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High monthly student loan payments can overwhelm even the best of us, and full repayment sometimes seems impossible. That’s when student loan refinancing comes to the rescue.
Student loan refinancing allows the borrower to group of of their student debt together by using a new loan with a lower interest rate. By using a new loan, the monthly payment will be less and the loan repayment term will be longer.
In this article, we show you how to refinance student loans, and offer a strategy to help you pay off debt and start building wealth years earlier than you thought possible.
Reportedly, 43 million Americans owe more than $1.6 trillion in student loan debt, and 2.8 million of them owe more than $100,000 individually. If you’re one of them but want out, keep on reading.
What Is Student Loan Refinancing?
Simply put, student loan refinancing is when a lender pays off your existing student loans and offers you a new loan on better terms.
There are no expenses to refinance a student loan, and in return, it can save you a lot of money over time by lowering your interest rate.
And because it's a new loan, you may even have a longer repayment period, meaning, your monthly payments is spread out over time.
Why Is Refinancing Your Student Loans A Good Idea?
Wiping out your student loan debt is critical to building wealth because investing should be done early.
The earlier and more often you invest in stocks or real estate, the more money your investments will earn over your lifetime.
Allowing your loans to drag out for an extra 5 or 10 years can massively reduce your earning potential from investments.
Hence the importance of refinancing your student loans.
How Student Loan Interest Works
Making minimum payments on your student loans can keep you buried in debt for decades because of the way interest works.
Student loans are “front-loaded,” which means you pay off the loan’s interest first. The amount you borrowed, the “principal” amount, gets paid off slowly over time.
Moreover, the amount of interest you pay is different in year one than it is in year ten.
For example, if you’re paying $333/month in student loans, here’s what you’re paying for in year one:
- $1700 in interest
- $2300 in principal
By year ten, you’re paying:
- $150 in interest
- $3850 in principal
There’s an advantage to front-loaded student loans – the quicker you pay off your loans, the less money you pay in interest. On the other hand, the longer you take to pay off your loans, the more expensive they become.
Long-term loans put you at a disadvantage because you’re gambling on the idea that you’ll have the ability to make your payments on time every month for the next ten years.
The good news is that paying a little extra on your student loans every month can save you a small fortune and help you climb out of that financial pit much quicker.
Additional payments make a significant difference because any money you pay above and beyond your minimum monthly payments is interest-free.
When you pay more than the minimum due, that extra amount pays off your principal (not interest).
This reduces the total amount due, plus it reduces the amount you pay in interest (since it takes less time to pay it off).
You Can't Escape Student Loan Debt
If you’re like most people, you probably made the decision to take on student loans before you were even a legal adult. At that time, you most likely had no concept of budgeting, banking, or how interest rates work.
Now, the debt is like a weight hanging around your neck, and the only way you can deal with it is by thinking about it as little as possible. Sound familiar?
Sadly, avoiding your mountain of debt will only make it worse. Many people think there are ways out of or around paying off their loans, but that doesn’t usually work out the way you think it could.
“I’ll just file for bankruptcy.”
Dismissing your student loan debt through bankruptcy is a long shot, and it’s rare that people are able to prove the “undue hardship” required to get out of their student loan debt.
“I’ll file for student loan forgiveness.”
Almost no one receives student loan forgiveness through the Federal government. Before the pandemic hit, less than 0.3% of student loan debt was forgiven.
“I’ll get on one of those sliding-fee repayment programs.”
Enrolling in a government repayment program that’s tied to your income is one of the most common ways people end up deeper in debt than when they started.
Because of the way interest works on many student loans, you can end up paying tens of thousands of dollars more than you originally owe.
“I’ll wait until the government forgives everyone’s student loans.”
Don’t hold your breath on this one!
If the U.S. government were to forgive all student loans, it would impact our taxes as well as inflation. No matter how good it sounds, the U.S. ultimately has to protect its economy to remain functional.
So, while loan forgiveness sounds wonderful to people who owe the debt, it’s unlikely that the ”powers that be” will allow it to happen, since it could have a significantly negative impact on our economy.
“I can just put my debt in forbearance.”
While in forbearance, your debt accrues interest that gets added to the balance once you restart making payments. That means you’ll be paying interest on your interest.
By the time you’re back on track, your debt has grown, and you’ve dug yourself into a deeper hole than before, with no guarantee that you won’t get sick or end up unemployed again before your debt is paid off.
How A Student Loan Refinancing Works
Refinancing your student loans in the near future can have a massive impact on your overall debt, credit score, and ability to build wealth. You can refinance loans in one of three ways:
Refinance For The Same Repayment Term
When you refinance for the same repayment term, it significantly reduces the minimum monthly payment required.
If you use this opportunity to make additional payments (above the minimum), you can save thousands of dollars and pay off your student loan debt years earlier.
This is the student loan refinancing option we’d recommend. It allows you to reduce the amount of your loan and pay it off years earlier.
However, if you have a bad month or become unemployed, you can stick to the minimum payment required without incurring outrageous additional debt.
You can check Credible to find top interest rates from lenders that charge no hidden fees.
Refinance For A Shorter Repayment Term
When you refinance for a shorter repayment term, you can save a significant amount of money over the term of your loan, as long as you stick to your repayment plan and pay on time every month for the entire term of your loan.
For example, borrowers who used Credible to refinance student loans with shorter repayment terms increased their monthly payments by an average of $135 and reduced the term of their loans by 50 payments.
This strategy saved borrowers an average of $17,000.
Refinance For A Longer Repayment Term
When you refinance with longer repayment terms, you can drop your payments down to a much lower minimum monthly payment.
While this refinancing strategy means you’ll pay about $209 less per month, it also requires you to make an additional 62 months (on average) of payments.
*The above figures are based on an average student loan debt of $52,001. Savings, rates, and terms vary according to your loan balance and lender.
Student Loan Refinancing – How To Do It (The Right Way)
Here’s a step-by-step explanation of how to refinance student loans. Thankfully, the Internet today makes everything so much easier.
Step 1. Research Lenders
To find the lowest interest rates on a student loan refinancing, start by researching and comparing lenders.
When choosing a lender to refinance your student loans, look for the following:
- Find the lowest interest rates.
- Select a company that’s willing to refinance based on the term length you need.
- Refinance with a company that offers low or no-fee refinancing.
- Avoid lenders that penalize you for early payments!
You can quickly compare lenders’ rates, terms, and fees by using an online comparison service like Credible that provides you with personalized loan offers from a variety of lenders.
They will provide you with a list of competitive loan rates from several banks, and it only takes a few moments.
Filling out an application at Credible won't affect your credit score, and they don’t give your phone or email information away, so you never get hounded by hungry salespeople.
Step 2. Apply For The Loan
If you’re using Credible, you can select a lender and fill out a full loan application online immediately. Now, remember that this application requires a full credit check so it can impact your credit score.
Once you submit the student loan refinancing application, the lender will verify your documents, analyze your debt-to-income ratio, and review the details of your application and credit history.
Step 3. Receive An Offer
Once the lender reviews all your information, they decide whether to approve your loan and what interest rate to offer you.
Depending on your credit, debt, and income, your interest rate could be different than the lowest rates they offer. If you applied online, you’ll receive the offer on your email address.
Step 4. Make The Decision To Accept Or Not
You’re able to review the loan offer and decide whether it’s best for you before you sign.
Once you get an offer that you like with a lender you trust, you’re ready to sign your loan documents.
Step 5. Sign The Loan Documents
Once you accept a loan offer, you’ll sign the documents, and – congratulations! – that should be the last of your paperwork!
Step 6. Get The Funds
After you turn in the signed loan agreement, it should only take about two days to receive your funds.
Continue Payments On Existing Loans
Even though you’ve received your funds, it’s essential that you continue making payments on your existing loans until you get confirmation that you’re no longer obligated.
If you skip loan payments on your existing loans, those late payments can affect your credit score.
Just make sure your original lender received and processed your payment, and that they released you from all payment obligations — before you stop making payments on your existing loan.
Student Loan Refinancing Tips – Final Thoughts
Now that you know how to refinance student loans it’s up to you to for the lowest interest rates and borrow only the amount you need to pay off your student loans.
When you refinance your student loans the right way, you can pay off your student loans quicker and get busy enjoying the lifestyle you work so hard for!