Refinancing Student Loans
The student loan refinance process is relatively straightforward and simple to understand. When you have a current loan and you wish to restructure that loan in order to reduce the interest rate and/or extend the term on the loan in order to reduce the monthly payments, you generally seek out a student loan refinance. The is similar to a student loan consolidation, but a refinance normally involves the changing of a single loan whereas a consolidation involves changes to several loans.
The first rule you need to know is that if you have a current federal direct loan or a Federal Family Education Loan then your refinance will have to be into another federal program. If you have one of the many private and non federal student loans then you will have to seek out a private student loan refinance. It is important to understand this because you want to make certain that when you are weighing the alternatives of a refinance that you understand what programs are available to refinance your particular type of loan.
When determining if a refinance is in your best interest or not, you need to consider many more factors than simply the monthly payment. All too many borrowers refinance a loan in order to get a lower monthly payment but then do not understand that they have reset the clock on their loan. What is meant by this is think if you had a 10 year loan and you have already paid for 4 years. When you refinance, you may be getting a lower rate, but if the loan is then reset for another 10 years. This means that you may not be saving as much money as you it appears when looking at the new lower monthly payment. For example a payment that was $200 per month and you only had 7 years left to pay multiplies out to a total of $16,800. If you are offered a lower payment of $160 per month but then have to pay 10 years again, the total of payments comes to $19,200. You see, the monthly payment may be less but the total payback is much more.
On the other hand, if you can refinance your loan to a lower interest rate and yet maintain the discipline to continue to make payments the same as before the interest rate reduction, and make certain the extra payment is applied to the principal of the loan, you will payoff the loan much faster. In other words, if you have a loan for $200 per month at 5% interest and you have 7 years to pay it off, and then you refinance into a loan at 3% interest with a 10 year term your required monthly payment will be decreased. But if you continue to pay the $200 that was you minimum before the rate reduction and make certain the lender applies the extra money you are paying each month to the principal of the loan, then you will pay that loan off much faster than 7 years. In fact this is a great way to maximize your benefit from a student loan refinance.
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