Keep in mind, student loan refinancing can be confusing and lead to financial problems down the road if you don’t make the right decisions when applying for refinancing or consolidation.
Let’s jump right into the questions!
1. What will be the new term of the refinanced student loan?
When you refinance your student loans, banks offer varying term options. The “term” is the expected amount of years in which you are expected to repay your loan. Banks typically offer 5, 10, 15, and 20 year repayment terms. The biggest consideration to keep in mind is how much you can afford to pay now, and how much interest you will accrue over the lifetime of repayment. For example, on a 5 year term you will accrue the least amount of interest during repayment, but your monthly payments will be the highest vs. a longer term student loan.
2. Does the new student loan have a variable or fixed interest rate?
Your student loans have either variable or fixed interest rates. By refinancing your student loans, you can convert a variable interest rate to a fixed interest rate loan or vice versa. Fixed interest rates tend to be less risky, whereas variable interest rate loans fluctuate due to economic conditions. You can learn the difference between variable vs. fixed interest rate student loans here.
Due to the 2008 recession, interest rates over the past 4 years have been historically low. If the economy improves, interest rates will most likely rise over time, making variable interest rate student loans less favorable when compared to fixed rate student loans. In the current economy, fixed rate student loans tend to have a higher interest rate, which means you might end up paying more interest over the long term.
3. What are the repayment terms?
When does the repayment start? What will my monthly payments be? How do I pay? What fees can occur if I miss a payment or default on my student loans? Is there a 0.25% interest rate reduction for ACH automatic payment withdrawal?
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