Thousands of students tend to have to sit through the ordeal of dealing with student loans. Fending off student debt is no easy feat. Fortunately, if you are a student, you still have a couple of cards left to play if you want to ease the process of handling student debt. These two options are student loan refinancing and student loan forgiveness.
What is Student Loan Refinancing?
Student loan refinancing involves getting a new loan at an entirely new interest rate. You can typically refinance both private and federal student loans. You will have to clear your old loan and acquire a new loan with different repayment terms, and hopefully, a more appealing interest rate.
Federal loans vs Private Loans
Here are a few major differences between federal loans and private loans:
- A federal loan allows you to put off your repayments until the student leaves the university, graduates, or changes his or her enrollment status to less than half-time. On the other hand, a private loan requires you to make repayments while still in university. However, some private loan lenders allow you to defer payments.
- The interest rate for federal loans is fixed and is generally lower than that of private loans, and undoubtedly lower than credit card interest rates. Private student loans typically have variable interest rates. These rates could be higher or lower than those of federal loans depending on your circumstances.
- If you have federal loans, you could potentially qualify for loan forgiveness to have a chunk of your loan payments forgiven. However, in the case of private loans, most lenders do not offer student loan forgiveness programs. They can be forgiven in some states under certain circumstances.
What should I know before going for Student Loan Refinancing?
You may want to refinance student loans. However, it is essential to consider a few factors before you go ahead. If you choose to refinance your federal loans, you will lose the following privileges that come with federal loans. Here they are:
Forbearance
Forbearance refers to the option of delaying your loan repayments if for some reason, you are not able to make them every month. While in forbearance, your loans will accrue interest. In simple terms, your loan balance will be high overall when you resume your loan repayments.
While this can be a useful short-term solution, it can cause problems in the long-run. Make sure you do not have to resort to this unless it is necessary.
Income-Driven Repayment Plans
The federal government provides the Income-Driven Repayment (IDR) plan. The point of an IDR plan is to enable borrowers to handle their loan payments with as little hassle as possible. This plan takes your income levels into account and formulates a repayment plan accordingly.
You can use it if you need to take a break from continuous repayments. However, you need to keep in mind that you will be charged higher interest rates.
Deferment
A deferment allows you to stop making loan repayments or cut down on the loan amount you are liable to pay, for up to three years. During this period, the interest on deferred loans does not accrue as the government takes care of it. However, if you choose to refinance your student loans, you will lose these privileges.
What happens if you get declined for Student Loan Refinancing?
Seldom do you get approved for student loan refinancing on the first attempt. If you have been declined, consider doing the following to boost your chances of approval.
Apply to Multiple Lenders
There is no actual limit on the number of lenders you can approach to get your student loan refinancing underway. Increasing the number of lending agencies you apply to boosts your chances of getting approved.
Get rid of your Current Debt
The applicant's debt-to-income ratio plays a role in getting approved for student loan refinancing. This ratio is calculated based on the debt amount that you collect and your monthly income. If you can manage to lower your debt and increase your monthly income, you will see your debt-to-income ratio improve, and in turn, further your chances of getting loans at reasonable rates.
Getting a qualified Co-signer
If you can get someone close to you to act as a co-signer to apply for student loan refinancing, you can better your chances of availing the same. This cosigner can be your parent, guardian, spouse, relative, and so forth. However, keep in mind that this co-signer will need to have an excellent credit score and an impeccable credit record. This option is particularly beneficial if you have a mediocre credit score, which is highly likely if you are a student who is only just starting out.
Student Loan Forgiveness Programs
Student loan forgiveness can free you from the obligation of having to repay a chunk of the loan amount or the entire loan depending on your circumstances. As appealing as it is, not everyone is eligible for this.
There is a student loan forgiveness programs list that you can look into if you are considering availing student loan forgiveness. While it is not easy to avail one of these programs, you can significantly improve your chances if you happen to be employed in the public service sector. Police officers, government agency employees, and so forth have a chance at getting their student loan forgiveness program applications approved.
