Refinancing your student loans is a great way of ensuring you have a debt free future. When taking out a student loan, it is required that prospective borrowers sign a promissory note. This serves as a form of contractual agreement between the individual collecting the loan and the party giving out the loan. This is basically an agreement to pay off the amount collected together with an interest. It also includes other forms of agreements between both parties. A lot of students sign this agreement without putting sufficient thought into it. Borrowing the money is often received with more optimism that repaying the loan. Students, therefore, look for ways to adjust the terms of agreement. This is mostly because the interest rate increases the actual amount owed. This then leads to the issue of refinancing loans. This refinancing is usually at a lower rate of interest. However, it is also possible to go into this blindly. We will be taking a look at some of the things to know about refinancing student loans.
Things to know about refinancing student loans
- Consolidating and refinancing your student loans are two different things: A lot of students who borrow funds for college often mistake consolidation for refinancing. While consolidating your student loans would also lower your interest rate, they are not the same thing. Both options are largely similar because they replace your former loan with a new loan on new terms. However, studies show that consolidating your loans would not reduce your interest rate. Consolidating your loan has its benefits, such as choosing the services you would prefer to work with. It also gives you the option of additional repayment on loans, but it will not still give you lower interest rates.
- Refinancing your loan changes the terms of your loan: When you refinance your student loans, it changes the terms of the loan you collected. It may decrease the interest rate on your loan, but this depends upon whether you have a good credit score or not. If you have a cosigner, it would also help to reduce your loan’s interest rate. Refinancing basically puts you on a new loan structure, with new terms and new interest rates. A downside of this is that your interest rate could also increase.
- Student loans may also come with federal protections: One of the benefits of a student loan is the fact that it comes with a number of federal protections just in case you are finding it hard to keep up with payments. There are some repayment plans that can entirely pause your loan or decrease the amount you have to pay. This, coupled with refinancing your student loans can make it more bearable when dealing with repaying your student loans.
Putting all of these things into consideration would help you make the right decisions when it comes to refinancing your student loans. Refinancing your loans can greatly reduce the amount you have to pay back to the financing party, you just need to go about it wisely.