, as well as government programs such as income-tested payments.
You recently declared bankruptcy: It is not impossible to refinance student loans if you have declared bankruptcy, but it is more difficult. Many creditors require a period of four to ten years after declaring bankruptcy.
You recently paid off student debt: A default of the past is a red signal for creditors. If the default is removed from your credit report, which typically lasts for seven years, you may be eligible as long as you meet credit, income, and other underwriting criteria.
You will take a longer time to pay off your loans: Refinancing with a lower monthly payment can mean a longer loan period and more interest payments. Suppose you are five years into a ten-year loan, and you switch to a new ten-year loan. You will pay more interest in general because you are paying off the loans for a total of 15 years instead of 10 years.
When to refinance student loans
Not everyone can apply for a student loan refinance. Generally speaking, you need a college degree, good credit, and a good income to comfortably face your expenses and debts. If you meet these conditions, consider refinancing under these circumstances:
The rate environment is strong: Fixed and variable refinancing rates for private loans can change based on economic factors, such as increasing or decreasing the Federal Reserve rate. When rates go down, you may want to take advantage of the situation by refinancing.
The savings will make a difference: You don't have to wait until you have the perfect loan to refinance, as long as you can get a better rate than you currently have. See if the lender offers student loan refinancing to increase your savings.
You have high variable-rate student loans: Payments with an adjustable-rate loan can be difficult to predict, and even low-rate loans can be more expensive to pay. Before the loans rise, consider refinancing to lock in a fixed rate.
You have private student loans: You have virtually nothing to lose by refinancing private student loans, as these loans do not qualify for federal loan programs, such as income-based payment and public service loan forgiveness.
Your finances have improved: If refinancing does not make sense when you graduate, think about it when you have a stronger financial foundation. And if you've already refinanced but just paid off your credit card debt or got a raise, for example, you can now get a better rate; you can refinance as many times as you want.
FOR HELP WITH FILING YOUR TAXES, CONTACT DANIEL P VIGILANTE CPA & PROFIT CONSULTANTS BY CLICKING THE BLUE TAB ON THIS PAGE.
THANKS FOR VISITING.
Daniel P Vigilante CPA and Profit Consultants