Friday, September 2, 2016

Muhammad Akbar

10 Questions to Ask Before Refinancing Your Student Loans

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Refinancing your student loans can be a great strategy to manage your student loan repayment situation and improve your financial health.
Keep in mind, student loan refinancing can be confusing and lead to financial problems down the road if you don’t make the right decisions when applying for refinancing or consolidation.
Let’s jump right into the questions!

1. What will be the new term of the refinanced student loan?

When you refinance your student loans, banks offer varying term options. The “term” is the expected amount of years in which you are expected to repay your loan. Banks typically offer 5, 10, 15, and 20 year repayment terms. The biggest consideration to keep in mind is how much you can afford to pay now, and how much interest you will accrue over the lifetime of repayment. For example, on a 5 year term you will accrue the least amount of interest during repayment, but your monthly payments will be the highest vs. a longer term student loan.

2. Does the new student loan have a variable or fixed interest rate?

Your student loans have either variable or fixed interest rates. By refinancing your student loans, you can convert a variable interest rate to a fixed interest rate loan or vice versa. Fixed interest rates tend to be less risky, whereas variable interest rate loans fluctuate due to economic conditions. You can learn the difference between variable vs. fixed interest rate student loans here.
Due to the 2008 recession, interest rates over the past 4 years have been historically low. If the economy improves, interest rates will most likely rise over time, making variable interest rate student loans less favorable when compared to fixed rate student loans. In the current economy, fixed rate student loans tend to have a higher interest rate, which means you might end up paying more interest over the long term.

3. What are the repayment terms?

When does the repayment start? What will my monthly payments be? How do I pay? What fees can occur if I miss a payment or default on my student loans? Is there a 0.25% interest rate reduction for ACH automatic payment withdrawal?

4. Is there an origination fee?

Some banks charge a student loan origination fee up to 2% of the total amount you are requesting to be refinanced. For example, if you refinance $60,000 in student loans, you will pay a $600 for a 1% origination fee. The origination fee is usually added to the loan amount due and you will not need to pay this amount upfront.

5. Will they combine both federal and private student loans?

Some financial institutions, such as Darien Rowayton Bank and SoFi are now refinancing federal and private loans bundled together. This can ultimately help you get a lower interest rate to save money, but be careful as you lose most alternative and flexible repayment plans associated with the federal government loan program.
You can read more about refinancing your federal loans here: Should you refinance your federal student loans?

6. Do I need a cosigner? Do you offer cosigner release?

If your income or credit score is too low, the bank might require a cosigner to insure your student loans in the case of default. Alternatively, lenders such as LendKey, offer cosigner release, which releases any existing cosigners from your student loans. This can help free up revolving credit for your cosigners and allow them to make other purchases such as a mortgage or auto loan.

7. What are the typical credit score, salary, and debt-to-income requirements?

According to our research, most banks require a ~680 credit score or higher, 45% maximum Debt-to-Income ratio and minimum monthly salary of $2,000, depending on your total debt load. Be sure to ask the credit score requirements before submitting your application.

8. What are the maximum amounts of debt they will refinance?

Banks typically have a maximum amount of debt they will refinance. This amount is varies by bank and education level, such as undergraduate, graduate, and other certificate programs.

9. Do they refinance student loans from my school and/or my degree program?

Ask which schools are eligible for the refinancing product. Some banks don’t lend to student loan borrowers who have attended for-profit private institutions, community colleges, and/or certificate programs.

10. What type of support and customers service does the bank provide?

At the Student Loan Hero office, this is the most important question we ask our banking partners. As student loan borrowers ourselves, we have worked with banks that provide terrible customer service, not to mention banks that are hostile and threatening.
Refinancing your student loans means that you will be working with this bank for the next 5-20 years. Be sure to do your research before refinancing your student loans!

Muhammad Akbar

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