Refinancing your student loans can be a great way to get a better deal on your debt, lower your payments and reduce the number of payments you have to make each month. But it can also represent a significant risk if not done wisely. Refinancing student loans, particularly federal ones, strips away protections such as the ability to participate in Income Based Repayment and Pay As You Earn and the balance discharge these two types of plans offer. Refinancing is not something to take lightly and needs to be done with eyes wide open.
Here are seven factors that must be considered when comparing refinance offers:
#1 Does the lender charge an origination fee?
Federal loans charge an origination fee of a little more than 1% so taking a refinance offer with an origination fee further increases your debt needlessly. Some private refinance lenders won’t charge this fee at all– others may charge a similar 1-2% fee. This adds on to the principal that you’re borrowing. For a $50,000 refi, a 2% origination fee tacks on $1,000. No origination fee is best.
#2 Does the lender offer fixed or variable interest rates?
Fixed rates are usually higher than variable but won’t fluctuate over the life of the loan. Variable rates are tied to a key index like LIBOR and may fluctuate once per year, twice or quarterly depending on your agreement. Variable rates can add an element of risk, but if you can get a lower starting variable rate and accelerate repayment while rates stay low, this can save you big bucks.
#3 Does the lender punish for prepayment and how long is the term?
Your loan term is the length of time the loan will last. Some refinance offers may be as short as five years, and some as long as 10 or 15 years. A longer term will be tougher to get as it represents more risk of non-payment. You also want a loan that you can pay back faster if you want without incurring a penalty for early payoff. You want a loan you can back early if you’re able.
#4 Does the lender allow a mix of private and federal loans in the refi?
If you have both federal and private loans and want to refinance them all together, you have to find a lender that allows this. You should also be aware of what you lose when you refinance federal loans into a private loan. In addition to not being allowed to participate in IBR, you won’t be able to use Public Service Loan Forgiveness (PSLF) or other federal protections.
#5 Does the lender demand a cosigner and offer cosigner release?
Depending on your credit, you may be asked to apply with a cosigner. If your credit is below 640, you likely won’t be able to get a refinance loan on your own. Even if you can get a loan on your own, applying with a cosigner with excellent credit may get you a better deal. Look for a loan with cosigner release– this means after a number of on-time payments, the loan will be all yours.
#6 Does the lender’s deal offer more reward than risk?
You need to do the math on what your current loans will cost you versus the refinance offer. This student loan calculator can be used to crunch the numbers on each loan then add them all up to see what the total cost of debt is. Then run the calculator on your refi loan offer and see how the numbers stack up. Clearly understand the math to make sure it’s a good deal.
#7 Does the lender have a good reputation?
Do some digging on the lender. Check them out on the Better Business Bureau (BBB) website, Yelp and on Google in general to see what kind of feedback other borrowers are offering and what their experiences are to give you a glimpse of what you can expect before you tie yourself to a particular lender for the next five years or even a decade or more.
You’ll want to compare two or three lenders’ offers against your current situation before making a decision. If you can’t get a preferable deal, now may not be the time to refinance. If you are asked for a cosigner, but can’t come up with one, take the time to work on improving your credit rating and then reapply again in a few months.
Whether you’ve got a few loans, a consolidation or a refinance, Tuition.io’s free student loan tool is your best resource to track, control and optimize your debt. Be sure to read our blog often for tips on paying for college, dealing with student loans and every day money advice.