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College is expensive, and many students turn to federal or private student loans to help pay their way. According to a November 2014 report by the Institute for College Access and Success, in 2013, seven in 10 graduating seniors at public and nonprofit colleges had student loans, averaging $28,400.
Generally speaking, there are two types of student loans: federal and private. Private organizations such as banks, universities, credit unions, and state agencies fund private student loans, whereas the federal government funds federal loans.
While borrowers with federal loans may opt to consolidate their multiple loans into one longer-term loan, borrowers with private loans may want to consider refinancing to lower their monthly payments. Eligibility depends on the type of loans the borrower has, as well as his credit score.
What are some reasons borrowers may consider refinancing private student loans?
There are two major motives that that tend to drive borrowers to refinance their private student loans.
What does it mean to refinance a private student loan?
When you refinance a loan, you’re effectively creating a new loan agreement. With it, you may lose certain protections afforded by your current loan terms, such as income-based repayment plans or options for deferment. (While private student lenders are not required to offer these options, many loans still provide loan relief programs to borrowers.)
Additionally, if you’re not careful, you could end up paying more interest in the long run. For example, let’s say your current loan agreement stipulates that you will pay back a $10,000 loan with a 5 percent interest rate over three years. By the time you pay off your loan, you will have paid $789.52 in interest. If you refinance that same loan at a 4 percent interest rate but extend the payment period to seven years, you will pay a total of $1,481 in interest when the term is complete.
Are there eligibility requirements to refinance private student loans?
While lenders allow many types of borrowers to refinance, the best terms (including lower interest rates) are typically given to borrowers with a “very good” or “excellent” credit score. Your credit score is a numeric expression of your creditworthiness. The higher your score, the better your interest rate. A “very good” credit score typically ranges from 725 to 759, whereas 760 to 850 is considered “excellent.”
If your credit score is not up to par, you may want to hold off on refinancing and focus instead on building good credit habits. A strong credit score may help you land a lower interest rate that could save you thousands of dollars in interest payments of the life of your loan. Be sure to pay all of your bills on time, and avoid maxing out your credit card accounts.
You should also consider ordering your credit report at least once a year to assess how your credit behavior is impacting your credit score. Every year, you can request one free copy of your credit report from each of the three credit reporting agencies (CRAs) through AnnualCreditReport.com. If you want to review your credit report on a more regular basis, you can also purchase a credit monitoring product.
Understand your current loan terms
If you’re considering refinancing your student loans, you should first take the time to review your current loan terms. You should know your interest rate, your overall balance, and how long it will currently take you to pay back the loan. Additionally, use an online calculator to determine how much you will pay in interest over the life of the loan. Then, talk to your current lender to find out if you have options for a repayment plan or other protections in case of a financial emergency.
If you have steady employment and a strong credit history, refinancing could save you money. However, be sure you understand all of the information on your current student loan agreement before you start shopping for new loans.
The information contained in this blog post is designed to generally educate and inform visitors to the Equifax Finance Blog. The blog posts do not give, and should not be assumed to provide, personalized tax, investment, real estate, legal, retirement, credit, personal financial, or other professional advice. Before making any financial decision, you should always consult with the appropriate professionals who can explain your options, rights, and legal responsibilities, and advise you on any tax, legal, credit, or business implications that may result from those decisions. The views and opinions expressed by the authors of blog posts are their own views and may not be the views or opinions of Equifax, Inc. and/or its affiliates.
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