Students can be a great investment, so it’s no surprise that many parents and grandparents are willing to help their children or grandchildren with college costs. But borrowing money to pay for education comes with significant risks — particularly if you don’t know what you’re doing. Loans generally have higher interest rates than other types of debt, like credit cards or home equity lines of credit. And if your child earns a degree in a low-paying field like art history or sociology, it may take years for their salary to catch up with the cost of their degree. Therefore, it is best to compare student loan refinance rates before you conclude. So take a look at the following factors to make a well-informed decision.
Interest Rates
The interest rate is the key factor and can range from 5% to 12%. Lowering your monthly payment will mean a longer repayment period, but it may be worth it if you have more money at the end of the day. The higher your interest rate, the more expensive your debt will be and negatively impact your credit score.
Loan Term
The loan term is the amount of time you want to pay off your loan. This is important because it will directly affect how much money you save by refinancing and extending the term of your loan, as well as how long it takes to pay off that loan. If you’re not sure what length of time would be best for you and your situation, consider asking yourself these questions:
- Do I need the money from refinancing?
- How many years do I want to continue repaying my student loans?
- What will happen if I don’t make my monthly payments on time or at all?
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Loan Type
When looking for the best student loan refinancing option, it’s important to consider a few key factors. The first is how much your current monthly payments are and how they compare with the new payments you’ll be taking out through refinancing. For example, if your current payment is $300 per month, but refinancing will cut that in half, then it might be worth considering.
Another thing to consider is whether there are any prepayment penalties when paying off the loan ahead of schedule. Many lenders don’t charge any penalty for making extra payments, but some do—so before signing up for anything, make sure you know what’s going on!
Fees
The next thing to consider is the fees. When looking at student loan refinancing, you will likely see two types of fees: origination fee and interest rate spread.
Origination Fees
An origination fee is a percentage of your loan balance that the lender charges for processing your application and issuing you a new loan. Origination fees can range from 0% (for example, if you have an excellent credit score) to as high as 6%. Since origination fees are paid upfront, they’re usually included in the overall cost of refinancing loans—but not always! As per Lantern by SoFi advisors, “There is no guarantee you will be approved or qualify for the advertised rates, fees, or terms presented.”
As you’ve seen, there are a lot of factors to consider when refinancing your student loan. First, you should research and ensure that you are getting the best deal possible for your situation.
