Strategies for Refinancing Student Loans in 2024
April 13, 2024
Getting into college is one of the greatest milestones every adolescent is looking forward to. The sense of freedom and independence is something they may savor for several years. Some things to expect are new friends, a new environment, and new paths. In this article, we will give some strategies for refinancing student loans in 2024.
However, it can be challenging for those living far away from universities and paycheck-to-paycheck.
Aside from increased responsibilities, students must have adequate finances to cover educational requirements and daily needs. They may also have to pay rental expenses if no university is located near their community.
Indeed, getting a degree can be very expensive without enough preparation.
Thankfully, student loans bridge the gap between enrollment and graduation. Students have several months to breathe and repay loans after graduation.
And if things don’t go as planned, they can always turn to other lenders to refinance student loans and find more favorable deals. This strategy can be a lifesaver, helping more students and young professionals achieve financial freedom.
Maintain a Good Credit Score
Credit score is a key aspect lenders are looking into a borrower’s profile. A bad credit score lowers the chance of getting approved for a loan.
Unsurprisingly, many are turning to subprime and payday lenders, which can be risky and predatory. Skyrocketing loan rates and limited payment duration are just some challenges lenders may face. Worse, they may get harassed by these lenders, especially the unregistered ones.
Given these, it is essential to maintain an excellent credit score before applying for student loan refinancing. One way is by paying student loans religiously and punctually. Timely payments will reflect your financial responsibility, increasing the chance of getting a loan approval.
You need a credit score of about 680 to meet basic eligibility requirements.
Furthermore, you and your cosigner should score 750 and above to get better student loan refinancing rates.
Make Extra Payments
Many borrowers are too complacent about paying the required minimum monthly payment only. Little do they know that most of their monthly payments go to interest.
This method can get them stuck in the student loan quicksand. It can be far more challenging during periods of high inflation, like what happened in 2022. The Fed implemented a series of interest rate hikes to temper inflation. But in turn, it made borrowing costs more expensive, leading to delinquencies and exhaustion of savings.
Given all these, we suggest you make extra payments for the loan principal. This payment is separate and on top of your monthly payment. You can do it in person or by bank transfer. Here is an example to help you understand how it works.
Suppose your existing loan is $40,000 with 7% interest or $2,800 annually, and you must pay $500 monthly. We also assume that no miscellaneous fees are added to the interest. Once you transfer $500 to the lender, $233 goes to interest, and only $267 is deducted from the principal.
The remaining amount is $39,733, showing that only 0.7% was deducted from the total amount. After a year, you still have a loan balance of $36,796; after adding the 7% interest, it will increase to $39,371. Almost no difference, right?
However, if you make extra principal payments of $200 per month, the loan balance will be much lower at $34,396 after a year. After adding the 7% interest, it will be $36,804. There will be a difference of $2,570 ($39,371 – $36,804), which exceeds the annual extra payment of $2,400 ($200×12). Hence, it will help you complete your payments faster.
Get a Job
You can’t wait for a miracle to pay off and erase your student loan records magically. Get a job. That’s the most fundamental part of paying your debts.
You can’t always rely on loan forbearance and deferment, especially if your existing student loans are from private lenders. The Federal government often grants loan forgiveness and deferment. Private lenders rarely do these since it’s purely business for them.
You can pay your student loans on time if you have a job. You will not have to worry about the cumulative interest rates and penalties. It will also help you maintain an excellent credit score, allowing you to apply for loan refinancing, which often has more flexible payment schedules.
Assess as Many Lenders as You Can
There are plenty of lenders out there. Each one of them promises a favorable payment schedule. But remember that there is always something more than meets the eye. Refinancing student loans can be helpful if you do it wisely.
Check all lenders you come across personally and on the internet. Once you gather enough lenders, study all aspects, such as interest rates and payment schedules.
You must also find out if they charge miscellaneous fees, which can be more expensive than interest rates. Not all lenders disclose this information to attract borrowers.
Lastly, investigate their reputation, such as transparency and harassment issues. Doing so will keep you away from unnecessary stress, especially during the payment week.
Enroll in Autopay
Enrolling in autopay can help you lower student loan interest rates so that a considerable portion of your payment goes to the principal amount. This approach will also increase your chance of refinancing student loans with lower interest and fees.
Note that federal student loan providers have a 0.25 interest rate discount if you let them deduct payments from your digital wallets or bank accounts automatically.
Meanwhile, private lenders lower the automatic payment deduction amount. This lower rate can help you save about $150, and with the other strategies listed, student loan repayment may become easier and cheaper.
SoFi, a student loan provider, promises fixed rates starting as low as 3.99% APR using APR. This rate is much lower than the 4.9% US average for undergraduates.
Look for Side Hustles
Getting a job may not always guarantee enough capacity to cover your monthly expenses, including student loans. That is why you must look for more income streams.
Getting part-time or freelance jobs is easy and convenient today as more businesses without brick-and-mortar emerge. If you have a laptop, you can work during your break or while commuting to your primary job. You can also work from home instead of spending all your free time watching movies and social media.
Study Macroeconomic Changes
Before refinancing student loans, you must beware of macroeconomic changes that can help you build or destroy your finances. Inflation and interest rates are essential to watch out for since they significantly affect student loan rates. Higher inflation leads to higher interest rates, making student loans more expensive.
Today, inflation is decelerating, and the Fed targets to cut policy rates thrice, which can favor student loans.
Wrap Up
Getting a degree can be tough but possible with determination and enough resources. Thankfully, student loans are always there to assist you in pursuing your dreams. Once you graduate, the choice is all yours to achieve financial freedom or get trapped in the financial quicksand.
By applying these strategies, one can use student loan refinancing as a tool to improve their financial status.
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