About the author: Lamar Watson, CFP®, is a Fee-Only Financial Advisor in the Washington, D.C. area, that works with clients virtually across the country. Lamar's work with his clients focuses on budgeting, employee benefits, paying down debt, buying their first home, and investing. Lamar is the Founder of Dream Financial Planning, a virtual financial planning firm specifically designed to help young professionals and minorities take control of their finances and fulfill their dreams. Feel free to schedule a complimentary consultation to learn how we use the The DREAM Financial Planning Process ™ to help our clients achieve their goals.
Student loans are becoming a large part of the debt that many students are starting out their adult life with. While it can be easy to borrow the money, paying it back on schedule is something that many postgraduates will find themselves struggling with. If your student loan debt is quickly getting out of hand, you might consider refinancing your student loans to reduce the interest you need to pay back and lower your monthly cost. Before refinancing your student loan debt check out the 10 must-know facts listed below.
1. You Will No Longer Qualify for Loan Repayment Assistance
Student loans are federal loans that can offer protection in the event you become disabled, have an accident, or lose your job. In these events, if you are unable to make the payments, the government may provide you with some relief. Additionally, some jobs such as teachers can receive loan forgiveness after they have worked so long in the field. If you refinance your student loans, you will be turning these into conventional loans which will no longer provide these options.
2. You Will Need to Be Able to Qualify for a Traditional Loan
Since it is students who are often applying for financial aid loans, there is some leeway on the requirements that the underwriting company will be looking for. When you attempt to refinance your loan, the loan company will require you to have a steady income, a specific debt to income ratio, and a certain level of credit score to be able to qualify.
3. You Can Refinance Multiple Types of Student Loans Into One Refinance Loan
When financing your education with student loans, odds are you will utilize multiple types of loans to cover all of your expenses. Each of these loans will have their own payments which can make it difficult to keep up with. When you refinance your student loans, you can combine parent PLUS loans, federal loans, and private loans into one loan and one loan payment.
4. The Rate You Get Will Vary on the Terms of Your Loan
Sometimes refinancing your loans will not always save you the most money. While many companies will advertise low-interest rates, you will be given a specific rate and terms depending on your income, debt, and credit score. Those who have established jobs and are paying for graduate loans will often find better terms such as 2 percent or less, but those just starting out or are less established may pay rates as high as 4 percent.
5. You Can Include Loans Under Your Parent's Name in Your Refinance Loan
Due to high expenses, lack of credit, or lack of means to repay the loans, you may find yourself depending on your parents to take out some student loans on your behalf. When you refinance your student loans, you will be able to incorporate the loans your parents took out under their names. You can also choose to combine all the loans under your name and have your parents co-sign to help you qualify for a better rate.
6. You Might Face Tax Consequences After Refinancing
If you refinance your student loan, you are turning it from a student loan to a personal loan and in the eyes of the IRS, which changes the nature of the loan. If you regularly claim student loan interest as a deduction on your tax return, you will no longer be able to take this deduction.
7. You May Not be Able to Refinance Your Loans if You Didn't Attend an Accredited School
Those who incurred student loans to attend a college or university that was not accredited may face complications if they attempt to refinance the loan. Some lenders will require that the loans come from attending a school that participates in a Title IV federal student aid program.
8. Some Lenders May Offer Flexible Repayment Programs
Since you are giving up the deferred payment options and government relief when you refinance your student loans, it may be worth finding a lender that has flexible repayments in the event of financial situations.
9. You Can Refinance Even if You Have Declared Bankruptcy
If you have declared bankruptcy, you still have the ability to refinance though the lender may make you wait a few years since the bankruptcy before you apply. Most lenders will want to see some recent activity of you repaying your debt so that they can increase their chance of being repaid.
10. You Might Be Able to Refinance Loans Even if You Are the Cosigner
You may find situations where you were the cosigner on the student loan and the original borrower may not be in a position to repay the loan or may not be in a situation that they can refinance. Some lenders will allow the cosigner of the loan to repay the debt as they will have some responsibility if it goes into default.
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