To refinance a loan means the process of replacing an existing loan, or loans, with a new single loan under different, more preferable terms. For your student debt, this involves gathering your current loans, whether federal or private and then replacing them with a new single loan. This new loan will usually offer a better interest rate and payment terms more suited to your current situation.
As an example, a recently graduated student may have a debt package that can include a mix of private student loans and federal student loans. Both loans come with different interest rates, different terms, and can even come from different companies. By swapping out these loans for a single loan with only one company, it becomes much easier to pay off.
Refinancing is also a way of removing cosigners from a loan. A borrower would consider refinancing when they find themselves on more secure financial grounds. This reason can eliminate the need for another person to share the responsibility of debt.
Usually, the borrower has a better credit score than when they took out the initial loan. It is for this reason that refinanced loans typically come with better interest rates.
Why Should I Refinance My Loan?
When the federal government issues loans to students, they do not check credit scores. Instead, they issue loans with the same interest rate, no matter the financial background of the borrower. A Federal loan is excellent for new students starting education with a low credit score. The fresh student may not be able to secure a loan from a private loan issuer, so the government offers a helping hand.
As time passes, a borrower can change their financial situation. A better job and a higher credit score should secure the student a better interest rate. The government, however, will not refinance the federal loan at a better interest rate. They will not refinance, even if the market average interest rate has decreased. In the long run, this leaves graduates paying more than they should. If you are in this situation, then refinancing with a private loan issuer is an excellent decision. In the long run, refinancing can lead to saving money that you would have otherwise thrown away.
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Saving Money
Saving money is the main reason for refinancing. Striking a good deal with a low-interest rate, you can save quite a lot. To put it into numbers, say you have outstanding loans of $60,000 with an average interest rate of 6.50%. You then refinance your student loans into one single loan with a 5.00% interest rate. After ten years of repayment, you could save just over $5,000 on interest. That money could go toward a down payment on a house, a new car, or a nice vacation. If you do want to put those savings into a holiday, then check out some last-minute travel deals.
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Are There Other Reasons for Refinancing?
Saving money doesn’t have to be the only motivator for refinancing a loan. There are several other reasons why refinancing your loan is a good idea:
A Better Interest Rate
When you refinance student loan debt, you will receive a new interest rate. This new rate is likely to be lower than your current one. At least it should be. A lower interest rate will mean that you need to pay back less money. This new rate can save you money, which leads to the next point.
Reducing the Number of Monthly Payments
Unfortunately, your income situation may change for the worse; that is life. This change in your financial situation can become a struggle to keep up with the monthly loan payments. You can try other repayment options. For instance, you can opt to refinance student loans for a longer repayment term. With a longer repayment term, your monthly payments will be less. The downside to this is you will be paying higher interest, but if it means being able to keep up with your payments, then refinancing may be worth it.
Paying Off the Loan Quicker
As the opposite of the above, you may find yourself in a more favorable financial situation then you were when you took out the loan. Refinancing your loan on a shorter repayment term can mean higher payments per month but less overall interest. If you can afford to do this, then you should — fewer loans to pay means less stress for you.
One Monthly Payment Over Multiple
As touched on above, it is much simpler to pay one loan to one supplier. Doing this is much simpler than making numerous payments to various loan issuers. Refinancing your student loan debt can do just that. One loan is much simpler to remember: one payment, one interest rate, and one supplier.
When is the Best Time to Refinance Student Loans?
The sooner you refinance student loans, the better. From the very first payment on your refinanced loan, you can save money. The key to refinancing is getting a new interest rate that will make a difference in your life. You don’t need to see a significant difference in your first refinance, but any savings are better than none. You can refinance student loans as many times as you like, but it’s best to ensure it makes sense.
Federal student loans tend to offer reasonably low rates, so it is not possible to go from one federal loan to another. This means you will have to go to a private student loan lender and lose your federal benefits. If you go from one private lender to another, then you have nothing to lose.
If you are with a private issuer and hold a variable interest rate loan, then now might be a good time to refinance and lock in a fixed rate. Interest rates are expected to rise throughout 2020.
Why You Shouldn’t Refinance Right Now
Refinancing may not be an option while you are still studying. A better time for refinancing would be once you have graduated and have a secure financial footing along with a better credit score. Being able to pay more while holding a better credit score will secure you better interest rates than what you could achieve in school. If your current interest rate is 6% or more and you have over $10,000 in student loans, then it makes sense to consider refinancing.
What Makes the Right Candidate for Refinancing?
The best candidates for refinancing to better loan terms would have the following qualities:
A Credit Score of 650 or Higher
Examine your credit report for any mistakes that may negatively affect your score. A score of 650 is usually enough to pass the application, but 780 or higher is needed to get the best interest rates.
Current Employment or a Job Offer in Writing
The next point below explains further, but a refinance company needs to know you can pay off your loan. For this reason, some companies demand you to have current employment. However, this is not the case for all companies, and some will refinance your loan while you are still in school.
Steady, Recurring Monthly Income
Some refinancing companies have a minimum monthly or yearly income requirement. Purefy, for example, requires an annual salary of $42,000 to be eligible for their refinance plan.
A Low Debt-to-Income Ratio
To calculate your DTI percentage, you add up all your debt (rent, bills, and student loans). You then divide that by your income before taxes. This calculation will then give you your DTI. A DTI should never be above 36%. If you need additional help with debt management, then check out this article.
No Default Record on Student Loans
Defaulting on a loan can seriously harm your credit score, for the negative, for several years. Defaulting usually happens after a lack of payments for 270 days. A hit to your credit score is not all you should expect and is only a minor consequence when compared to other penalties for defaulting.
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That Mostly Sounds Like Me
If you meet these criteria, then refinancing your loan could be a great option. The above are general rules that each lender expects of a good borrower.
If you do not have an excellent credit score (check out some credit cards that can help with that) or reliable income, then you may feel like you don’t have a lot of options. That is precisely not the case as it is possible to use a cosigner to secure a better interest rate in comparison with the one you would receive on your own.
A cosigner would be a person (family or friend, for example) who meets the above requirements. This person would then sign the new loan agreement with you. Doing this does make the cosigner responsible for the account. Some lenders will waive that responsibility once you meet specific loan terms. Usually, a certain amount of on-time payments is required. For example, Citizens Bank will release a cosigner after 36 consecutive, on-time payments. This process is called a cosigner release.
To maximize your chances of securing the best deal when refinancing, you should apply to multiple offers from multiple lenders. Unlike applying for a credit card, the credit bureaus consider multiple applications as one hard credit pull. For you, this means the effect on your credit score is not as bad as it would be with other types of credit affecting products. Some lenders do not even report your application, meaning no effect on your score.
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How Do I Apply for the Refinancing of a Loan?
The best way to refinance your loan is to apply online. It’s also possible to do it in the branch of a bank or on the phone with particular lenders. There are multiple lenders online who provide low rates and an easy application process. Most of these lenders will allow you to check your offered interest rate without any effect on your credit score.
Once you have your new interest rate, you should compare it against your current student loan rate. Some online calculators can help you work out your potential savings.
When you have found agreeable loan terms for your new loan, it is time to apply. Applying can be done online and can take between 10 and 15 minutes. You will need to submit certain documents such as a driver’s license, recent pay stubs, and your academic transcript.
What Should I Do if I Get Rejected for Refinancing?
You may feel that you meet all the criteria for refinancing. Even if you have a favorable credit score, you can still suffer rejection for something you might have missed. As stated above, employment status, debt-to-income ratio, and income will be taken into consideration when a lender is making their decision. If you don’t get initially accepted by your choice of the issuer, there are multiple other offers available, some with lower requirements.
If you still wish to proceed with your choice, you can apply again. You shouldn’t apply multiple times, though, if the rejection reason was minor, then a second attempt won’t hurt. Take the time to work on the basis you were denied the first time and check your desired loan’s criteria carefully. Also, you can use a cosigner who has a better credit rating than you. Doing this will make you eligible for offers that you usually wouldn’t be. If you find that you are not suitable for refinancing, then you can consider loan consolidation or other alternatives.
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Are There Negatives to Refinancing?
Refinancing a student loan may now sound like a great idea. It generally is, but you need to consider some downsides:
Loss of Benefits
Refinancing a federal student loan into a private student loan will mean losing out on some benefits. Federal student loans come with multiple benefits you won’t receive with a private student loan. Income-driven payment plans, student loan forgiveness options, forbearance, and deferral are some of these benefits.
Prepayment Penalty
Your reason for refinancing your loan may be to pay off your loan quicker. If this is your motivation, then be sure to check there is no prepayment penalty fee. Being penalized for being responsible is not fair, but it is down to you to review the terms of your loan. The list below contains some picks that do not charge this fee.
Variable Interest Rate Loan
Your newly refinanced loan may be a variable interest rate loan, whereas your previous loan came with a fixed interest rate. A variable interest rate means that, while the initial interest rate is low, there is a chance for that interest rate to increase. You may, in the end, find yourself with a higher interest rate than your initial loan. The fact that the loan is variable can be a plus, though. You may accept the loan at an average interest rate, but that variable rate can then drop. A fixed loan rate means you are paying the interest upon which you have agreed, no matter the average.
Origination Fee
A student loan origination fee is the cost of taking out a loan. This amount is usually included in the total loan amount and adds unexpected expenses. An origination fee can apply when refinancing a loan, as well. If you hold a federal loan, then you have paid this fee. All federal loans include an origination fee. Not all private student loan issuers charge this fee, as the list below explores.
You Don’t Qualify for a Better Deal
Refinancing makes life more comfortable, but it is not easy to be eligible. There are criteria to be met before you can refinance your loans. Your income may not be enough to be able to pay off the higher payments. You may not even be employed. An insufficient credit score may not secure a better deal than the one you already have. Your current debt-to-income ratio may make you unappealing to lenders. Refinancing can help you financially, but you should be prepared for rejection if you don’t meet the requirements.
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What is Loan Consolidation?
While researching your options for refinancing your loan, you will come across loan consolidation. Student loan consolidation is similar to refinancing a loan except that you take out a new loan. However, this new loan offered at a better interest rate is just all of your outstanding loans rolled into one. When you consolidate federal student loans, you get the average interest rate on your existing loans. This process is called a direct consolidation loan.
That standard loan repayment term on a consolidated loan is ten years. You can go for an income-driven repayment program and have this increased to 20 or 25 years. It is explored further below, but consolidating your loan means you get to keep the benefits that come with a federal loan.
You can consolidate privately issued loans, but you cannot do this through government programs.
To summarize, consolidation is a way to organize your loans better. Refinancing your loan is done to save money. Whether refinancing your loan versus consolidating your loan will depend on your situation. If you have the income and credit score, then refinancing is usually the better option. The consolidation of your loan will put all your debt into one package. Doing this may increase the term of the loan, leaving you with more interest to pay in the long run.
Parent Plus
Another option you may come across in your search for the best refinance option is the direct PLUS federal student loan program. More specifically, this is the Parent PLUS loan. A loan like this is for the parent or guardian of the undergraduate. The aim is the same as a standard student loan—to help pay for education.
It is the parents’ responsibility to pay back the loan payments. If they fail to do so, then the default consequences fall to them. The Parent PLUS loan is a government program. For this reason, government benefits can help when the financial burden becomes too great to handle.
Listed below are some of the best loan refinance issuers. On this list are some of the private banks and financial institutions that will refinance a Parent Plus loan. They can also refinance the loan into the student’s name. Doing this passes on fiscal responsibility and can be of use when the student becomes more financially stable. Not every loan refinance company will work with this type of loan as it is not strictly a student loan. If you hold a Parent Plus loan, then you should seriously consider refinancing. The currently issued Parent Plus loan comes with an interest rate of 7.08%.
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Where Should I Go to Refinance My Loan?
Multiple lenders can offer refinancing of a loan; some can both refinance and consolidate loans. Everyone’s needs are different: some banks and financial institutions provide more benefits than others. Some great places to start looking at refinancing options are:
Citizens Bank
Citizens Bank is a significant bank in some states. Even if you don’t have a local branch, you can still take advantage of their online refinancing options. Citizen Bank is an excellent option if you wish to keep all of your financing needs in one place. They offer credit cards, investments, debit cards, and other forms of banking. With regards to terms, Citizens Bank offers both fixed-rate and variable interest rate loans with terms of 5, 10, 15, and 20 years. Their fixed rates start at 3.45%, and their variable rates start at 2.46%. Citizens Bank will refinance loans with a minimum of $10,000. The maximum limit is $500,000 though this is only allowed for a graduate degree. Citizens Bank will also refinance Parent PLUS loans for similar interest rates.
To determine your interest rate, Citizens Bank looks at the traditional criteria: income, credit score, etc. You can use a cosigner to help secure your refinancing if you don’t meet these criteria. To achieve a cosigner release, you must make 36 consecutive on-time payments.
Another benefit to Citizens Bank are their bonuses. Automatic payments earn a discount of 0.25% interest (this is a bonus that is not unique to Citizens Bank). There is also another 0.25% loyalty bonus if you use Citizens Bank for your checking account. That means a reduction of 0.50% is available.
College Ave
Flexibility is the main appeal to loans issued by College Ave. Flexibility also extends to their refinancing options. You can start making payments while still in education. College Ave offers up to 16 different loan repayment terms. Their competitors, on average, offer just five. You can opt to start making payments right away, or you can have two years of interest-only repayments. You can also set up a loan plan that allows payment of as little as $25 a month. For even more flexibility, College Ave offers in-school deferment if you need a break from loan payments.
Loan terms of between five and 15 years are available to the borrower. The loan amount can range from $5,000 and $25,000. The offered interest rates start at 2.74% for variable loans and 3.54% for fixed rates. The highest interest rates a borrower can receive is 7.99%.
More flexibility comes from the fact that this loan is not only restricted to U.S. citizens or permanent residents. An international student can use a cosigner who is a permanent resident to apply for a loan and refinancing. This cosigner can be released after you have reached specific terms.
CommonBond
CommonBond was one of the first student refinancing companies around. The company offers both fixed-rate loans and variable-rate loans. Both come with a high-maximum borrow amount of $500,000. Interest rates start as low as 2.37% on a variable loan and 3.48% on a fixed-rate loan. There are no origination fees when refinancing your loan. As well as offering to refinance regular student loan debt, it is also possible to refinance Parent PLUS loans. For parents, this provides an opportunity to seek a better interest rate. Parents can alternatively use CommonBond to transfer the loan to the student.
As well as low-interest rates, CommonBond offers a unique bonus to student loan borrowers. They provide a unique unemployment protection program. Loan payments can be put on hold if you find yourself unemployed. CommonBond will even help you find a job and have been known to hire borrowers for short-term consulting projects.
CommonBond also provides funding to children in need with every new loan that you or anyone else refinances with them.
Credible
Credible is not a loan refinance company, but a loan-refinance marketplace. Despite not being a loan refinance company, it does make this list. It serves as a platform to compare multiple offers from refinanced loan issuers. This process only takes a few simple steps.
There is a short form to fill that should take about two minutes. Once complete, options from providers, some of which are on this list, will be provided to you. Details on whether the loan is a fixed rate or variable rate and the interest rates are all in one place, which makes comparing them easy. You can even apply through the platform. Despite the ease, you should always check out the company before committing to any loan.
Reviews are provided by Credible to ensure an easy inquiry process for the consumer. Credible does not have minimum requirements, but it is recommended to have a credit score of 650 or above. As per the list, some companies will also have minimum income requirements, and it is recommended to have a score of 780 or higher to get the best deals. Credible is free to use as the company makes its money from the commission when you take out a loan.
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Earnest
Earnest is a technology-based loan servicer and lender that offers student loans in addition to a range of other loans. They are also one of the most flexible lenders due to their trademarked Precision Pricing model. A model like this allows borrowers to choose a loan with monthly payments and a term between five and 20 years. This option will enable you to maximize your savings and only commit to what you can afford. Earnest claims to offer the lowest interest rates among competitors. Their interest rates for variable-rate loans start at 2.27%, with fixed-rate loans starting at 3.47%. Earnest also provides the option to skip one payment per year with you making it up in the future. As an option, this is great if you are having a financially tough month.
With Earnest being a technology-driven company, it is fair to expect their application process to be streamlined. Luckily, this is the case because within the two minutes it takes to complete the application, they provide you with your interest rate. Earnest also offers resources for you to understand the loan process and your credit better. Resources like these can provide information to keep you a step ahead of your credit score.
Education Loan Finance
Education loan finance or EIfi offers multiple options for refinancing. Student loan debt can be refinanced here as expected, but it is also possible to have a Parent PLUS loan refinanced into the student’s name. Elfi is considered to be one of the best lenders available. Their services are available across the U.S. and in Puerto Rico. They even offer $100 if you accept their loan within 30 days of applying. There is a minimum refinance amount of $15,000, with the maximum being your outstanding loan balance. The maximum balance can be great for those with high amounts of debt to be paid. Interest rates start at 2.80% for variable-rate loans and 3.29% for fixed loans. Refinancing terms can vary with agreements for between five and 20 years. For parents, the available terms are between five and ten years.
Your credit score should not be below 680, and you should also earn at least $35,000 per year to qualify for Parent PLUS loan. If you don’t meet these conditions, then you can apply with a cosigner. You can later remove them from the loan agreement.
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First Republic Bank
First Republic Bank offers low student loan refinancing rates. The downside is that to achieve these rates; you should have an ATM rebate checking account with First Republic Bank. This term is in place to ensure that First Republic Bank can see to all of your banking needs. To open this account, you are required to make a minimum deposit of $500. A monthly service fee of $25 is charged monthly if the balance in the checking account is under $3,500.
Just a checking account isn’t enough; you are also required to set up a direct deposit along with other requirements. If you can meet these requirements while also having a good credit score, then you can secure a low-interest rate. Interest rates can start from as low as 1.95% — payment terms for the refinanced loan with First Republic Bank range from five to 15 years. There are no origination or annual fees when refinancing a loan. There is also no prepayment penalty if you want to pay off your loan early. The minimum loan balance is $25,000, with the maximum amount being $300,000.
FRB Bonuses
A bonus that First Republic Bank provides is a 0.75% discount on your loan. You can be eligible for this discount if you either hold 20% of the amount of your loan in the checking account or have $10,000 in that account. There is also a 0.50% discount available if you hold $5,000 or 10% of your loan amount in your checking account.
To refinance with First Republic Bank, you need to live in an area that they serve. First Republic Bank is an excellent option for those who use its banking services. The particularly low-interest rate is very enticing.
If you don’t hold a checking account, then you are not eligible for this loan. The fees for the checking account can be off-putting for a student looking to save money.
iHelp
iHelp offers loans and refinancing to undergraduates, which is something that not all loan providers do. For you, this means you can get the best deal before you’ve finished your education. You must hold two years of good credit history, including no student loan debt in default. There are a few plans available offered by iHelp loans. You can opt to make full monthly payments, interest-only payments for 24 months, or payments on an income-sensitive plan. It is also possible to work with a cosigner with the release available after 24 months of on-time payments.
Loans are issued and refinanced for amounts ranging between $10,000 and $250,000. The interest rates for fixed-rate loans start at 4.75% with variable-rate loans at 4.63%. These rates are higher than competitors, but there is a lot of assistance available for borrowers. The in-school loans come with a variable rate on a 20-year term. Interest starts at 3.89%.
Laurel Road
Laurel Road, formerly known as DRB Student Loans, is a well-established student loan lender. They have lending schemes for all borrowers but may be more appealing to medical students. They will refinance student loans for more than $300,000, which isn’t typical of a student-loan lender. Loan terms vary from five to 20 years. Fixed-rate loan interest starts at 3.50% with variable-rate loans starting at 2.43%. The rate for you can be given online in less than five minutes. This search requires no hard credit pull. Therefore it won’t affect your credit score.
There is also no prepayment penalty, which comes handy when doctors start making the high salary that comes with their profession. Laurel Road understands that potential doctors can make their repayments, so they treat them with more flexibility than other firms. It is also possible to qualify for lower payments when you are in your residence. This would extend your loan and increase the amount of interest paid, so it may not be the best option.
Lendkey
Lendkey is unique in that their refinanced student loans are financed from a pool of money from local community banks and credit unions. This model provides access to low-interest rate loans. The idea is that instead of going to each of your local community banks and making multiple applications, you go to Lendkey and do it all at one time.
The loans from Lendkey come with flexible repayment terms. The loans often range from $5,000 to $300,000, depending on the income of the borrower. Interest rates start at 2.24% for variable loans and 3.49% for fixed-rate loans. There is also no origination fee. Unfortunately, refinancing is not available to those who did not graduate.
For those struggling with payments, there is a four-year, interest-only option. An option like this may be of use to some but should not be taken lightly as your principal balance will not decrease unless you specifically pay it.
It is best to avoid the interest-only option. Lendkey is still an excellent choice for refinancing both federal loans and private loans. There are also discounts for setting up autopay.
MEFA
Mefa or the Massachusetts Educational Financing Authority offers an education refinance loan. You don’t have to live in Massachusetts to be eligible for their offer.
With their education refinance loan package, they claim to be able to save, on average, $161 a month. There is no origination fee, and a cosigner can help with a low credit score.
To qualify for an education refinance loan, you need to be in good standing on your current student loans. You have to provide a record of on-time payments for the last 12 months. The minimum loan amount is $10,000, with the maximum being the amount of your outstanding loan balance. Fixed interest rates start at 3.85%, with variable rates starting at 3.78%. MEFA offers a quick online application form but also provides the chance to apply via the phone.
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Purefy
Formerly known as CordiaGrad, Purefy is a Washington D.C.-based, financial-services company. Purefy offers multiple options for refinancing, known for its flexibility. They provide single loans, couple loans, Parent PLUS loans, and of course, student loan refinancing. A potential borrower is required to fill out a simple five-question form to get their quoted interest rate. Another 15 minutes is needed to fill out the actual application.
Purefy uses traditional means of calculating the reliability of the borrower. You must show a record of employment for at least two years and no longer be enrolled in school to apply for a refinanced loan through Purefy. Then, you should show a minimum income of $42,000 per year or $25,000 with a cosigner to qualify. Lastly, you should also have a credit score of 770 or higher. The credit score can be lower if you have a cosigner. It is also possible to have the cosigner removed from your current loans. For couple refinancing, Purefy uses the higher of the two credit scores to calculate the interest rate that will be owed.
Purefy’s loans range in amounts from $7,000 to $150,000. Loan amounts are offered for loan terms of 5, 8, 12, and 15 years. Interest rates start at 3.75% for fixed-rate loans and 2.98% for variable-rate loans. No matter your choice in loan terms, Purefy does not charge any origination fee with this loan nor any prepayment penalties.
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SoFi
SoFi is short for Social Finance. It started in student loan consolidation and student loan refinancing before moving on to offer a broader range of financial services.
SoFi offers a streamlined application process that takes about two minutes. Due to their history with student loans, they are a lot more understanding of the financially struggling student. In their application process, they pay less attention to income and credit scores (they are still relevant). SoFi takes into account your school and degree. Greater, long-term career prospects may net you a better interest rate than you would usually get, even with a lower credit score. To achieve the best interest rate, having a high credit score is still better than a low one, though.
If your score is low and your prospects don’t meet their requirements, then you can still use a cosigner on your loan.
Their loans come with both fixed rates and variable rates in terms of 5, 7, 10, 15, and 20 years. Their fixed interest rates start at 3.49%, with their variable rate starting at 2.43%.
SoFi Bonuses
As a bonus, SoFi also offers support to students concerning their future careers. Support can come in the form of local events and career teaching. There are no origination fees to worry about with SoFi.
If you are a borrower who is also an upcoming entrepreneur and have managed your credit score well, then you are in luck. SoFi might provide the best rate for you. One of the downsides to SoFi is that they do not offer a cosigner release. However, they can transfer a loan from a parent to a child.
Splash Financial
Splash Financial offers a unique student loan refinancing plan. They use lending partners as their loan servicer. One unique feature that Splash offers is excellent for couples with debt. If you and your spouse are saddled with student debt, then Splash Financial will let you refinance that debt into a single loan. One total payment is better than two separate ones. A single payment, combined with a low-interest rate, can be a great deal.
In terms of what you are looking to receive, Splash loans have a minimum of $5,000 and no maximum. Variable interest rates start at 2.43%, with fixed interest rates start at 3.50%. The maximum loan amount is suitable for education that comes with higher loans. With that in mind, Splash Financial also offers specific finance options for those in the medical profession.
As expected with a private loan, there are no origination fees when refinancing with Slash. There are also no prepayment fees, meaning you can pay off outstanding debt before it is due.
Splash does not generally offer any deferments or forbearance. Despite this, they will work with the borrower to find terms that are suitable for both parties if payments cannot be paid for some reason. A nice bonus to Splash is that they offer a cash bonus of $250 to you and someone you recommend. This bonus is only valid if you recommend a friend, and that friend makes use of Splash Financial to refinance their loans.
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Alternatives to Student Loan Refinancing
As mentioned above, refinancing a loan can lose the benefits of a federal loan. Alternatively, you may not meet the requirements for refinancing. If you do find that refinancing is not going to be possible for you, then consider speaking to your current loan issuer. They may be able to offer other solutions to the problem. If refinancing a loan is not an option for you, then you can use the government benefits to make life a bit easier.
Under certain circumstances, to be confirmed with the loan issuer, you can receive a deferment or forbearance. The new terms allow you to temporarily stop making payments or at least reduce the amount of what you owe in a period. An in-school deferment is an option for those who have an outstanding student loan but then go back to school. It can be challenging to both study and earn an income, so this can provide some breathing room.
You may still have to pay the interest on the loan, or you can opt not to pay anything for a period. The interest that you do not pay in that period is then added to the loan principal balance (the amount of the loan minus interest and other charges). Deferment and forbearance are short-term solutions, and you should only use them when you are suffering temporary financial troubles.
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A Long-Term Solution
If you are going through more long-term money problems, then setting up an income-driven repayment plan may be a better option. A new repayment plan can set your monthly payments to an amount that is more manageable for your income. The agreed-upon amount can change per year as your income changes. The monthly payment can be up to 15% of your income. Unfortunately, this is the same as refinancing your loan to a longer term; it will come with longer repayment terms meaning more interest paid.
Loan Forgiveness
Student loan forgiveness options are also available but will depend on your situation. When exploring this option, you will see the terms of forgiveness, cancellation, and discharge. These are all loan forgiveness options, but they clarify the reason for forgiveness on the loan. Forgiveness and cancellation are usually related to employment. Discharge refers to other circumstances.
The Four Primary Loan Forgiveness Options
Teacher Loan Forgiveness
If you become a public-school teacher after graduating, then you may be valid for forgiveness. A teacher of a low-income school or educational service agency for five or more academic years can be eligible for forgiveness up to $17,500.
Public Service Loan Forgiveness
When employed by a government or not-for-profit organization, you are entitled to receive forgiveness through a Public Service Loan Forgiveness Program or PSLF. The remaining balance of your loan will be forgiven after you have made 120 monthly payments.
Closed School Discharge and Borrower Defense to Repayment
You take out a student loan to cover the cost of your education. If your chosen school then closes during your enrollment, then you may be able to apply for a closed school discharge. The other type of forgiveness related to the school is the borrower’s defense to repayment forgiveness. If you feel the school has misled you or the school has violated specific laws, then you may be valid for this type of loan forgiveness.
Total and Permanent Disability Discharge
If you struggle to make your monthly repayments due to a disability, then you may be valid for a TPD discharge. If you qualify, then this discharge can lead to forgiveness on your complete outstanding student loan balance. The department of education must receive proof of your disability. A general definition for a total and permanent disability is a disability that prevents you from engaging in substantial gainful activities. If a disability is expected to result in death, it lasts for a continuous period of 60 months or longer, and then you may be eligible.
Should I Refinance My Loan?
Any financial decision like this will depend on a person’s financial situation. You should be sure to research and examine the pros and cons of student loan refinancing. Once you find yourself in a more secure financial situation, it can be worth your time refinancing.
The average interest rate also changes over the years. What was normal six years ago may be considered high now.
If you’ve been making payments of your current loan on time, then you may have seen an increase in your credit score. This increase can help secure you a better rate when refinancing.
A student, provided they have the income and a high enough credit score, can benefit from refinancing their loan every five to seven years.
In Conclusion
Even if you don’t have the highest income, refinancing could still be for you. Your current loan may be too much to handle, so increasing the term for lower monthly payments can make life easier. You can always refinance again once you are in a better situation.
Refinancing a loan can also help by organizing all of your debt into one package.
Generally, refinancing a loan is a great idea and a money saver. However, if you plan to take advantage of the benefits that come with a federal loan, then refinancing won’t be for you. For some, losing out on income-based repayment plans and possible loan forgiveness is not worth the better interest rates.
Do you have a preferred refinance company? Have you seen the benefits of refinancing your loan?
Additional Reading: How To Find Fast Cash
