What happens when you refinance a student loan
Borrowers in the United States hold more than $1.7 trillion in student loan debt. And that number shows no signs of slowing down. If you’re working to pay off your student loans, refinancing is one path that could lead you to financial security. Here’s what happens when you refinance a student loan.
What is student loan refinancing?
The first step to knowing what happens when you refinance a student loan is being able to answer the most essential question: What is refinancing?
If you’re used to being baffled by money issues, you might be surprised to learn that the answer is actually quite simple. Refinancing is simply the act of taking out a new loan to replace the current one. This is an incredibly common process used by individuals, businesses, and even governments for all kinds of debt.
Although it would be convenient for the refinance to be exactly the same in all cases, unfortunately this is not the case. While there are good advantages to refinancing student loans, even beyond those of other types of debt, there are also disadvantages. To make an informed decision on whether or not refinancing is the right decision for you, you need to have more in-depth knowledge about student loan refinancing.
What happens when you refinance a student loan?
Now that you have an idea of the mechanism behind refinancing, it’s time to examine what actually happens when you do this. It may be a good idea to divide this into expected and unintended results. Generally, your intentions will coincide with more positive outcomes than what is not desired.
The most common intention of a student loan refinance is to lower your interest rate. A lower rate means you’ll potentially pay off a significantly lower amount over the course of your loan. If you care about saving money, getting a lower interest rate through student loan refinancing is definitely a logical decision.
Again, when you refinance student loans, you’re just replacing the old with the new. This new loan can have all sorts of features attached to it. Those who want to become more aggressive or conservative with their loan repayment can change their loan term when refinancing. A short term will increase your monthly payment, but generally give you a lower interest rate and allow you to pay off your debt faster. A longer-term loan will lower your monthly payments, but require you to pay more interest at a higher rate over a longer period. Knowing what is best for you will allow you to choose the optimal student loan to refinance deal.
The whole process of refinancing student loans can be made much easier by working with an organization like Juno. Instead of being a lender, they partner with financial institutions that offer the best student loan refinance deals. You can save a lot of time and money by using Juno’s services, which are free to the consumer.
Is there a downside to refinancing student loans?
Nothing can be the only benefit. Of course, there are things that can happen when you refinance student loans that won’t necessarily work in your favor. The most relevant of these is that student loan refinancing can only be done through a private lender.
This is true, even though the federal government offers Direct Consolidation Loans, these are only compatible with federal student loans and do not actually reduce your net interest rate. To take advantage of a lower rate, which is the main attraction of refinancing in most cases, you will need to obtain a private loan. The thing is, when you do that, you’ll lose some of the inherent benefits of a federal loan, including forbearance and income-driven repayment plans.
Additionally, since all student loan refinances must be done through private loans, this means that the lender will manage your credit before making the refinance offer to you. Those with a low credit score or low income may be required to find a co-signer before they can refinance their student loans.
Although the actual act of refinancing a student loan is quite simple, a lot of other things happen when you do this. Knowing the full range of what happens when you refinance student loans will help you improve your financial situation or avoid a costly mistake.
(Devdiscourse journalists were not involved in the production of this article. The facts and opinions appearing in the article do not reflect the views of Devdiscourse and Devdiscourse claims no responsibility for them.)